Alpha Third Street Ag Investments’ December 2018 Month End Comments

US-China Relations and their Impact on Grains

by Jessica Darmoni

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 month started with all eyes focused on Argentina and the meeting between Presidents Trump and Xi. What came out of that meeting was an agreement to postpone any additional tariffs and to work toward a comprehensive trade agreement within 90 days. The first face-to-face meetings between the two countries are scheduled for January 7th in China. To underscore the deadline the United States Trade Representative (USTR) has scheduled the next round of tariff increases to go into effect on March 2nd.

When compared to the highly volatile equity markets the agricultural futures have been relatively calm this month. Corn, wheat, and soybean futures had net monthly changes of 1-3% and a monthly range of only 5-6%, roughly comparable to this past Wednesday or Thursday in the stock market. For 2018 nearby wheat was the big winner gaining almost 20%. Corn/ (soybeans) was a great ratio trade with nearby corn up 8% and soybeans down 6% for the year.

Russia maintained its position as the volume and price leader in world wheat. Black Sea values moved steadily higher, ending the month $10-$12/metric ton (MT) above last month. A mid-month rally in the CME futures was triggered by false rumors that export controls would be announced at the regularly scheduled meeting between the Russian Agricultural Ministry and the exporters. The exact opposite was true as the Ag Ministry increased their export estimate from 35 to 37 million MT (MMT) shortly after the meeting and no restrictions were put in place.

CME wheat futures have been range-bound as prices below $5/bushel make SRW the cheapest class of wheat and prices over $5.30 make us uncompetitive, particularly for the forward positions.

We’ve written previously about storage income for soybeans becoming far more lucrative than wheat. As a result, many warehouses moved wheat to make space for soybeans. Wheat in deliverable space is 20 million bushels below a year ago and we are about to trigger the second consecutive decrease in the Variable Storage Rate (VSR). This will take the rate to five cents per month versus 11 cents three months ago.

U.S. futures also found support when some acres intended for winter wheat didn’t get planted because of the cold wet fall. Most notably, Kansas lost 200,000 acres and now has the fewest planted acres in 100 years.

The corn market has moved straight sideways this month, finding support in the international markets but headwinds domestically. Overseas the Black Sea market firmed by $6-$7/MT and Mexico came to the U.S. for 1.65 MMT of calendar rail business. But at home ethanol margins are at 10-year lows and the industry is slowing and idling plants. The industry has been plagued by crude oil prices at 18-month lows and far too many waivers being granted by the Environmental Protection Agency (EPA). Exxon was the latest refiner to receive a “hardship” waiver, waivers which were intended for small refiners who were struggling to meet their mandate.

Rumors continue to circulate that China will buy U.S. corn in addition to soybeans. To date there have been no signs of interest, but the government did issue 7.2 MMT of Tariff-Rate Quotas (TRQ’s), an import license, back on December 10th. That number is very close to private estimates of their import needs.

Soybeans have not only been the lead agricultural story, they’ve also been the lead business and international trade story. Chinese activity in the U.S. soybean market is the clearest barometer of relations between the two countries and their purchases have been viewed as a meaningful goodwill gesture. The best estimate is that China bought 3-3.5 MMT of U.S. soybeans in two mid-month tranches. The purchases were made by Sinograin and COFCO, two state-run or state-affiliated business entities. To the best of our knowledge, no private companies made purchases and the 25% import tariff is still in effect.

The Chinese purchases created only a small rally in U.S. futures and prices have drifted lower ever since. We are seeing confirmation of slower Chinese crush rates and port stocks of soybeans and soybean meal are at record levels. The Chinese crushers did an excellent job of preparing for the trade war and Brazil and Argentina have responded with record fall exports.

After an ideal start to the growing season, South American weather has turned more mixed. Southern Brazil and Paraguay are too dry and northern Argentina is too wet. Initial crop estimates for Brazil started around 119 MMT and rose gradually to 123 MMT. We are now returning to 119 MMT. Should these patterns persist the market will be quick to write in lower numbers as we move into January. It is earlier in the growing season in Argentina, so the range of possible outcomes is wider. Earlier this month we were at 56 MMT and leaning higher. Today we are at 55 MMT and leaning lower.

As we look ahead, we see increased volatility as the market attempts to read the tea leaves on the U.S.-China Trade Talks and the South American crops move into pod setting and pod filling. It will also not be long before U.S. planting intentions move to the front page with crop insurance prices being set in February.




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