"Tariffs: On, Off, or Dimmer Switch?"

We delayed this issue for a couple days to see what the long awaited news would be on trade negotiations with China and the possibility that agreements would be reached to lower or limit trade barriers and allow beans and other products to flow into China. While the rhetoric was very positive coming out of the meeting, there is only one major change at this time that we know of. That one thing is a delay in the imposition of additional tariffs placed on Chinese goods coming into the US from January 1 to March 1. All existing tariffs, both US and Chinese remain in place, with "talk" that China will purchase large amounts of US agriculture products, although no definitive amounts or specifics. We look at this as a "truce" with some time to talk, but since there were no specifics detailed, each side was free to spin the meeting as they saw fit. For us, we got lots of promises of maybe good things, while we suspect that China will look at this as a win because they gave up nothing as yet, and bought some time on tariff increases and the ability to see how the Brazilian crop develops as well as how bean prices react. We also note that China is already buying US pork AND paying the tariff, as African Swine Fever is apparently a bigger problem than we might have thought. If that disease is causing bigger problems, it is not bullish beans. We remain skeptical on how big a deal this really is, but also note that fund short covering could easily give us a rally in beans beyond what we saw yesterday. (Monday) The real question is how much selling both in the US and Brazil will meet any short covering by the funds? Watch basis levels closely, both here and Brazil for clues. So far, the Brazilian crop is as good as its ever been according to our contacts there, planting ahead of normal and plenty of rain so far. This could change in a week or two, but for now, crop conditions are good to excellent. We also want to see what USDA offers for export projections in the monthly supply/demand report on December 11th. This will give us an indication of just how much China may buy from us and what the carryout projections look like compared to last month. Given how far behind we are in a normal export season, we feel it will be very difficult to make a big dent in the deficit compared to last year.

Corn has a different story, as exports have been performing well, and the stocks to use ratio for the US has tightened a bit further. The November supply/demand report was friendly corn on a US basis, but over 5 billion bushels of corn was "found" in China. Supposedly this was the result of "under reporting" over the last 10 years, but in real terms, probably not a factor as China does not export corn due to high subsidies and internal controls. Its hard to grasp, but according to these figures, 2/3 of the world corn stocks are in China! Bottom line is, there is a comfortable level of stocks, but demand for this years corn is right at 15 billion bushels. We need good crops in both South America and the US to maintain these levels. This is why we are leaning friendly corn as we approach the "too" season where more uncertainty leads to more risk premium is added to market price, giving us selling opportunities. We do NOT want to miss out on these, even though we see potential for better prices if weather becomes a major player, as we still want to make sure we are profitable, reducing price risk as we reach those profitable levels. There is a lot of talk about more corn acres this coming year and less beans, and that is possible, but we are not convinced as yet. We know the reasons why the initial reaction is more corn, but here are some reasons that may not happen: 

1) Fertilizer prices are higher, other inputs subject to tariffs are as well

2) Fall weather has not been good for fall tillage and fertilizer application, possibly limiting corn/corn acre increases

3) Price ratios for beans/corn not really leaning either way, yet.

4) Logistics and higher finance costs for more corn on "marginal acres"

Given what we know, and being reluctant to speculate on what we don't, our feelings on the grain markets can be summed up as follows:

1) We would be rewarding the rally in beans with sales or at least put protection on old crop

2) With November 2019 beans over $9.50 we would start selling, doing an HTA contract, or looking at short dated puts

3) December corn over $4.05, if profitable for you, should be considered, although we are looking at $4.15 to ramp up protection, keeping flexible through March 31 acre reports.

4) Wheat has many questions as to acres planted and slow development, we would be patient on new crop wheat sales for now

5) Courage calls bought on a break to make sales against on a rally in any crop have merit. They make decision making easier, and when placed at levels that make sure we are profitable, give us a definite foundation to build on. Owning puts also provides a base, they can always be rolled up if markets rally sharply, and provide peace of mind on at least a portion of your production.

 Old crop sales are a function of local basis in our mind, and in some areas, corn basis has improved dramatically. With demand of 15 billion, it doesn't take long to eat up "free" stocks, and elevators want to stay full to earn the carry in the market and earn storage revenue. Watch basis closely this month, as often times December bids will exceed January/February as more sales are pushed to a new tax year. If basis is good, consider selling and re owning, especially if grain quality in storage is a question. We would be anxious to move cash grain on any good basis pop as for now, supplies are comfortable, and shift our ownership to paper where basis is no longer a risk. Cash flow is generated, bills paid, discounts for early payment are in hand, and grain quality concerns are gone. Sometimes these factors make it very worthwhile to move grain early, and with a limited risk futures/options strategy, you can still benefit from a rally while significantly lowering risk!

In conclusion, we recognize the emotions generated with the potential of a trade agreement, but also caution ourselves that these take time and lots of it. Trade deficits did not happen overnight and likely will not go away quickly either. Chinese behavior with regard to intellectual property has benefited them enormously, and giving that up will not be easy. There are so many factors to address that getting through most of them will take time. We cannot foresee the end, but what we can do is make sure that when our business is profitable, we are protecting that price level in some way. That's what we are here to do, help find that combination of ideas that make those bottom line figures green instead of red. Call us for some quality visiting time to see what we can come up with. And most importantly, thank you for your business and friendship. Have a very Blessed Christmas and look forward with us to a great New Year!

Dates to remember this month:

Export Inspections every Monday at 10 am

Export Sales and Shipments every Thursday at 7:30 am

Crop Conditions and progress every Monday at 3 pm

December 11th: Monthly Supply/Demand and Crop Production

December 21st: Cattle on Feed and Cold Storage

December 21st: January  Options Expire

Mike Daube  888-391-6330