Although uncertainty is a fixture, even a necessity, in commodity markets, it has perhaps never been greater for agriculture traders than so far in 2019 as the future of trade between the United States and China remains unclear.
Negotiations between the two countries are ongoing, but if they are dragged out much past March 1, the 2019 U.S. growing season – and farmers’ planting decisions – could be at risk.
Since mid-last year, Chicago-traded soybeans have possibly been the most prominent hostage of the trade war, as China typically accounts for more than half of U.S. exports. That exchange was valued at more than $12 billion in 2017.
Top U.S. officials are in Beijing this week and will meet with Chinese President Xi Jinping on Friday, just two weeks before the U.S. deadline for a deal, after which tariffs on Chinese goods will increase. Bloomberg reported on Thursday that U.S. President Donald Trump was considering a 60-day extension on the deadline, but the White House had yet to confirm that by Thursday evening.
Trump has been quoted several times in the past few weeks saying how well the talks are going with China, but whether true or not, market participants generally remain in the dark as to the eventual outcome.
Although an extension would mean that the trade war would not escalate any further right away, it might be an even worse scenario for the soybean market, which has seemingly been caught in limbo for several months. It would also delay the potential return of Chinese buyers to the U.S. market.
The uncertainty around soybean trade, coupled with a record U.S. crop, sent CBOT futures close to 10-year lows last year. However, the most-active contract has recently traded more than $1 per bushel off those lows even with the United States poised to more than double its soybean supply year-on-year by mid-2019.
According to the futures market, there is no clear message to U.S. farmers to drastically reduce soybean acres in 2019 since November soybean futures are still sufficiently elevated relative to December corn. That relationship is often important in determining the U.S. acreage mix, especially at this time of year.
The U.S. Department of Agriculture is set to publish U.S. planting intentions on March 29, which will establish the starting point for the 2019 corn and soybean harvests. However, without more clarity on the U.S.-China situation soon, the helpfulness of the planting report could be limited.
The worst-case scenario would be if U.S. farmers end up planting quantities of crops that do not match the eventual market requirements, which could be the case if trade negotiations linger on through March and April, or longer.
USDA surveys farmers for planting intentions during the first two weeks of March. In the last 20 years, the largest change in soybean acreage from March to the final was the addition of 3.3 million acres, or 4.5 percent, in 2012. The largest downside move by percentage was 3.6 percent in 2007, totaling 2.4 million acres.
U.S. farmers typically start planting corn and soybeans in earnest during mid-April.
CHINA’S CONCEALED RETREAT
The recently ended U.S. government shutdown has also ushered in loads of uncertainties as some USDA and other government datasets went on hiatus during the closure. One such dataset that has since resumed is weekly export sales, and this report caused a stir in the soybean market on Thursday.
USDA has been relatively slow to catch its weekly export sales up to date ever since the government reopened on Jan. 25. On Thursday, the agency published sales for the week ended Jan. 3.
Analysts were stunned to discover net soybean cancellations of 612,000 tonnes, especially since they expected net sales to land somewhere between 600,000 and 1 million. An even bigger blow to the market was that China had canceled 807,000 tonnes of U.S. soybeans the week ended Jan. 3.
This event shook traders’ confidence that the ongoing trade talks would culminate in something positive for the soybean market because it implied that China had already canceled some of its “goodwill” purchases from December following the meeting between the U.S. and Chinese presidents in Argentina.
Through Dec. 6, China’s U.S. soybean commitments for 2018-19 totaled 455,491 tonnes, though the promised purchases from the Chinese began in the next week, totaling 1.56 million tonnes. Jan. 3 cancellations exceeding 800,000 tonnes would have to mean that China walked away from some purchases that were less than a month old, and that were part of the tentative trade agreements.
Sales of another 444,000 tonnes of soybeans to unknown destinations were canceled through Jan. 3, and some traders believed at least part of that could have been China. Others wondered whether the cancellations reflected reduced Chinese demand due to the African swine fever outbreaks.
USDA is set to publish six weeks’ worth of export sales data on Feb. 22, which would cover the period from Jan. 4 through Feb. 14 and catch the data up to normal speed.
