Chinese Trade Update and Weather Concerns With South American Crops
Update for December 27th, 2018
A big topic in the agriculture industry right now is the news of more ethanol facilities halting production. Now analysts are debating whether the USDA will need to make additional reductions to demand in upcoming reports or if the 50 million bushel reduction made in the December report is still sufficient. We have all heard for quite some time now that ethanol margins are under pressure and estimates indicate that the majority of plants have been operating at a loss for the past 13 weeks. This downturn in ethanol production and demand will negatively affect basis values as well as futures values through the coming months. A study from Advance Trading Inc. stated that every 100 million gallon ethanol plant that halts production is equal to nearly 2 unit trains of corn per week that is not being consumed in the regional supply line.
Our U.S. Secretary of Agriculture, Sonny Perdue detailed what functions of the USDA that will remain available during the government shut-down and which services will not. “There may be a lapse in funding for the federal government, but that will not relieve USDA of its responsibilities for safeguarding life and property through the critical services we provide. Our employees work hard every day to benefit our customers and the farmers, ranchers, and forester, and producers who depend on our programs. During a shutdown, we will leverage our existing resources as best we can to continue to provide the top-notch service people expect.” During the first week of the shutdown, 61% of employees will either be exempted or accepted from shutdown activities. If the shutdown were to continue on beyond the first week the percentage of workers and activities will begin to decrease as available funding decreases. There is a long list of functions carried out by the USDA and I chose to include only the few that pertain closely with crop production.
USDA activities that WILL CONTINUE for the FIRST WEEK include:
Some farm payments which include
o Direct payments
o Market Assistance Loans
o Market Facilitation Payments (note-also listed in the short-term beyond one week so this is unclear)
o Disaster Assistance Programs
Other activities that WILL CONTINUE for the short-term include:
Market Facilitation Loans
Trade Mitigation Purchases made by USDA’s Agricultural Marketing Service.
Agricultural export credit and other agriculture trade development and monitoring activities.
USDA’s Market News Service, which provides critically important market information to the agricultural industry.
Bloomberg reports that U.S.-China trade talks are scheduled to begin on January 7th in Beijing with Deputy U.S. Trade Representative Jeffrey Gerrish set to lead the Trump Administration’s team. While Chinese and U.S. officials have been in constant contact over the phone since the 90 day truce was reached in Argentina a month ago, this will be the first face-to-face meetings held. According to two individuals in Beijing that have knowledge of the negotiations have stated that China is not exactly clear on the specific details of what the U.S. wants. China has made it clear that they want which is for the U.S. to remove the punitive tariffs that have been imposed and for no new tariffs to be added. A hard deadline of 90 days/March 1 was agreed to during the November meeting between President Xi and President Trump. Since then Trump and other members of his trade team, including National Economic Director Larry Kudlow, have said that this deadline could be extended further if it appears that the two sides are making sufficient progress towards a resolution.
Hot and dry weather arrived about mid-November across south central Brazil and those conditions still persist. Many of Brazil’s major growing regions have received less than half of their normal rainfall and according to Dr. Cordonnier these unfavorable conditions have caused 20-25% of the crop acreage to become too dry and he has reduced the expected soybean and corn yields each by 1.0 million tons.
Dr. Cordonnier also cut the Argentine soybean crop by 1.0 million tons and the corn crop by 0.5 million tons. Argentina has two problems, part of the country is too wet while the other part is too dry.
The two week outlook for precipitation in Brazil shows below-average rainfall for Mato Grosso, Goias, and Mato Grosso do Sul. If this forecast is correct it will extend a dry streak that has already lasted more than a month during the heart of crop development season.
In addition to the expected below-normal rainfall as we enter early January, these dry regions could also see temperatures reaching 100 degrees.
Argentina’s outlook is showing more rainfall than previously forecasted with some regions expecting up to 4 times the normal amount for this time of year. Temperatures are forecast to be 6 to 10 degrees above-normal during this same time period.
These forecasts are consistent with what is expected during an El Niño weather pattern. The Australian Government Bureau of Meteorology reports that we remain in an El Niño Alert which means there is a 70% likelihood that an El Niño pattern will form this winter, most of the key thresholds for this event have not yet been met.
The 8-14 day outlook for the National Weather Service is forecasting drier-than-average conditions and moderate temperatures for most of the U.S. through January 9th.