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China Buying and USDA Worksheet

Update for May 8th, 2020

U.S. Trade Representative Bob Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu held discussions late yesterday to discuss the Phase 1 trade situation along with some economic issues. Regularly scheduled meetings between lead trade representatives from both countries is a requirement of the original agreement and were designed to keep the lines of communication open to discuss trade and other important issues. President Trump warned earlier this week that the U.S. could end the trade agreement if China does not fulfill their purchase commitments. But following the U.S./China discussion yesterday Lighthizer and Mnuchin wrote a statement regarding the meeting saying, “Both sides agreed that good progress is being made on creating the governmental infrastructures necessary to make the agreement a success…They also agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner.”

This week China purchased 686,000 metric tons of U.S. corn which is their third sizable order since March. This purchase also moves them back onto the list of the top 5 markets for U.S. corn. In addition, for the first time since December a shipment of U.S. crude oil is headed to China and is expected to arrive by mid-May. This initial cargo contains around 1.3 million barrels of Alaskan crude and is believed to be a positive indication that China is now starting to see some economic recovery following the COVID-19 outbreak.

The Andersons, an ethanol production company with 5 locations located throughout the Midwest, has restarted operations in 2 plants. All 5 of company’s plants had been idled in March but production is now underway in Albion, MI and Denison, IA. While these two communities are very fortunate to have their facilities reopen there are many more “vulnerable rural communities” that desperately need the same. A group of 24 farm-state senators told President Trump this week that the EPA should deny the requests to waive bio-fuel blending mandates that were sent by governors of big oil states. Explaining that such an action, “would cause further harm to the U.S. economy” in our most “vulnerable rural communities” and the granting of such waivers would worsen the outlook for our struggling biofuels industry and the farmers whose income is directly tied to the strength of the sector.

There are finally a few positive factors influencing the corn market right now. There is increasing hope that recent large sales of U.S. corn to China is a sign there will be more significant purchases to come. In addition complications have developed in Brazil’s Safrinha crop and forecasts for record setting cold weather across northern sections of the Midwest over the weekend could cause some damage to newly emerged crops. Of course the reality of early planting, huge corn and soybean acres and demand uncertainties also continue to weigh on prices as well. Corteva, a large seed and pesticide company is concerned about the lack of corn demand through the rest of the year and what that may mean for next season’s sales. Half of the company’s revenue comes from seed corn sales and there is a considerable amount of concern regarding how many corn acres producers will in 2021. The Chief Executive Officer of Corteva told Reuters, “Our assumptions right now is that we could see a 5 to 7 million acre decline in corn”.

Only 10% of the Chinese soybean purchase commitments in the Phase 1 agreement have been fulfilled with well over 1/3rd of the year already gone. This has many in the market thinking the Chinese will soon ramp up purchases to meet their commitments to the U.S. Expectations of large U.S. soybean acres, good planting conditions and a weak Brazilian currency are currently limiting soybeans upside potential.

FarmDocs Daily recently published a paper explaining the outlook ag economists from 5 universities have regarding government payments to producers in 2020. Low market prices for this year’s corn and soybean crops brought on by the coronavirus is expected to trigger a payout somewhere between $3.9 -$7.2 billion in USDA subsidies to corn and soybean growers. The group compared futures prices for corn and soybeans prior to the COVID-19 outbreak and prices after the virus became widespread. They concluded that the actual value of the crops before the outbreak was around $101 billion and after, the value had fallen to $83 to $88 billion depending on the difference between the futures prices in May and cash prices when the crop is sold.

The May USDA WASDE and Crop Production Reports are scheduled for release next Tuesday, May 12th. This will be the first USDA estimate for the new 2020-21 crop production year. Most traders are expecting a large increase in corn and soybean production/acres. The biggest unknown going forward is how they will forecast demand which will be very difficult to determine given current circumstances.

The map below illustrates the wide-spread cold temperatures which are expected to fall below freezing by tomorrow morning for a large section of the upper Midwest and eastern Corn Belt.

The 6 to 10-day (May 13-17) U.S. outlook forecast calls for below normal temperatures and above normal precipitation for much of the country.

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