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Govenment Shutdown and Trade Negotiation Updates

Update for Thursday, January 3rd, 2019

With the continuation of the partial government shutdown, president and advisor of Allendale Inc. Steve Georgy told Bloomberg that we should expect to see higher volatility in the grain markets. The regular flow of U.S. federal data that is released by the USDA has now been halted. Georgy expects that traders instead will be turning to media outlets and Twitter to compensate for the lack of official government information and that will lead to higher volatility. Georgy explained that Funds will begin their start-of-year rebalancing and “A lot of money is going to be moved around. You have nothing that is tangible from the government, and its all hearsay, so it’s more explosive.”

The highly anticipated, annual January WASDE report that was scheduled for January 11th will likely not be on time even if the government shutdown ends next week. Pro Farmer analysts Jim Wiesemeyer explained that while USDA-NASS had gathered most of the information prior to the shutdown the analysis of that data is not completed. The USDA-NASS will need a full week to complete this process in order to release the report once the government reopens. This delay has Paul Georgy concerned, “This could cause a surge of USDA data to be released within a short period of time” (2+ weeks of export sales, CFTC updates and the January crop report). At this point it appears as though this could be a prolonged shutdown.

President Trump recently tweeted that he and Chinese President Xi Jinping had been working on negotiations by phone and “big progress” has been made. “Deal is moving along very well, if made, it will be very comprehensive, covering all subjects, areas and points of dispute.” This coincides with headlines that are reporting U.S. and Chinese negotiators are starting to work out many of their differences. (Source Wall Street Journal) Another indication that relations between the world’s two largest economies is improving comes from a report by Reuters revealing China’s plan to allow imports of U.S. rice for the first time ever. According to China’s customs authority, imports of U.S. brown, polished and crushed rice will soon be permitted. Currently rice makes up a small percentage of U.S. agriculture exports but that may soon change.

Politico reports there are multiple trade decisions to be made in 2019 in addition to the ongoing negotitations with China. Congress needs to vote to approve the newly negotiated NAFTA now called the USMCA. Formal trade talks may soon begin with both Japan which could begin as soon as January 20th and the EU as well. U.S. trade representatives are looking to secure comprehensive market access for American farm goods.

Corn prices have been unable to move beyond an extremely tight, $0.20 trading range for quite some time. The old-crop MAR19 contract has basically remained in a range of $3.70 to $3.90 a bushel since the end of September with the exception of 2 occasions when the market closed below $3.70 and once in mid-October when it closed above $3.90. Even though prices remain in this rather narrow range, there are some signs that corn may have a more optimistic outlook compared to other key crops. According to Chris Hurt, a Purdue University economist, “In terms of corn, we really have made some progress in our usage being higher than our production numbers in the last several years, and we’ve reduced those inventories to what I call manageable levels.” This reduction in inventory levels is favorable to corn producers and gives the crop a bit of an advantage to move higher in 2019 compared to soybeans. He stated, “We think we’re going to see some further erosion in inventory levels, and be getting corn prices higher, back to levels where at least we’re closer to getting cost and price into alignment.” So while Hurt does not look for corn prices to explode higher he explained the situation facing soybeans is a very different situation calling it a “difficult carryout situation”.

Traders have been debating what producers will ultimately decide to plant this spring considering all of the present factors. At current price levels the soybean to corn ratio is around 2.36, meaning it takes 2.4 bushels of corn to equal the value of 1 bushel of soybeans. Given the higher input costs involved with planting corn analysts believe that this ratio needs to be closer to 2.2 for farmers to plant corn instead of soybeans. For this ratio to be met using the current MAR soybean price of $9.05/bu., corn prices would need to rise to $4.10/bu.

Spot corn futures finished 2018 with a $0.24 gain, this is the first annual gain in 6 years. Ending corn stocks are estimated at 1.781 billion bushels which is 656 million bushels less than a year ago. Soybean futures ended 2018, $0.70 lower and an increase in inventory over the previous year.

The weather outlooks in Brazil have called for slightly below-normal rainfall totals for many regions with some areas of Mato Grosso receiving above-normal precipitation and Rio Grande do Sul forecast to receive 3-4 times above-normal rainfall totals. Forecasts just out for the first half of January show the northern and central crop growing regions are expected to receive 30-50% of their normal rainfall totals for this time of the year, this dry pattern has persisted for well over a month now and crop yields have suffered as a result.

To add to the lack of adequate rainfall most of the country is also expected to see temperatures average about 5 degrees above normal for the next couple of weeks.

Western Argentina has become quite dry but is forecast to receive rainfall during the next two weeks. Above average rainfall totals are expected across much of the eastern region of Argentina.

El Niño-like weather trends have caused extended dryness and is threatening the corn crop in South Africa. Forecasts show dry conditions will continue everywhere outside of the Eastern coast.

A warming trend has started for the entire U.S. with the exception of the Northeast, these above-normal temps are expected to stick around for the next 6 to 10 days. Precipitation is forecast to be above-average for most of the western two thirds of the country, below-normal precipitation is expected across the southeastern U.S.

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