- US President Trump and Chinese Vice Premier He announced a Phase 1 Deal on US/China trade that included a verbal agreement for China would ramp up US ag purchases to $40-50 billion in the next two years. The deal is agreed to in principle and has not been written down/signed. This is to be worked out over the next 4-6 weeks and potentially signed by Trump/Xi in the APEC meeting in Chile. We suspect that this is the first US major trade deal that has been announced in some totality, but not written down/signed. There was no breakdown of what US ag goods that China would secure and when. Moreover, if China has 2 years to reach $40-50 bilion of US ag purchases. And no one knows when the US/China start reducing their existing tariffs. The US will not raise tariffs in October, but the December hike is still on the table.
- The $40-50 billion of Chinese demand in 2 years could be great news for American Agriculture. But this is a President to President agreement and not a US/China trade treaty. What would happen when either Trump or Xi is no longer President. The US ag markets will watch for “deal confirmation” from China on the weekend and when their retaliatory tariffs on US ag goods will be dropped. A higher ag opening is expected on Sunday, but deal confirmation then the key.
- Soybean futures rallied to end the week on fund buying/short covering on hopes that the US and China could reach a trade truce. Other news was limited for the day, but harvest remains slow as an early winter blizzard moves across the N Plains and Midwest states, while rain has limited progress across other parts of the Midwest. The Commitment of Traders report showed that for the week ending Oct 8, funds were net long soybeans. Managed Money long positions totalled 101,103 (+10,489), short positions were at 94,602 (-4,742), for a net position of long 6,504 contracts (+15,231). Harvest progress will again be limited over the weekend, but a drier forecast is offered for next week. We anticipate harvest progress through Sunday to reach 19-21% complete. News of a China trade deal is viewed as supportive of US soy prices. Ultimately it is record large stocks and large S American production that looks to cap Chicago soybean prices. A S American drought is needed to support spot futures over $9.50.
- Chicago corn futures ended sharply higher with Dec rallying 18 cents. Details surrounding US-China ag purchases are absent, but US Sec of Treasury said that China would ramp up US ag purchases to $40-50 billion in 2 years after a Phase 1 Deal is signed. There will be 4-6 weeks of US/China ag negotiations before the deal can be written and signed. There are no assurances today of when China will secure US corn. Chicago could rally early next week, but no one will want to chase the market until actual commodity purchases are realised. This is a de-escalation of US/China trade tensions. Managed funds as of Tuesday were short a net 91,000 contracts. Funds were active in buying corn on Friday with purchases pegged at over 25,000 contracts. Dec corn above $4.10 will slow US export/ethanol demand further. More important longer term is the arrival of rainfall to Argentina and much-improved forecast in Central Brazil beginning October 19. Don’t chase this rally would be our advice.
- US wheat futures rallied 13-18 cents led by KC. There is no wheat-specific news available, but European wheat futures followed. Managed funds on Tuesday were short 19,000 contracts of wheat in Chicago and a more sizeable 35,000 in KC. This KC position is logical as HRW stocks rise and exports lag. Yet, without knowing details of the partial US-Chinese deal, shorts are being covered. Future wheat export potential remains bleak. EU futures today rallied $.09/bu, and so Gulf HRW’s premium to other origins will widen further. Yield-stabilising rain falls across Cordoba, northern Buenos Aires and Santa Fe in Argentina this weekend. Additional short covering is possible early next week, but until major exporter balance sheets tighten significantly, spot Chicago is overvalued above $5.10. If China secures US wheat in the next year, it likely would be HRW wheat, not SRW. China has 2 years to ramp up purchases to $40-50 billion. No immediate purchases are foreseen.
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Weekend summary 11 October 2019
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