Bare Knuckles Ag ™

Market reaction understated because China trade deal is underrated.

Background: Markets had nearly grown immune to reports of “progress” on ending the trade war with China because Beijing so regularly either denied any agreements had been reached or insisted what they had agreed to was “lost in translation” (overstated) by Washington. Traders cynically adopted the proverb “Fool me once, shame on you; fool me twice, shame on me!”

Burned before, big market players say “We’ll believe it when we see it.”  Lingering cynicism has muted the market strength thus far. While the deal was impressive enough to stimulate significant short-covering in corn and soybeans by big specs and funds, fresh new buying is limited. Burned before, the big players on the buy side are cautious; covering shorts and pulling to the sidelines until they see if this time there’s a match in the interpretation of the deal emanating from Beijing … and evidence of followthrough.

China-based consultancy, JC Intelligence Company (JCI) believes it now! While another $20-25 billion in U.S. ag sales to China over each of the next two years seems a pipe-dream to some, this respected firm says Beijing is unlikely to renege because relief from U.S. tariffs is badly needed for their flagging economy.  Further, they’ve been depleting reserves of critical commodities to supplement increased purchases from South America as an offset to reduced purchases from the U.S.

Figure 1 from the U.S. Commerce Department shows the Chinese pledge to purchase $40-50 billion in U.S. ag products over the next two years would be a moon shot; nearly doubling the level of U.S. sales at the pre-tariff 2015 peak! While markets firmed on the news, it was more short-covering and a halt to new spec selling than a surge in buying.

Chinese ag imports in 2018 alone from all sources were reportedly $124 billion. The promised increases in annual purchases from the U.S. are only about 20% of that amount, far from a “pipe-dream” as alleged by skeptics. Further, much more is involved than resumption in soybean trade. Trade Rep Robert Lighthizer says increased buying of wheat, corn, rice, cotton, ethanol by-products, beef, pork, poultry and even forest products will all grow and count towards the “ag portion” of the Phase 1 accord.

Why USDA’s long-term “baseline” price forecasts are suddenly too conservative:

Each spring, USDA puts out long-term 10-year “baseline forecasts” for all major ag commodities. Figures 2 & 3 below show the average farm price forecasts for corn and soybeans through 2028 released in March of this year:

There are three reasons these charts are likely too conservative now:

1) 2019 corn and soybean prices are beating early assumptions. Initial 2019-20 forecasts were for ending stocks of 2.485 billion bu. for corn and an average farm price of $3.30. The December WASDE puts ending stocks now at 1.910 billion and an average price of 3.85. The initial outlook for soybeans was for ending stocks of 970 million bu. and an average farm price of $8.10. The December WASDE puts the figures at 475 million and $8.85.

2) Baseline forecasts assumed China trade disputes would not be resolved! Here’s the exact language from the baseline abstract: While agricultural prices overall will work slowly higher long-term, ongoing U.S. trade disputes with China have dampened expectations for soybeans. These trade disputes are assumed to last the duration of the projection period to 2028.

3) Baseline forecasts did not factor in new USMCA or new deal with Japan! Here’s the exact language from the baseline abstract: Projections assume steady macroeconomic conditions, farm policy and normal weather, with no domestic or external shocks to global ag markets or trade policies from current status.

New long-term baseline price forecasts through 2029 are due in February 2020. There is always the risk China will cheat if not renege, of course, but monitoring procedures are in place to catch them quickly if they do.  Some have even been described already, as Lighthizer abides by the “Reagan Doctrine” regarding foreign deals to “Trust, but verify!” Unless there is already evidence of Chinese cheating and U.S. tariffs are slapped back on (as they’ve been warned will happen), expect USDA’s long-term price outlook for corn and soybeans to ratchet higher from those shown above when updates through 2029 are released in February.

Dan Manternach, President

Perfect Fit Presentations, LLC

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