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Agriculture Significant Component Of China, United States Trade Agreement
DR. AARON SMITH
KNOXVILLE, TENN.
The big agricultural news for the week was the signing of the Phase 1 trade agreement between China and the United States. Agriculture was a significant component of the agreement, with approximately 30 pages in the 96 page document (including text and tables), designated to agricultural commodities and related products. Unfortunately, specifics were limited, which caused agricultural markets to pull back on Wednesday and Thursday before rebounding Friday. Many market participants were looking for large export sale announcements for specific commodities to “kick-off” the new pact.
The agreement has the potential to be very beneficial for US agriculture, however it is difficult to determine the exact implications of the Phase 1 trade agreement for individual commodities due to the vagueness of the language and lack of specifics regarding commodity or product purchases. For example, the agreement indicates that China’s purchases of US agricultural products, in 2020 and 2021, will be $12.5 and $19.5 billion greater than the 2017 baseline, however the baseline is not clearly de-fined. Is the baseline the $24 billion in agriculture and forestry commodities and related products that the US sent to China in 2017? Are China’s increased purchases (or the baseline) for the calendar year or an alternative annual interval? Additionally, no product specific purchases were disclosed. Many think that soybeans, cotton, sorghum, pork, beef, and poultry stand to gain substantial sales to China (a reasonable assumption). This is based on past US agricultural exports to China and anticipated in-creases in meat exports due to the impacts of African Swine Fever in China. However, not knowing the magnitude and timing of the sales for individual commodities makes market reaction challenging. Traders appear to want confirmation of export sales before markets move prices upward. For reference, in 2017, of the $24 billion in agriculture commodities and products exported to China, soybeans accounted for $12.2 billion (51 percent), cotton $978 million (4 percent), and coarse grain, corn, and wheat for $1.331 billion (5.5 percent).
The Full 96 page Phase 1 Trade Agreement between China and US can be accessed at:
https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf.
Corn
Ethanol production for the week ending January 10 was 1.095 million barrels per day, up 33,000 from the previous week. Ethanol stocks were 23.006 million barrels, up 0.544 million barrels compare to last week. Corn net sales reported by exporters for January 3-9 were up compared to last week with net sales of 30.9 million bushels for the 2019/20 marketing year and 8.1 million bushels for the 2020/21 marketing year. Exports for the same time period were up 6 percent from last week at 21.4 million bushels. Corn export sales and commitments were 43 percent of the USDA estimated total annual exports for the 2019/20 marketing year (September 1 to August 31) compared to the previous 5-year average of 58 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at Memphis, Northwest Barge Points, and Northwest Tennessee and weakened at Upper-middle Tennessee. Overall, basis for the week ranged from 12 under to 28 over, with an average of 18 over the March futures at elevators and barge points. March 2020 corn futures closed at $3.89, up 4 cents since last Friday. For the week, March 2020 corn futures traded between $3.75 and $3.90. Mar/May and Mar/Dec future spreads were 6 and 13 cents. May 2020 corn futures closed at $3.95, up 3 cents since last Friday.
In Tennessee, new crop cash corn contracts ranged from $3.91 to $4.14. December 2020 corn futures closed at $4.02, unchanged since last Friday. Downside price protection could be obtained by purchasing a $4.10 December 2020 Put Option costing 30 cents establishing a $3.80 futures floor.
Soybeans
Net sales reported by exporters were up compared to last week with net sales of 26.1 million bushels for the 2019/20 marketing year. Exports for the same period were up 14 percent compared to last week at 47.0 million bushels. Soybean export sales and commitments were 63 percent of the USDA estimated total annual exports for the 2019/20 marketing year (September 1 to August 31), compared to the previous 5-year average of 78 percent. Average soybean basis strengthened at Memphis, Northwest Barge Points, Northwest, and Upper-middle Tennessee. Basis ranged from 26 under to 20 over the March futures contract at elevators and barge points. Average basis at the end of the week was 8 over the March futures contract. March 2020 soybean futures closed at $9.296, down 17 cents since last Friday. For the week, March 2020 soybean futures traded between $9.20 and $9.49. Mar/May and Mar/Nov future spreads were 14 and 31 cents. May 2020 soybean futures closed at $9.43, down 16 cents since last Friday. March soybean-to-corn price ratio was 2.39 at the end of the week.
In Tennessee, new crop soybean cash contracts ranged from $9.20 to $9.75. Nov/Dec 2020 soybean-to-corn price ratio was 2.39 at the end of the week. November 2020 soybean futures closed at $9.60, down 14 cents since last Friday. Downside price protection could be achieved by purchasing a $9.80 November 2020 Put Option which would cost 57 cents and set a $9.23 futures floor.
Cotton
Net sales reported by exporters were up compared to last week with net sales of 232,900 bales for the 2019/20 marketing year and 14,500 bales for the 2020/21 marketing year. Exports for the same time period were up 43 percent compared to last week at 301,700 bales. Upland cotton export sales were 77 percent of the USDA estimated total annual exports for the 2019/20 marketing year (August 1 to July 31), compared to the previous 5-year average of 73 percent. Delta upland cotton spot price quotes for January 16 were 67.47 cents/lb (41-4-34) and 69.72 cents/lb (31-3-35). Adjusted World Price (AWP) increased 1.32 cents to 61.4 cents. March 2020 cotton futures closed at 71.25 cents, down 0.06 cents since last Friday. For the week, March 2020 cotton futures traded between 69.73 and 71.96 cents. Mar/May and Mar/Dec cotton futures spreads were 0.94 cents and 1.12 cents. May 2020 cotton futures closed at 72.19, down 0.27 cents since last Friday.
December 2020 cotton futures closed at 72.37, down 0.11 cents since last Friday. Downside price protection could be obtained by purchasing a 73 cent December 2020 Put Option costing 4.85 cents establishing a 68.15 cent futures floor.
Wheat
Wheat net sales reported by exporters were up compared to last week with net sales of 23.9 million bushels for the 2019/20 marketing year and 2.2 million bushels for the 2020/21 marketing year. Exports for the same time period were up 30 percent from last week at 16.9 million bushels. Wheat export sales were 74 percent of the USDA estimated total annual exports for the 2019/20 marketing year (June 1 to May 31), compared to the previous 5-year average of 82 percent. March 2020 wheat futures closed at $5.70, up 6 cents since last Friday. March 2020 wheat futures traded between $5.58 and $5.78 this week. March wheat-to-corn price ratio was 1.47. Mar/May and Mar/Jul future spreads were 1 and 0 cent. May 2020 wheat futures closed at $5.71, up 5 cents since last Friday. May wheat-to-corn price ratio was 1.45.
In Tennessee, June/July 2020 cash contracts ranged from $5.70 to $6.14. July 2020 wheat futures closed at $5.70, up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $5.80 July 2020 Put Option costing 41 cents establishing a $5.39 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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