WPI SpotlightThe WPI Spotlight showcases the best analysis recently written by our analysts.
We've chosen to share these articles so you can see how we approach market and policy analysis and see the value for yourself.
Enjoy reading this collection of "best of" articles and feel free to contact us with any questions.
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
This article originally appeared in the 11 December 2018 issue of Ag Perspectives.
By Gary Blumenthal
The American side accuses Brussels of delaying tactics in the negotiations and insists that agriculture is an agreed part of the effort. European officials point to the literal text of the July Juncker-Trump letter of agreement and say agriculture is not included for two reasons: 1) Trump insisted he wanted a quick agreement, but agriculture would take more than the allotted seven to nine months to negotiate; and 2) it is a quid pro quo for Washington refusing to negotiate on government procurement.
U.S. Ambassador to the EU Gordon Sondlond likely raises hackles in Brussels by insisting that the bilateral relationship is imbalanced, and if it cannot be righted on a voluntary basis, it will be accomplished “in other ways.”
Breakdown in Geneva
The EU has been spearheading reforms of the WTO to save the organization, but opposition from too many other countries will bring it to the brink of collapse. Developing nations are against the proposed reforms because they say the changes will remove the policy space they need for development. They not only want to retain their exceptions from free trade requirements via special and differential treatment but hope to expand their ability to distort the agriculture market. Moreover, they oppose having their practices monitored by the WTO. Seeing the unlikelihood of reaching a consensus on trade liberalization, several countries are now pursuing plurilateral agreements on issues.
The U.S. is opposed to the proposed reforms of the appellate process but is offering no solutions of its own, which threatens the entire dispute settlement process. It is unclear whether the American goal is to strengthen its unilateral position by abandoning the WTO authority, or if it merely wants to bring the system to the brink in order to raise its leverage for real changes.
Mercantilist Trade Negotiations
President Trump insisted on the EU committing to soybean purchases as part of the July bilateral agreement even though it is Europe’s private sector and not the Commission that makes such purchases. Now it appears that he also begged Chinese President Xi Jinping to immediately buy soybeans. Reports indicate that China will buy 5-8 MMT for its state reserves, and there may be 2 MMT of commercial purchases. China has also agreed to cut the auto tariff to 15 percent, but it is unclear what commitments the U.S. side has made. Either way, the Trump administration’s approach is mercantilist and poses risks since it reinforces the political importance of the American agriculture sector.
The defeat of fuel tax initiatives at the ballot in three American states and the reversal of French President Emmanuel Macron on higher fuel taxes mean that fighting climate change needs a new roadmap. International Energy Agency Executive Director Fatih Birol says that ethanol will play an important role in decarbonizing the transport sector. However, that will likely have to be conventional ethanol. The U.S. has spent over $120 billion over the past decade in support of renewable energy, but only a very small fraction of the fuel produced could be categorized as advanced or cellulosic.
Quick Farm Bill Read
Congressional leaders hope to have a new farm law enacted by the end of the week. They circulated a compromise bill late on Monday evening and are allotting members just a day or two to read its 800-plus pages. If errors are found later, it will not be the first new law rushed through the process that requires some subsequent tweaking. Of course, the bill differs only minutely from the prior law. Historically, larger changes in farm policy occur during periods of high prices, and the more conservative status quo is favored during periods of lower prices.
This article originally appeared in the 11 December 2018 issue of Ag Perspectives.
By Dave Juday
The farm bill conference report was signed by the conferees last night and the text released. It is being touted as a “bipartisan” bill despite the partisan turn it took when drafted in the House. Just past 4pm today, the Senate passed it in an unexpected move, taking up the legislation prior to its consideration in the House in an effort to shore up votes in that chamber. In the new political arena of Twitter, various key tweets highlight the top issues. Note the following:
- Senate Ag Committee Chairman Pat Roberts: “The bipartisan, bicameral 2018 Farm Bill conference report is live!”
- Senate Majority Leader Mitch McConnell: “Making it official with my hemp pen!”
- USDA Secretary Perdue: “Would like more on forest management & SNAP work requirements, but farmers need this bill.…”
- House Speaker Paul Ryan: “This is a good day for farmers and families. The #FarmBill strengthens work requirements for our federal nutrition benefit programs.…”
And from the loyal opposition, the Heritage Foundation tweeted: “Imagine if conservative legislators stood up for #conservative principles. They fought to reduce #cronyism not expand it, and sought to reduce dependence on government. They have a chance to do so by rejecting the #farmbill”.
As Senator Roberts (R-Kansas) noted upon the bill’s release (in reference to the delay in the legislation as well as the general trade and supply/demand situation facing agriculture), “We’ve been trying to point out this is no time for a revolutionary farm bill.” That sentiment was echoed by House Agriculture Committee Chairman Michael Conaway. He pointed out that that this is the fifth year of declining farm income, and “passing a farm bill this week” is “vitally important.”
The final bill was completed on 29 November, but it has to be scored for budgetary costs by the Congressional Budget Office (CBO). The preliminary estimate is $876 billion over 10 years. The release of the text was managed to prevent any opposition from building momentum and undermining the bill’s approval.
As for the whip count, House Agriculture Committee ranking member and incoming chairman in 2019, Representative Collin Peterson (D-Minnesota), is predicting “most all” House Democrats will vote for the bill, and Representative Mark Walker (R-North Carolina), chair of the conservative Republican Study Committee in the House, predicted about half of all Republicans will support it. The final version is nearer the Senate bill, passed by a vote of 86-11 earlier in the year, and includes several key farm policy revisions.
ARC/PLC – Instead of the one-time election for these two commodity support programs as provided in the 2014 Farm Bill, farmers will be able to make annual elections after the 2021 crop year.
The PLC payment rate for 2019-2023 will be set as the difference between the reference prices and the effective price, and USDA will be required to publish the payment rate for each covered commodity within 30 days after the end of each applicable 12-month marketing year.
Marketing Assistance Loans (MAL): These rates were updated (see below).
Payment Limits: These were maintained at an aggregate amount of $125,000 per person or legal entity for all commodities except peanuts, which have a separate limit. Further, the definition of family member will now include first cousins, nieces and nephews.
Crop Insurance: Driven by the boom in specialty brewing, barley and hops will have crop insurance policies developed.
Conservation: The Conservation Reserve Program (CRP) acreage cap is raised to 27 million acres from the current 24 million acres. In the original drafts, it was proposed that the Conservation Stewardship Program (CSP) be eliminated and folded into the Environmental Quality Incentive Program (EQIP), but both will be maintained as separate programs.
Dairy Margin Protection Program: This is renamed the Dairy Margin Coverage (DMC) program, and premium rates are reduced. Producers can elect coverage in $0.50 increments from $4.00/cwt to $9.50/cwt for their first 5 million pounds of production. For those who do so at $8.00/cwt or higher, the maximum allowable coverage is 95 percent of production history.
This article originally appeared in the 12 December issue of Ag Perspectives.
By Matt Herrington
The biggest news today was a report that Chinese state-owned enterprises purchased nearly 2 MMT of soybeans from the U.S. Early reports said 12 cargos (0.5 MMT) were arranged for shipment between January and March, while later reports have pegged the figure as high as 30.
The soybean market reacted in accordance with the adage “buy the rumor, shrug off the fact”, and promptly did nothing after the report surfaced. The market’s attitude seems to be one of “That’s nice, but we need a lot more to get excited”. Late afternoon cash trade, however, has a stronger tone and CIF soybean values are rising.
Outside the soybean market, corn futures were steady/higher on limited news while wheat continued a modest rally. Cattle futures rose but were unable to substantially build upon yesterday’s gains while hog futures were mixed.
Wall Street is higher after falling back from an earlier 200-plus-point gain in the Dow. The DOW is up 0.7% and the S&P500 has added 0.5% to its value. The VIX is slightly lower while the U.S. dollar is flat. Crude oil continues to creep along the bottom of its recent trading range, with both WTI and Brent futures lower.
March corn traded 1 ¼ cents higher in a day that saw little fresh news. The EIA’s weekly report said ethanol production fell 2.2 percent last week even as stocks remain stubbornly high. Ethanol margins rebounded somewhat last week but remain staunchly negative (at least, to the extent they’re observable through USDA data). That should work to limit production/corn use, which USDA noted in yesterday’s WASDE. March futures look to remain range-bound for the near-term.
Soybeans finished 5 cents higher in the January and March contracts while deferred futures saw more modest gains. The biggest news was China’s report of a half-million MT of soybeans for January-March delivery. The market is unsure whether this is a “good faith” purchase or more gamesmanship by the Sino side of the U.S.-Sino trade war. January and March futures are in a short-term uptrend, but both face stiff resistance at the 200-day MA. That point turned back March soybeans just today, and strong fundamental data (i.e., exports) will be needed to push the market above this point.
March KC wheat rose 6 ½ cents but was unable to break above the 50-day MA despite tightening world fundamentals. December contracts roll off the board Friday and the March/May SRW and MGEX spreads are looking bullish. Cash SRW and HRS prices are moving higher on signs of increased demand. HRW prices are heading sideways which will limit futures support. Exports are now the name of the game for wheat.
Buyer support continues to move into the live cattle market, which pushed April futures to a new contract high. The market is trending higher across most listed contracts and looks to continue the trend until boxed beef values start to turn lower. With February and June futures nearing prior resistance levels, traders should watch carefully for the market to form a top.
Rest-of-the-Week Outlook: Boxed beef values were mixed this morning with the Choice cutout down $2.83/cwt and the Select up $0.31/cwt. The Fed Cattle Exchange listed 156 head for sale, of which 97 sold (all from Kansas) at $119 live. A few cattle traded in the western Cornbelt yesterday at $117 live on very light demand. Feedlots are asking $120-122 live this week while packer bids are still few and scattered. With boxed beef values maintaining elevated levels and packer margins excellent, it seems the trend this week will be steady/higher cash trade.
One-Month Outlook (updated 11 Dec. 2018): One thing is certain in the cattle markets: packers like making money. That dynamic is responsible for driving the large kill numbers of recent weeks and pulling fed cattle prices higher. Despite the $6/cwt gain in fed cattle in recent weeks, packers still face margins of nearly $200/head – amazingly strong for this time of year. That speaks to the strength of the beef market. With USDA data showing limited beef sales 30 days out, packers are either aggressively forward contracting what’s being killed these days or putting it in storage. Given packers’ distaste for storing product and holding that risk, our guess is that forward sales are quite aggressive. Until beef prices slip substantially, look for packer margins, kill numbers, and fed cattle prices to increase into 2019.
Feeder cattle were unable to substantially build upon yesterday’s gains and closed just below trendline resistance, a point above which bulls briefly pushed the market. The long-term trend for feeder cattle remains downward but support is a mere $5/cwt below.
Regarding market direction, some analysts have recently pointed out that the Feeder Cattle – Live Cattle futures spread has fallen under its “normal” value as judged by the five-year average spread. That is true, but when examining the prices on a ratio basis (Feeder Cattle as a percentage of Live Cattle), the analysis shows feeder cattle are “fairly valued” relative to 2017 and the five-year average. Consequently, this analyst does not expect a “mean reversion” to occur in this series where by feeder cattle will gain significantly on live cattle. Rather, look for the feeder market to be led by fed cattle, which will, of course, be led by beef prices. Simply put, as goes boxed beef, so goes the entire cattle complex.
Oklahoma City auction prices were higher this week with feeder steers up $2-3/cwt and heifers “too lightly traded for a[n] accurate trend.” Calf prices were steady/slightly higher after expected weekend storms (that failed to materialize) limited livestock movement.
Hog futures were lackluster to begin the day but found some support with the China soybean purchase news. Livestock traders interpreted the news as a good sign that China may return to purchasing U.S. pork again soon. February futures finished $0.50/cwt higher, as did April and May futures (but who cares about May hog futures?). The summer contracts finished with slight gains as the market has put in an aggressive premium in these contracts that must now be backed up with excellent exports or a sharp reduction in hog numbers. Given the $10/cwt run-up in August futures is likely to have incentivized hog production expansion (or at least even keel farrowings), it seems exports are the burden of proof now.
Cash prices on the National Direct report were $0.20/cwt lower this morning while IA/MN prices slipped $0.43/cwt. The pork cutout dropped $0.11/cwt today on lower butt and ham prices while belly values added $8/cwt. Hog slaughter continues to be very aggressive with packers increasing hook speeds and pulling hogs in as fast as they can be procured.
*Trading commodity futures and options involves substantial risk and is not suitable for all investors. Read ourhere.