U.S.-China trade war, the U.S. harvest and South American planting
Hehmeyer Trading + Investments is home to a plethora of experienced and knowledgeable managers. One of the reasons we launched this blog was to create a space to share their expert insight and observations. This week we are featuring commentary from Chad Burlet of Third Street Ag Investments. The opinions and views expressed in this commentary are that of the author. Hehmeyer Trading + Investments may not necessarily agree with the opinions of the author.
The three lead stories that captured the market‘s attention this past month were the U.S.-China trade war, the U.S. harvest, and South American planting. Developments in the trade war were decidedly bearish with no talks held and more tariffs implemented or threatened. The U.S. harvest was slightly supportive to prices as many experienced rain delays in the first half of the month and yield reports were widely mixed. South American planting was bearish as most areas proceeded at a record pace and the weather remained favorable for early crop development.
Despite the importance of those three topics to the U.S. and world balance sheets, U.S. agricultural futures were sharply sideways for the month. Chicago wheat, corn and soybeans all ended October within a dime of where they ended September. As expected, corn did gain on soybeans, but modestly so. It was interesting to note that corn registered its lows on the first day of the month and soybeans traded their lowest price on the last day of the month. Both of those markets traded their highs on the same day, the 15th.
International news dominated the wheat market with deteriorating conditions in Australia and improving prospects in Russia being the most important developments. Eastern Australia was particularly hard hit with ABARES, the Australian Agricultural and Resource Bureau, lowering their crop estimated to 16.6 million metric tons (MMT). That was about 2 MMT less than the consensus number at the beginning of the month. They also estimated their exports at 10 MMT. That was 3 MMT less than the USDA estimate from two weeks prior.
The Russian crop trended in the opposite direction. At the end of September the market was wrestling with fears the Russian exports would be capped at 25 MMT and crop estimates were in the mid- to upper-60’s MMT. Fortunately, harvest weather – particularly in Siberia – improved and crop estimates have risen to 72 MMT. Last week, following a meeting with exporters, the Russian Ag Minister pegged their exports at 33-34 MMT.
The third wheat headline was that for the first time in 17 months the U.S. sold wheat to Egypt’s GASC, their General Authority for Supply Commodities. For that entire stretch their business has been dominated by Black Sea origins. Even now, a great number of things had to fall into place just for the U.S to get single cargo sold: our futures market broke 40 cents in the seven trading days prior to the tender; Cargill made an aggressive offer; and a vessel owner offered a very competitive freight rate. Even with that, the trade would not have occurred if GASC had not purchased an unusually large eight cargoes. There were seven cargoes from other countries that were offered more competitively. Our futures markets rallied sharply on the news of the trade, but they’ve settled back as traders recognize that it was probably an anomaly.
As we mentioned above, South American planting has been going well. Soybeans, in particular, have benefitted from an early start to Brazil’s rainy season. This has taken on added importance because of the U.S.-China trade war. China is trying to bridge themselves to the Southern Hemisphere new crop without taking any U.S. soybeans. A harvest that will start in late December and record January exports out of Brazil will go a long way toward helping them accomplish that goal. Breaking news about a Trump/Xi phone call has generated some optimism, but we expect that to ebb and flow with the news cycle.
Brazil and Argentina are also doing a good job of coming up with old crop supplies. Brazil’s October exports were a record and virtually every boat went to China. Their vessel line up remains extensive and they have cargoes for sale for virtually every position from now until next summer.
Argentina’s primary contribution has been as a point of arbitrage. For the past two months they have been busy importing U.S. soybeans to crush and exporting their own soybeans to China at a huge premium. Totaling the U.S. export shipments for the past two weeks shows that Argentina has been our top destination. While that may sound encouraging, it is a tiny fraction of what we would normally be sending to China.
The USDA has been slow to embrace this reality in their balance sheets. Their estimate of U.S. exports is at least 200 million bushels (MB) too high. Our exports in the last two weeks alone have been 90 MB less than the same two weeks last year. A record U.S. crush rate will provide a bit of an offset, but we believe the U.S. carryout will be over a billion bushels, versus a USDA estimate of 885 MB. If no trade talks occur prior to the G20 Meetings it will be too late for the U.S. to capture any December business.
The corn export picture has been decidedly more positive than the soybean picture. The U.S. has enjoyed a six-month period where it was decidedly the cheapest origin. The result has been all-time record exports. Year-to-date inspections are running almost 70% ahead of last year. Unfortunately, that has come to a rapid end. Brazil, Argentina and Ukraine, in particular, have become very competitive over the past month and our sales market share has plummeted. Unlike soybeans, the USDA’s export estimate is attainable, but early ideas that we could far exceed that total have now been set aside.
For positive demand news the corn market has had to look to the domestic side and the EPA has accommodated them. On October 9th President Trump announced that the EPA would be approving year around sales of E15, an optional fuel blend for vehicles. Early expectations for demand increases were modest, but Marathon, the country’s largest refiner, has announced they will sell E15 in Minnesota and POET has announced they will build a new ethanol plant in Shelbyville, Ohio.
The EPA hopes to have all of the necessary rules in place prior to next summer’s driving season, but expected litigation from the petroleum industry may succeed in disrupting that.