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Trade, USDA Report Worksheet and Weather

Update for May 7th, 2019

Yet again we are disappointed with the most recent updates regarding our trade negotiations with China. High level Chinese officials have now taken a tough line with negotiations and do not want to settle on any agreements that would require the Chinese legislature to make changes to current law already in place. In March the Chinese legislature approved a new foreign investment law which added protection for foreign companies that feared being forced to share their technology and know-how to Chinese firms. The Trump administration and business groups say that the new Chinese regulations do not go far enough to adequately protect the intellectual property rights of our goods and services.

President Trump sent a tweet this past Sunday that reportedly caught Chinese officials by surprise. He wrote, “For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billion Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”

Following the Presidents tweet, markets have been struggling both here and in Asia. There has been a lot of talk that a deal was within reach this week as 100 officials and top negotiators from China are scheduled to arrive in Washington to continue talks. Reports indicate that the chief negotiator for China, Premier Liu He did not board the plane to Washington with the rest of the delegation but instead is expected to arrive separately later in the week if discussions are going well. White House Economic Advisor Larry Kudlow told Fox News that the President was issuing a warning to China with the tweet on Sunday. Kudlow explained that the U.S. has “bent over backwards” by suspending the tariffs that were scheduled to go into effect several months ago in response to the positive progress with the trade negotiations at that time. In a sense, time is up, and U.S. patience and generosity have run out. President Trump and U.S. negotiators are working to build a framework on which the two greatest powers and biggest trading partners on the globe will operate for many years to come, so we must get it right. U.S. trade representative Robert Lighthizer commented that there was some erosion in commitments and the Chinese were reneging and pulling back on some of their previous commitments. Steven Mnuchin stated that “there were communications over the weekend that moved the agreement substantially backwards and that the entire economic team is unified in recommending to President Trump that the U.S. go ahead with increasing tariffs if there is not an agreement by Friday”. The VIX, otherwise known as the Fear Index jumped up +20% following these latest updates, traders and money managers are taking notice of these latest developments and are becoming quite nervous. While many aspects of U.S. business have been effected by this long and tenuous process I think most of us can agree that the agriculture industry has taken the largest direct and harmful hit. And while Ag Secretary Sonny Perdue may say there will be no more government programs to subsidize producers while a deal is worked out, perhaps the administration should consider using the added revenue from the Chinese tariffs to partially reimburse U.S. farmers for the extensive personal and financial sacrifices that have been put upon them as a result of this ongoing trade war.

Funds are currently holding a record bearish position in the corn market based largely on the much larger South American crop production total than a year ago and a decrease in demand for corn here in the U.S. Many traders are looking for the USDA to lower their estimates for corn exports, feed and residual usage and ethanol estimates. Bulls are aware of all of these factors but are remaining hopeful that the significant weather issues facing producers in a large portion of the country will more than off-set any reductions in total demand. One very important point to remember is that right now 5 of the largest corn producing states are massively behind schedule. Iowa, Illinois, Indiana, Minnesota and Nebraska account for 48 million of the estimated 90 million corn acres that are projected to be grown in the U.S. this year. As of Sunday, the USDA estimated that Illinois still had 90% of their corn acres left to plant, Indiana had 97%, Iowa 65%, Minnesota had 94% and Nebraska had 65% left to plant.

Soybeans are facing additional pressure with the African Swine Fever headlines that are continually adding more uncertainty about the virus. Yesterday, Tyson Food CEO Noel White said that “AFS has taken 5% of the global pork supply out of the marketplace”. He said that 150 to 200 million hogs in China have already been culled as a result of the disease and that “the rate in which it has spread over the course of the last 12 months makes it very plausible that it could come to the United States”.

The weekly Crop Progress update shows 23% of the U.S. corn crop is now planted which is an 8% climb from the previous week. This is 2% less than the average trade estimate and 23% below the 5 year average. Soybean planting is up 3% over the previous week to 6% completed. This is 2% less than the average trade guess and 8% below the 5 year average.

This Friday the USDA’s WASDE report will bring us up to date on the 2019-20 production estimates. Presently production estimates closely resemble those of the Ag Forum which are nearly equal to last year’s yields. Traders are not expecting any adjustments to be made from the USDA regarding weather concerns at this point, in addition carryover for corn, soybean and wheat are all expected to see increases from this crop to the next.

Source: USDA, Reuters, Bloomberg

Flooding continues along the Mississippi River and the National Weather Service Prediction Center is now saying that the flooding might persist through the end of May and perhaps even into June due to the unrelenting rainfall that continues to fall across the Midwest. Some parts of Iowa and Illinois have been in some degree of flood stage for more than 30 days, this has never happened since records have been kept and some of them go back 150 years. The map below shows the anticipated rainfall for Monday, May 6th to Saturday, May 11th. Very little of the country looks to remain dry during this timeframe with all portions of the Corn Belt expected to received 2 to 5 inches of rainfall by this weekend.

The outlook for the period May 11th through the 15th shows a drier pattern setting up but with below normal temperatures.

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