Update for February 7th, 2020
The February WASDE report will be announced this coming Tuesday, 2/11/2020 and now we have learned that it will not include Phase 1 trade commitments from China. Following the USDA January report we were told that the Feb report would include these figures but since USDA analysts have not been told of the specific buying targets for each farm product it will be excluded. USDA Chief Economist Robert Johansson said during an interview that the deal that was signed on January 15th will be factored in but the impact will be limited due to the lack any specific breakdown of the $40 billion commitment.
Source: USDA, Bloomberg
President Trump and China’s Xi Jinping have both reaffirmed their commitment to the implementation of the Phase 1 trade deal and according to the White House have “agreed to continue extensive communication and cooperation between both sides”. As a result China has announced plans to cut tariffs on imports of $75 billion of U.S. goods beginning February 14th. A statement from the Chinese Ministry of Finance said that this decision was intended to “alleviate economic and trade frictions and expand economic and trade cooperation”. “We hope to work with the United States towards the ultimate elimination of all increased tariffs.” The U.S. also committed to reducing tariffs by 50% on $120 billion of Chinese goods within 30 days and also agreed to not implement any of the additional planned tariffs.
Within the original Phase 1 agreement is a disaster related clause. A media outlet in China quoted an unnamed Chinese trade expert that said there will be no decision made whether to launch a consultation with the U.S. regarding this option until the end of the first quarter. He told the newspaper, “The Phase 1 agreement clearly stated that the two parties would consult with each other in the event that a natural disaster or other unforeseeable event outside the control of the parties delays a party from timely complying with its obligations under the agreement.” USDA Secretary Sonny Perdue has stated that the Trump administration understands that the outbreak of the coronavirus will make it difficult for China to meet their purchase agreement. He told attendees at an annual cattle industry convention that at that time there had not been any formal request for leniency, but would not be surprised if such a request would be made. “I think we would be asking the same thing, if we don’t see them trying to fulfill those needs other places, if they’re really trying and it really just blows the economy out of the water, I think we would be understanding of that.” Now that said, reports say that Chinese buyers have ramped up purchases of Brazilian soybeans, buying nearly 1 MMT, following the end of the Chinese Lunar New Year holiday. Everyone had hoped the signing of the new trade agreement would immediately mean more sales of U.S. soybeans but Brazilian soybeans are cheaper than the U.S. and they are taking advantage of the discount. The situation was different in December when the Brazilian currency strengthened making U.S. soybean prices competitive and in response China purchased from the U.S. But during January the Brazilian Real lost 6.9% of its value making them the cheaper option once again.
Corn exports rose again last week for the 3rd straight week to 48.6 million bushels. Total sales now stand at 848 million bushels 542 million behind last year. The current corn price at the U.S. Gulf is competitive and is now $8.00 per ton cheaper than corn out of Ukraine which has helped to boost sales over the past few weeks. U.S. prices will need to remain near current levels to remain competitive against the large supplies still available in Ukraine and the Brazilian crop that will be ready to begin shipping in June.
A U.S. court of appeals ruled on January 24th, that the EPA must reconsider three of the small refinery exemptions (SRE’s) that were granted to oil refineries. A group of biofuel industry groups challenged the 2016 exemptions for Holly Frontier’s Woods Cross, CVR Energy’s Wynewood and Cheyenne refineries. The court ruled that the EPA had overstepped their authority in granting the waivers to Holly Frontier’s and CVR because the neither of the refineries had received a waiver the previous year. (The RFS is worded that any hardship waiver granted after 2010 must be in the form of an extension, which means these were granted carelessly) The court concluded, “We remand these matters to the EPA for further proceedings consistent with this opinion.” Biofuel groups are pleased with the decision and said that it could raise questions about other waivers that have been approved by the Trump administration. (Reuters)
There is considerable fear within the ethanol industry that Monday’s Democrat caucus vote-counting fiasco could spell trouble for the U.S. ethanol industry’s political influence in future elections. Stephen Brown, a long time refining lobbyist stated, “The other loser along with the Iowa caucus Monday night might be the death grip that ethanol has had on the body politic.” He pointed out that because Iowa has had the first in the nation status for over 40 years presidential contenders have worked hard to earn the support of the corn lobby and RFS. Now the chaos from this week’s caucus has ignited calls for Iowa to lose the first in the nation status, an important privilege that has greatly helped the influence biofuel producers and farmers have had. (Politico)
The coronavirus which originated in China has now more than 31,000 confirmed cases and has claimed 638 individuals worldwide. This outbreak is the major market influence right now and will likely be the headline driving the market again next week. Another potential issue to consider is whether or not Chinese grain buyers will declare a “force majeure” which means the “buyer” has the option to default on deals by claiming the coronavirus is inhibiting them from taking deliveries. So far there have only been a few instances of this happening in other non-ag related companies but if more force majeure cancellations occur it will certainly cause instability in the U.S. markets.
Snow today and more expected over the weekend. The next system is expected to move through the Upper Midwest Saturday night into Sunday and has the potential to produce significant precipitation. The storm system is forecast to deliver snow across areas of northern Iowa into southern MN and Wisconsin. Further south there will be considerably less precipitation and will arrive as snow or a rain/snow mix. The GFS weather model is shown in the map below.