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In my near 40 years in the business, no truer words have been spoken that what I've read in Ag Perspectives. WPI Client and Risk Manager

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Is the Immigration-Tariff Deal with Mexico a Template for China Breakthrough?

This article originally appeared in the 17 June 2019 issue of Ag Perspectives. 

By Dave Juday

and/or come to a deal at the G20 Summit in Osaka on 28 and 29 June. Much of the rhetoric from the U.S. side has continued to take a tough stance in trade talks with China. However, it is now more than a year into an “easy-to-win” trade war with that country, which is longer than anticipated. More importantly from a political perspective, the conflict has slipped into the U.S. election cycle for 2020.

In fact, Trump will be holding a 2020 campaign kickoff rally in Orlando, Florida (a key swing state in his 2016 victory) tomorrow night. Indeed, there are domestic political reasons to make progress with China, notwithstanding the core issues to the U.S. of intellectual property protections and China’s capricious use of nontariff trade barriers in many sectors, including agriculture. Despite the stay-the-course rhetoric, the probability of a partial reopening of trade, which likely would include ag, is certainly increasing– at least from the U.S. perspective.

Recall that when the U.S.-China negotiations broke down, there were detailed plans and specific language reportedly in the works for issues such as currency manipulation and target goals for import purchases. When China pulled out of the talks, President Xi followed up with the following three-point plan as a requisite for China to re-engage:

  • Remove existing tariffs
  • Set realistic goals for import purchases from the U.S.
  • Preserve “dignity” and “balance” for both nations under any agreement

The interconnectedness of the separate negotiations with Mexico and China is hinted at by the first stipulation cited above. Xi undoubtedly watched the U.S. fail to remove tariffs on Mexican (and Canadian) steel and aluminum despite the signed (but not yet ratified) USMCA deal. That had to ring alarm bells in Beijing; why cut an agreement and not see tariffs removed, especially those on Chinese steel and aluminum? The other two stipulations from China were much less specific and merely alluded to general principles for an outcome, and that is where the U.S. deal with Mexico on immigration provides another recipe.

This recent agreement resulted in a similarly broad 373-word statement with two promises in principle:

  • Mexican Enforcement Surge – Mexico will take “unprecedented steps to increase enforcement to curb irregular migration.”
  • Migrant Protection Protocols – Both the U.S. and Mexico will “accelerate” asylum cases.

There were no details on what unprecedented and accelerated might mean. Following is the third part of the U.S.-Mexico deal:

Both parties also agree that, in the event the measures adopted do not have the expected results, they will take further actions. Therefore, the United States and Mexico will continue their discussions on the terms of additional understandings to address irregular migrant flows and asylum issues, to be completed and announced within 90 days, if necessary.

That agreement could be an easy recipe for an interim deal with China. First would be the removal of some or all tariffs, depending on the sensitivity of the goods covered. Given China’s needs and the U.S. ag economy wants, U.S. exports of pork, poultry and soybeans would be likely candidates for resumed trade, and imports of Chinese-manufactured goods could be included.

Second, some kind of agreement on currency or other issue could be ready to roll out. Reportedly, currency manipulation and ag purchases were scoped out as potential “early harvest” items in the initial talks.

Third would be a commitment to continue discussions on tech transfers and intellectual property, which provides a win-win nod for both countries (i.e., U.S. legitimate interests in those issues and Chinese demand for respecting sovereignty).

As stated above, the rhetoric out of the U.S. about China remains tough, but there are tea leaves that suggest a breakthrough is not off the table. Domestic opposition is mounting. More than 1,600 comments have been filed with the U.S. Trade Representative (USTR), and they are almost all opposed to extending additional tariffs. USTR Robert Lighthizer is scheduled to testify tomorrow before the Senate Finance Committee, and what he says, especially in response to senators’ questions, could be of interest to the markets.

What may be of more interest is what senators may ask or say during that hearing. Congress is starting to react negatively to the possibility of extending more tariffs on China. Recall that the president’s threatened tariffs on Mexico were undermined by the opposition to them. Senate Finance Committee Chairman Charles Grassley (R-Iowa), who has been an important ally in that chamber for the Trump administration, is working on legislation to limit the president’s ability to levy tariffs without congressional approval. Grassley is reportedly is trying to craft a bill that will receive a large majority vote in the Finance Committee and also the Republican controlled Senate.

Perhaps the most telling tea leaf will be what Vice President Pence doesn’t say in his speech on 24 June. That major foreign policy address was previewed to be highly critical of China’s human rights record and was originally scheduled for 4 June, the anniversary of the Tiananmen Square massacre. If delivered, those remarks could set a tone for a meeting in Osaka.

It is far from clear that a breakthrough is in the offing, but the odds are growing marginally better with pressure mounting as the campaign begins. In addition, the template of a face-saving agreement has now been established via the deal with Mexico regarding the immigration process.

 

Market Commentary

This article originally appeared in the 17 June 2019 issue of Ag Perspectives.

By Matt Herrington

Grain and soy complex futures were higher overnight as continued rain across the Midwest threatens the corn and soybean crops. At this point, there are many fields that will simply go unplanted, while planted crops will deteriorate due to the excessive moisture. One potential problem is that the moisture can damage root systems and make the crop more vulnerable for future problems. For example, should this summer hold a significant hot/dry spell, the damaged root systems would be more impacted by the drought. While the crop may be (partially) planted, it’s far from being made. The market is aware of the rising number of risks facing the corn and soybean crops, and it is reacting accordingly.

The day session opened with corn and wheat under pressure from long profit-taking, while soybeans caught a bid from the continued rainy weather. Short covering was notable on the corn and wheat breaks, and the breaks were short lived (as typical of bull markets). The Export Inspections report was mixed for the CBOT with a neutral/bearish read for corn and soybeans but a neutral influence for wheat.

USDA’s latest crop progress report continues to show the effects of the Midwest weather with corn plantings advancing just 10 percent and soybean plantings gaining 17 percent. Corn planting progress matched the market’s expectation for this week’s report, but the soybean statistic was below analysts’ forecasts. Corn emergence improved over the past week with two-thirds of the crop now above ground. Soybean emergence reached 34 percent, which lags the five-year average of 73 percent. U.S. corn conditions were steady last week, and USDA noted that it expects to publish the first soybeans conditions ratings next week.

U.S. equity markets were higher today with the Dow and S&P 500 both finding modest gains. The CBOT Volatility Index (VIX) was slightly lower as investors continue to expect a more dovish approach from the Fed. The U.S. Dollar Index dropped 17 points today, and crude oil futures were lower as well.

 

Corn 

FUTURES

July corn closed 1.75 cents higher, while December futures managed a 5-cent gain and a new contract high. Rain is the name of the game, and the Midwest has too much. Long profit taking pressured the market early, but the lower bound of the morning gap opened higher on the charts and provided firm support. Cash prices are at their highest levels since 2014, and FOB NOLA prices continue to rally.

Bull markets tend to have five waves – an initial rally, a moderate pullback, a second rally, another pullback to the trendline, and a third final rally to the market’s top. By some measures, December corn has completed the first two waves of this pattern and is in the middle of the third. If the two yet-to-be-completed rallies are the same length as the first, it would take December corn to near $5.60-5.85/bushel by the end of the bull market.

If that seems too high, consider WPI’s ending stocks/price models forecast of $5.80/bushel if ending stocks drop to 1.1 billion bushels. Holding all other parts of the U.S. corn balance sheet constant from the June WASDE, that figure could be reached with 79 million harvested acres at a 165.5 bushels/acre (BPA) yield (producing 13.04 billion bushels) and a mild reduction in exports to 2.1 billion bushels. For reference, many analysts are already discussing a sub-13-billion bushel crop this year.

 

Soy Complex 

FUTURES

July soybeans gapped higher at the open, and bears were unable to push prices low enough to fill that gap. The contract finished 16 cents higher for the day, closing above the 200-day moving average (MA) – the first time it has done so since March. The November contract performed identically, its highest close in two months. The soybean market, once resistant to the effects of the cold and wet spring, is now squarely in Mother Nature’s rainmaking sights. The export fundamentals facing the crop are still bearish, but the supply-side risks are growing. That is creating volatility for the market and uncertainty for bears. Cash soybeans are rising but are still below their 2019 highs.

NOPA’s May report noted soybean crushings and soyoil stocks were below the market’s expectations. It indicated that 154.796 million bushels of soybeans were crushed in May, below the market’s expectation of 159.9 million bushels. The May crush rate was down 5 percent from the prior year. NOPA estimated soyoil stocks at 1.581 billion pounds, well under the market’s expectation of 1.785 billion pounds.

July soymeal futures rose $0.80 today in a continuation of their bull market, but they closed near the low end of the day’s trading range. Long profit taking from some funds pressured the market, while commercial buyers sat on their hands except for mild interest on breaks. The meal market is technically trending higher, but the upward momentum seems to be waning as prices near their end-of-May highs.

Soyoil futures rose 53 points today as the NOPA report was friendly from a fundamental standpoint. Today’s action saw July soyoil open and close above the 50-day MA – the first time it has done so since early March. Soyoil also received support from higher palm oil futures overnight.

 

Wheat

FUTURES

Wheat futures were mixed today with SRW futures higher and HRW slightly lower. The market received some bullish influence from corn and soybeans as well as growing concerns that wheat qualities may be adversely impacted by the rain. The bullishness of Chicago/KC wheat prices stands in contrast to world wheat values that are steady or declining. USDA’s Export Inspection report showed wheat shipments on the same pace as last year, which should continue to be price-supportive. Technically, wheat is trending higher, but KC futures are nearing key resistance. It will likely take some bullish influence outside U.S. borders to push KC futures above their 200-day MA.

 

Comprehensive Feasibility Study: U.S. Beef Cattle Identification and Traceability Systems

In response to the 2016-2020 Beef Industry Long Range Plan’s key strategic objective, “Secure the broad adoption of individual animal ID traceability system(s) across the beef community to equip the industry to effectively manage a disease outbreak while enhancing both domestic and global trust in U.S. beef and ensuring greater access to export markets,” WPI researched and wrote the industry’s most foundational analytical document on animal identification and traceability. The report offers a series of conclusions based on, among other methodologies, a 600-plus respondent quantitative survey, 90-plus interviews with industry participants from all sectors), and a deep-dive review of 9 global systems supported by direct interviews with foreign industry association and government officials.

Since the report’s initial rollout at the 2018 NCBA Convention in Phoenix, AZ, WPI has presented findings to and led constructive discussion with over 30 audiences of stakeholders from across the industry and beyond.

 

 

 

Updated Analysis: Exporting Corn through U.S. Beef and Pork

On behalf of the U.S. Meat Export Federation (USMEF), in 2018 WPI delivered the results of an updated study aimed at quantifying the value red meat exports deliver to U.S. corn producers. The original 2016 study, as well as the 2018 follow-up, also quantified the impact that red meat exports have on select corn co-products such as distiller’s dried grains with solubles (DDGS). The updated 2018 study concluded that 2018 beef and pork exports will use a combined total of 14.9 million tons of corn and DDGS, which equates to an additional 459.7 million bushels of corn produced – an increase of 29 percent over the 2015 projections.

 

 

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