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Phase 1 Details and ARC or PLC?

Update for January 3rd, 2020

The news that the agriculture industry has desperately waited for is finally becoming a reality, Phase 1 of the U.S./China trade deal will be signed by President Trump and high level Chinese officials during a ceremony at the White House on January 15th, 2020. The process to arrive at this agreement has been long and complicated, during 2019 trade representatives from the U.S. have met with their Chinese counterparts 33 times in negotiating sessions and spent hundreds of hours discussing all of the aspects needed to reach this agreement. Now that both sides have come to an agreement all documents will now need to go through a process of translation so that everyone understands exactly what the agreement legally says. This process takes an enormous amount of time due in part to the complexity of the Chinese language.

We still have not heard many details out of the news media regarding specific details on the Phase 1 agreement. Ambassador Gregg Doudd, top ag trade negotiator said, “The purchases commitment on the part of China is based upon a base year of $24 billion of ag purchases, which occurred in 2017. China agreed to buy an additional $32 billion over the next two years on top of the $24 billion. So, to make the math really easy, let’s take 32 divided by two and then add that 16 to the 24. That means on average, each of the two years, China’s committed to buy $40 billion of U.S. farm products. Now in the first year, it’ll be a little less and the second year will be a little more. But another very accurate way to describe this is China has committed to buying $80 billion in U.S. ag products over the next two years. So that’s the first thing: we have to make sure everybody understands what it is. I’ve seen a lot of folks say, ‘Well that’s just now possible. That doesn’t make any sense. It’s not a real number.’ My reaction to that is, I just don’t agree with that because here’s the statistic for everybody: China imported last year $124 billion in ag products from the world. To put that into context, U.S. total ag exports last year were $145 billion. So what we’re really asking China to do here is to move from $24 billion to $40 billion out of $124 billion. Some say that it’s still difficult. I understand that. But if you don’t take into account all the structural changes that we have negotiated in this agreement, which I understand you haven’t seen yet, but one you see what the structural changes are, then you can see the context of the discussion, and it will be clear to you that this is very doable. This is not some sort of weird pie-in-the-sky thing. These are commitments that China made: 80 billion over 2 years and with these structural changes, I think we’re more than capable of accomplishing that.”

President Trump is planning to travel to Beijing to start talks on Phase 2 of the trade deal, a specific date has not been scheduled yet. This next phase will address broader structural issues that many predict will deal directly with the tech sector. It’s generally believed that a Phase 2 deal is unlikely prior to the presidential election in November.

Excitement in the trade surrounding the new agreement has brought about a reduction in short positions held by the funds and speculative trade which has helped move grain prices higher over the past week. There have been more details regarding import intentions from China’s JCI consulting group which indicate that it is quite possible China can reach the $40 billion in U.S. imports as agreed to. Even so some within the trade don’t believe that the estimated purchase of 314 million bushels of U.S. corn by the Chinese is likely since corn offers from Ukraine are $4-$5/ton cheaper. A major U.S. biofuel producer Green Plains Inc. sees the potential for Chinese imports of American ethanol to increase to a billion gallons. This would be a major increase from the 200 to 300 million gallons shipped there in previous years. Virtually any significant boost in ethanol sales could solve the profit margin issues which are largely blamed on the downturn in export shipments and has caused the most trouble in the ethanol sector.

U.S. soybean exports to China rose sharply in November to 2.56 MMT, the highest monthly volume since March, 2018, good news when you consider the total for the first 11 months of the year had fallen off by 16.4% to 13.85 MMT. Chinese imports of Brazilian soybeans also declined in November by 24% to 3.86 MMT. This month China’s soybean imports are expected to reach nearly 9 MMT as more cargoes from the U.S. are forecast to help relieve the supply shortages that have developed with some Chinese crushers. We have seen soybean prices climb by about +$0.10 in the MAR20 contract since Christmas and while this is positive news, the fact is that this MAR20 contract is still nearly -$0.30 below its 12 month high that occurred on January 9th, 2019. Now we finally have some real potential for increasing demand out of China for our U.S. soybeans but talk of another record harvest in Brazil and speculations of a +9 million acre increase in U.S. soybean acres in 2020 are preventing any significant rallies, at least for now.

The rollercoaster year of 2019 will go down in history as one of the most challenging crop season ever thanks to Mother Nature. Agronomist Ken Ferrie says that there is at least one major lesson farmers learned in 2019 (if they didn’t know it already): planting conditions matter more than planting date. Heavy snowpack led to a wet spring which pushed back all farming activities and caused a domino effect throughout the entire growing season and well into harvest. Many producers are anxious to forget 2019 but the final outcome has produced some astonishing results and important lessons. With the advancements in genetics Ferrie said, “The crop is a little more forgiving when it comes to weather and planting dates. The idea of getting in a panic and forcing that crop in, I don’t think we have to do that anymore.” He went on to say “It seems like our September and October window has changed somewhat in the past 10 years, or definitely the last five years, and we can count on more heat. It’s kind of hard to count on September to finish out your crop, but that seems to be what’s taking place.” Fall weather really made the crop this year which surprised producers as well as the commodity markets. Mark Gold with Top Third Ag Marketing said, “I think the market got burned, and the fact that we had some of the worst weather and worst growing seasons that we’ve had, we couldn’t get the crop the crop in the ground.” Last spring the market reacted to the wet conditions and became more bullish but as fall approached the market realized the crop could still be made that reaction turned sour. Gold said, “We fell apart, because we had good weather in September. Corn, wheat and soybeans, which looked like they could go nowhere really but up because of all the delayed planting and the lousy weather and the wet cold spring, a lot of guys put big bets on that in the markets, and it didn’t work out. We found out that you can make a soybean crop and corn crop in September.”

Brownfield Ag News reports that the University of Illinois has created an online ARC/PLC calculator. This program was designed to help farmers decide between the Agriculture Risk Coverage (ARC) and the Price Loss Coverage (PLC) options under the 2018 Farm Bill. This program will calculate payments from each option based on county and modeling for each crop year from 2019 through 2023. Ag policy professor Jonathan Coppess explained that once the user creates their account they are able to run countless estimates. “You get a thousand simulations of these program payments to give you a rough concept of where those payments are likely to be and what the percentages or odds of getting a payment in that range looks like.” March 15th, 2020 is the deadline for producers to sign up for either program.

The first 3 maps below show the temperature departures from normal out to January 16th.

Days 0-5

Days 5-10

Days 10-15...a bit of a cooling trend.

The wet southern storm track is expected to remain far to the south during the first half of January. This means that most storm systems and heavy precipitation will track over the Ohio Valley where the jet stream is more amplified and full of moisture.

The two maps below from NOAA are their latest revised forecasts for the month of January.

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