The United States have reached an agreement on a Phase 1 deal that is set to be signed by both sides. While the initial reaction to this was positive, trade is becoming less optimistic on its benefits.
A Chinese media group has reported that low-tariff quotas on some commodities will not increase under the new trade agreement, including corn and wheat. China claims this will help protect their domestic market and provide financial stability to farmers. This news immediately generated doubts over the entire agreement. Many traders are already skeptical of the deal given China’s history associated with other trade deals. Sen. Chuck Grassley, R-Iowa, claims the text of the deal will be available as soon as it is signed, which is contrary to what trade has previously been told.
One great benefit for commodities as we begin 2020 is a shift in trade attitude. For much of 2019 we had selling develop on market rallies, which limited price potential. Toward the end of the year this changed, and we started to see buying take place when futures drifted lower. This is the primary reason we were able to post the yearly gains we did. The question now is if this was just profit taking or a trend that will give us a long-standing recovery.
Research shows that 2019 will go down as one of the most profitable for farmers in recent history. This stems from the Market Facilitation Program payments, which were enough to push income levels to the highest of the past five years. Economists claim these payments were more than enough to offset losses created by the Chinese trade war. There are now concerns over what incomes may be this year if the market does not recover losses, as the ending of the trade war will eliminate MFP payments.
Goldman Sachs has given a more optimistic outlook on commodity values. Sachs is now projecting a 6.4% return on commodity investments, an increase of 3%. This stems from the easing of trade tensions between the U.S. and China along with a more favorable outlook on crude oil. This does not necessarily mean commodity values will rally, but that they may simply stabilize and stop declining in value.
A considerable amount of displeasure is being voiced regarding the bio-fuel blending rates for 2020. According to White House policy, the renewable fuel industry will see blending demand of 20.09 billion gallons in 2020, up from the 19.92 billion gallons in 2019. While this is an improvement, the volume of ethanol to be blended remains the same at 15 billion gallons. Members of the Renewable Fuel Association are discouraged that this was not raised, and that waivers continue to be granted.
Some questions are being asked around the actual state of U.S. corn demand. Data shows that U.S. corn sales are down 44% from a year ago. While this is true, we also need to remember that corn stocks on a whole are down as well, so even with less corn exports we could see a contraction in corn inventory. This is especially true if domestic demand increases as much as some believe it will.
The Brazilian soybean planting season is all but done for the year. After a questionable start planting finished the year at its normal pace. This now puts the emphasis on weather, and conditions have deteriorated in Brazil this past week. Field scouts have started to question crop estimates as a result. Not only is this for soybeans, but possibly for corn if drought lingers and not as much double cropping takes place as expected.
This commentary is the sole opinion of Karl Setzer, market adviser for AgriVisor. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to contact Karl at email@example.com. You can also follow Karl on Twitter via @ksetzergrains.