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Tensions Rise Over Hong Kong and Weekly Crop Conditions

Update for June 5th, 2020

Alarming civil unrest has gripped the attention of the nation as cities of all sizes across the U.S. work to calm national tensions, thankfully so far the instability has caused little impact in equity or commodity markets. What has rocked the markets this week though is the escalation of tensions between the U.S. and China over Hong Kong. There seems to be a lot of confusion in the market regarding what news out of China is accurate and what is not. Earlier this week we heard reports that Beijing had ordered a freeze on imports of American farm goods which alarmed the U.S. markets. Bloomberg then clarified that under the order are some exceptions that allow state-run buyers to import U.S. ag products:

  1. They are needed to cover derivative positions.

  2. When purchased on behalf of private firms that are not affected by the government order.

  3. There is already an ongoing transaction.

Commercial Chinese soybean importers have not been ordered to suspend all U.S. purchases and are expected to keep buying from the U.S. to cover needs for the fourth quarter of 2020, through February, 2021. According to Shanghai JC Intelligence Co., many crushing plants do not have adequate supplies secured to cover the expected increase in demand for soybean meal for feed usage now that the hog industry is beginning to rebuild. Monica Tu, an analyst with Shanghai JC Intelligence pointed out that since soybean supplies in Brazil are dwindling the premiums are increasing for those cargoes, making American soybeans more attractive which could boost soybean exports even earlier. “Crushers will need to buy at least 20 million tons to cover their needs until then (meaning between now and the 4th quarter of 2020), regardless of state reserves.” (Bloomberg) Of course there is still an abundance of skepticism and nervousness surrounding the Chinese commitment to Phase 1. One veteran analyst explained his view of the situation this way, “China is light years from the pace of ag commodities they need to buy each month to reach the $36.5 billion commitment for 2020…the U.S. doesn’t have the export capacity to export $25 billion to $30 billion in ag trade to China from August through December 2020, on top of normal business. So I expect China will renege on the 2020 Phase 1 commitment.” U.S. Trade Representative Bob Lighthizer feels differently and says he feels “very good” about the Phase 1 trade agreement and believes the Chinese are doing a good job of keeping to the pact in the midst of the coronavirus pandemic and pointed out that this week China has purchased more than $100 million soybeans. The Chinese paper, Global Times wrote that this week’s sales of U.S. soybeans to China is proof that there has been no halt in buying as others had reported. Zhang Xiaoping, country director for China at the U.S. Soybean Export Council reported that Chinese firms are still buying U.S. soybeans in line with market rules, and are unaffected by diplomatic tensions between the two sides.

The USDA shows 93% of the U.S. corn crop is now planted, 5% more than last week, which is almost 30% higher than a year ago. The 2020 corn crop received a GD/EX rating of 74%, considerably higher than the trade had expected. Several key states have GD/EX corn ratings this year that far surpass ratings from this time a year ago:

  • Iowa 85% vs 58% last year

  • Minnesota 83% vs 60% last year

  • Ohio 62% vs 58% a year ago

  • South Dakota 82% vs 55% a year ago

  • Indiana 68% vs 53% last year

  • Wisconsin 83% vs 53% last year

*** Interesting to note that Illinois has the lowest rated crop condition for this week with just 56% rated GD/EX compared to 47% a year ago.

While most of these ratings look impressive some companies using new, high-tech geospatial and remote sensing technology to assist them in forecasting potential yields are estimating U.S. corn yields between 172 and 175 bushels per acres sizably lower than the current USDA estimated yield of 178.5. Market bulls are optimistic that with the potential for lower yields, developing weather uncertainties in the U.S. forecast, increased fuel consumption and expectations for unplanted corn acres to move to prevent plant acres, the USDA’s May total production forecast will be the largest we see for the year. Something else to consider-“Commercials are in the unusual position of holding more long corn hedges than short hedges. That tells you how tight corn is in the country. Users have no inventory and farmers are reluctant to sell. It also tells you that basis is likely as good as its going to get.”

The USDA estimated U.S. soybean planting progressed by 10% from the prior week to 75% complete and is rated at 70% GD/EX. Slow planting progress in 2019 delayed the first condition rating for soybeans until June 24th when only 54% was rated GD/EX. Listed are a few of the most notable differences in GD/EX ratings from June 1, 2020 vs those of June 24, 2019:

  • Nebraska 82% vs 75% last year

  • North Dakota 66% vs 70% last year

  • Minnesota 84% vs 66% last year

  • Iowa 81% vs 63% last year

  • Wisconsin 82% vs 59% last year

  • South Dakota 83% vs 55% last year

  • Illinois 56% vs 42% last year

  • Indiana 69% vs 41% last year

  • Ohio 61% vs 30% last year

Next week the Corn Belt will see temperatures running considerably below normal. Rainfall is also forecast to remain below normal for the majority of the Midwest.

The newly revised 1 month outlook released from NOAA for the month of June shows temperatures are expected to average well above normal for most of the U.S. while precipitation forecasts remain near normal for most regions.

Revised OFFICIAL 30-Day Forecasts Issued: May 31, 2020

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