Grain market waiting for the other shoe to drop

For a month, grain traders looked ahead to the expected meeting on the sidelines of the G20 meeting to Argentina between the U.S. and China. This was the big one. This was the moment when someone would blink, and this whole tariff mess that has stymied the sale of soybeans and pork to China would be resolved.

Only, the moment passed. The two countries just agreed to continue talking for three months, and China made a commitment to buy unspecified large quantities of unspecified goods from the U.S. in the meantime to show its good faith.

Instead of a 60-cent move on the Chicago futures market, we got a quick gap to a high 29 cents up, then a close of 11 cents higher. Since then we have been sideways, with a dip that almost closed the Monday morning gap.

At the close last Monday, we traded January futures at 9.05 3/4. This Tuesday morning, as this is written, we are at 9.13 3/4. Not what we hoped.

According to phone surveys of cash grain exporters, no sales to China are being booked yet. Perhaps this is China playing hardball, waiting for the last moment.

Detained

Perhaps the recent detention in Canada of the CFO of a large Chinese telecom company came at exactly the worst moment. Huawei CFO Meng Wanzhou, the daughter of the founder, was arrested in Canada at the request of our country.

According to a Bloomberg story, she is to be extradited to the U.S. to answer to charges that she conspired to defraud banks so that they cleared millions of dollars in transactions linked to Iran. This violated American sanctions.

The detention of Meng Wanzhou is cited by some commodity traders as a reason more progress has not been made in our trade disputes.

If you look at our trade from the Chinese perspective, they have been used to having all the advantages and feel they are under attack by the U.S.

The three-month negotiation period with China comes at a bad time, as it stretches out the period of our lack of sales of soybeans into the time when new crop beans will become available out of South America. Thus, unless the Chinese buy our soybeans at a premium in order to further the trade deal we hope gets made, we will continue to fall behind USDA projections for soybean exports.

Will exports resume?

Frankly, the idea that we will see significantly better soybean prices depends on a surge of exports to China that may not happen, or may not be a big surge. It can be stated that we are lucky our prices have not fallen more.

I believe our prices actually reflect optimism that the exports return. That optimism has put support in our market that may not be justified. Right now, I am betting that our President wins this in the 9th inning, just like he has with other trade deals in the last year.

Grain market ripples

Corn prices have been seen to be affected by the trade issues in only a minor way. This, because our trade with China is not about corn.

There are some indications this may not be true, based on trade rumors. It is possible there will be a corn price dividend in the trade talks.

It is also possible that China will be importing more ethanol from us. They are on track to triple their ethanol production by 2020, much like we did here a few years ago. Even with that production, ethanol demand would indicate the need for imports.

On last Monday, March corn futures gapped from 3.78 to 3.80 3/4, and closed up over 4 cents. Since then, we have had two lows to 3.80, but have not closed that gap. That is a bullish sign.

We are currently trading 3.83 1/2, down a half on the day. Our recent high was on the 6th at 3.86 3/4.

New report

USDA will release the December Supply and Demand Report later this morning (Tuesday). It will not report any new estimates for crop size. That will come in the final January Crop Production Report.

The November report had soybean production at 4.6 billion bushels and corn at 14.626 billion. At this point, traders are expecting soybean carryout for this year to drop 10 million bushels, to 945 million bushels. The corn is expected to gain just 2 million, to 1.738 billion.

For perspective, carryout on corn need to drop to 1 billion bushels before there is any sort of concern about supply.