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Phase I of U.S.-China Trade Agreement Signed
DR. AARON SMITH
KNOXVILLE, TENN.
Since the U.S.-China Phase 1 trade agreement was signed on January 15, March soybean futures are down 39 ¾ cents and November soybean futures are down 29 ½ cents. First, it is important to point out that market reaction to one event does not occur in a vacuum. The price reduction shown in the futures market is a culmination of many factors – South American weather/production potential being another dominant influence in soybean markets the past two weeks. However, one can easily argue that market expectations prior to the release of the text were not met on January 15. The magnitude of the agreement for agriculture – increased exports to China over the 2017 baseline of at least $12.5 and $19.5 billion for 2020 and 2021 – were as much as most could realistically hope for, and are undoubtedly a very good thing for the U.S. agricultural economy as a whole, if they are realized. Where market expectations were found lacking was in the agreement details. No product specific purchases will be released. There are numerous combinations of product purchases that could be made to achieve the total increase (this lack of detail will make it difficult for traders to front load markets ahead of anticipated Chinese purchases). Other phrases in the agreement like, “The Parties acknowledge that purchases will be made at market prices based on commercial considerations and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year” and “If China believes that its ability to fulfill its obligations under this Chapter is being affected by an action or inaction by the United States or by other circumstances arising in the United States, China is entitled to request consultations with the United States”, make timing of sales and enforcement of purchases challenging to predict and make sound, immediate trading decisions for commodities. With all of that being said, without substantial increases of U.S. soybean exports to China it is difficult to see a path for China to meet the mandated total import sales of U.S. agricultural commitments under Phase 1.
So, when will China ramp up soybean purchases? Will lower prices trigger soybean purchases? How large will the purchases be? Unfortunately, good answers to these questions are not available, but USDA export sales inspections data and weekly ex-port sales and shipments reports will be closely monitored for hints of aggressive Chinese buying for several commodities.
Corn
Ethanol production for the week ending January 17 was 1.049 million barrels per day, down 46,000 from the previous week. Ethanol stocks were 24.031 million barrels, up 1.025 million barrels compare to last week. Corn net sales reported by exporters for January 10-16 were up compared to last week with net sales of 39.6 million bushels for the 2019/20 marketing year and 0.1 million bushels for the 2020/21 marketing year. Exports for the same time period were down 28 percent from last week at 15.4 million bushels. Corn export sales and commitments were 45 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 61 percent. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at Memphis, Northwest Barge Points, Northwest, and Upper-middle Tennessee. Overall, basis for the week ranged from 15 under to 25 over, with an average of 15 over the March futures at elevators and barge points. March 2020 corn futures closed at $3.87, down 2 cents since last Friday. For the week, March 2020 corn futures traded between $3.84 and $3.94. Mar/May and Mar/Dec future spreads were 5 and 11 cents. May 2020 corn futures closed at $3.92, down 3 cents since last Friday.
In Tennessee, new crop cash corn contracts ranged from $4.00 to $4.19. December 2020 corn futures closed at $3.98, down 4 cents since last Friday. Downside price protection could be obtained by purchasing a $4.00 December 2020 Put Option costing 26 cents establishing a $3.74 futures floor.
Soybeans
Net sales reported by exporters were up compared to last week with net sales of 29.0 million bushels for the 2019/20 marketing year and 4.4 million bushels for the 2020/21 marketing year. Exports for the same period were down 13 percent compared to last week at 38.7 million bushels. Soybean export sales and commitments were 65 percent of the USDA estimated total annual ex-ports for the 2019/20 marketing year (September 1 to August 31), compared to the previous 5-year average of 79 percent. Average soybean basis strengthened at Memphis, Northwest Barge Points, Northwest, and Upper-middle Tennessee. Basis ranged from 15 under to 33 over the March futures contract at elevators and barge points. Average basis at the end of the week was 16 over the March futures contract. March 2020 soybean futures closed at $9.02, down 27 cents since last Friday. For the week, March 2020 soybean futures traded between $9.00 and $9.31. Mar/May and Mar/Nov future spreads were 13 and 36 cents. May 2020 soybean futures closed at $9.15, down 28 cents since last Friday. March soybean-to-corn price ratio was 2.33 at the end of the week.
In Tennessee, new crop soybean cash contracts ranged from $9.08 to $9.56. Nov/Dec 2020 soybean-to-corn price ratio was 2.36 at the end of the week. November 2020 soybean futures closed at $9.38, down 22 cents since last Friday. Downside price protection could be achieved by purchasing a $9.40 November 2020 Put Option which would cost 45 cents and set an $8.95 futures floor.
Cotton
Net sales reported by exporters were up compared to last week with net sales of 307,800 bales for the 2019/20 marketing year and 13,200 bales for the 2020/21 marketing year. Exports for the same time period were down 6 percent compared to last week at 282,600 bales. Upland cotton export sales were 79 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 75 percent. Delta upland cotton spot price quotes for January 23 were 67.28 cents/lb (41-4-34) and 69.53 cents/lb (31-3-35). Adjusted World Price (AWP) decreased 0.11 cents to 61.29 cents. March 2020 cotton futures closed at 69.4 cents, down 1.85 cents since last Friday. For the week, March 2020 cotton futures traded between 68.71 and 71.37 cents. Mar/May and Mar/Dec cotton futures spreads were 0.8 cents and 1.14 cents. May 2020 cotton futures closed at 70.20, down 199 cents since last Friday.
December 2020 cotton futures closed at 70.54, down 1.83 cents since last Friday. Downside price protection could be obtained by purchasing a 71 cent December 2020 Put Option costing 4.2 cents establishing a 66.8 cent futures floor.
Wheat
Wheat net sales reported by exporters were up compared to last week with net sales of 25.6 million bushels for the 2019/20 marketing year and 1.7 million bushels for the 2020/21 marketing year. Exports for the same time period were up 14 percent from last week at 19.3 million bushels. Wheat export sales were 76 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 84 percent. March 2020 wheat futures closed at $5.73, up 3 cents since last Friday. March 2020 wheat futures traded between $5.66 and $5.92 this week. March wheat-to-corn price ratio was 1.48. Mar/May and Mar/Jul future spreads were -1 and 0 cent. May 2020 wheat futures closed at $5.72, up 1 cent since last Friday. May wheat-to-corn price ratio was 1.46.
In Tennessee, June/July 2020 cash contracts ranged from $5.82 to $6.26. July 2020 wheat futures closed at $5.73, up 3 cents since last Friday. Downside price protection could be obtained by purchasing a $5.80 July 2020 Put Option costing 37 cents establishing a $5.43 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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