There’s news to celebrate out of the G-20 summit in Argentina. China has agreed to immediately start buying US agricultural products. But before you start jumping up and down for joy, there’s one caveat- China failed to specifically mention that they’d buy US soybeans. The 25% tariff on US soybeans is still in place, and it’s anybody’s guess what will happen next. The ball is in China’s court, and resolution could still be a long shot. In the meantime, should you make a fast break and sell when prices spike on rumors? Here’s the latest from Ag Update, Farm Futures and the University of Illinois Department of Agriculture and Consumer Economics.
G-20 Good News
efore last Saturday’s G-20 dinner between China’s president Xi-Jinping and president Donald Trump, traders were hanging on Trump’s every Tweet. They were desperately trying to predict soybean demand. Futures volumes rose the highest since August and hedge funds were more bearish just days before prices saw the best weekly rally in over a month.
Singh spoke with Lindsay Greiner, the president of the Iowa Soybean Association about the news out of the G-20. She said,
“Hopefully, in the next 90 days, negotiations will move forward and we can move to resolve this whole thing.”
Grenier also said that from a “physiological standpoint,” these are positive developments. A lot of details are still unknown, but we will probably have a higher push in prices.
Ball is in China’s Court
Bryce Knorr of Farm Futures Magazine says the next move in the trade truce is up to China. There are a lot of speculations about whether or not they’ll once again start buying US soybeans.
“We’re waiting for a sign that China might actually buy some soybeans. The tariffs are probably going to have to come down, because our prices are 5-10% below the cost out of Brazil. The 25% tariff makes the Brazilian beans still cheaper.”
It’s rumored that China’s soybean supply is running out. But will they run out before the Brazilian harvest hits? USDA Agriculture Secretary Sonny Perdue believes that will be the case. He predicts that China is going to need to buy soybeans from the US. Others aren’t sure. China has built up very large inventories. They’ve been sourcing soybeans and vegetable proteins from all over the world to make up for the lack of US supplies.
25% Tariff Needs to be Lifted
When you look at futures calculations, exchange rates, and taxes- it doesn’t appear that much will happen unless the 25% tariff is lifted. Alfred Cang of Farm Futures spoke with Monica Tu, an analyst at researcher Shanghai JC Intelligence Co.
“I see little incentive for Chinese commercial crushers to buy U.S. soybeans right now unless the 25% tariff is lifted, or U.S. farmers cut prices even more.”
Any purchases happening right now are probably just to resupply state inventories. If the cargoes are used for state reserves, China has said they’d reimburse the cost of the 25% tariff.
Should You Sell on a Rumor?
So, you’re probably wondering if you should sell when soy prices rally on a rumor? Todd Hubbs, from the Department of Agricultural and Consumer Economics at the University of Illinois thinks so. In his November 19, 2018 article, “Sell the Rumor? Trade Negotiations and Soybean Prices,” he looked at current projections of supply and foreign consumption along with developments in soy exports. US exports are weak, and the soybean stocks around the world are growing. Price rallies based on trade rumors might be some of the best opportunities for decent pricing right now.
World soybean production is set for a strong marketing year. U.S. soybean production is projected at 4.6 billion bushels for the 2018 crop. This production level is 189 million bushels larger than the 2017 crop and is set to push ending stocks for the current marketing year above 950 million bushels due to the reduced potential for exports. Brazilian production is forecast to be 5.7 percent higher than last year as higher export demand drove an increase in acreage the planting season. Projected harvested acreage in Brazil sits at 92.7 million acres, up 6.8 percent from last year. Brazil’s soybean yield in 2017-18 came in at a record 50.7 bushels per acre, up from 50.3 bushels per acre last year. The yield projection for the current crop is 47.7 bushels per acre.
The excellent start to the growing season in the region increases the potential for a much larger yield. Argentine soybean production is forecast at 2.04 billion bushels, up from last year’s drought-impacted total of 1.4 billion bushels. World production sits at 13.5 billion bushels for this marketing year, up from 12.4 billion bushels last year. While domestic consumption is projected up 558 million bushels to 12.9 billion bushels, world ending stocks look to rise by 455 million bushels to 4.1 billion. When considering the potential for a larger Brazilian crop, the world ending stocks number may rise even further. For U.S. soybean prices, the market share of exports remains the key despite the promise of strong crush levels this marketing year.
The loss of the Chinese market had made the US dependent on other regions. These other opportunities are growing, but have not made up the difference in lost exports to China.
The news out of the G-20 that China will once again start buying US agricultural products, on its face, seems like good news. But there are still many unknowns. Sources are saying that the Chinese soybean supply may be running low, and that they’ll need to purchase US soybeans. But will their supply run out before the Brazilian harvest hits? There are no guarantees. It may be a good bet to watch the markets closely and sell if prices spike.