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Rest of the Story: Unintended Consequences

19:44PM Aug 14, 2018

I apologize for missing a couple issues but there wasn’t much more that I could discuss prior to the USDA August Crop Report that I hadn’t discussed before, some over and over again regarding misconceptions on Chinese demand.  
Unfortunately, the outlook taken in this column beginning months ago was blatantly expressed by USDA but not before corn, wheat and soybeans had made a respectable attempt at clawing back part of prices previously lost to some technical resistance levels that were obvious to even the casual observer. For the most part, I am content with this year’s marketing of grains considering I was working against the grain to get my point across. A cursory look at media analyses does not look so beneficial as a lot of money was left on the table due to lack of due diligence, and miss-guided analysis. I hope I instilled individual thinking and decision making on your part to have avoided the collapse in soybean prices realizing that the Chinese will use U.S. agriculture as a pawn that runs the risk of having long term implications. Unfortunately, some in the media are still in the denial phase, with the anxious question still out there as not if but when will the Chinese have to come back to the U.S. for soybeans.  

Soybeans collapsed Friday on what supposedly was a surprise to the market of an increase in ending stocks to 785 mil-bu. This should not have been a surprise to readers of this column as I’ve warned of such a situation for months. If there was a surprise, it was in their raising the yield so soon especially with 100+ temps for the Northern Plains in the forecast last week that most assuredly took the top off of yields in ND/SD, but we grow soybeans in nearly every state. The U.S. export number seems to still assume China will be in for imports again. I am still less optimistic with ending stocks creeping up over time, assuming no resolution of the tariffs or weather issues in S America. Timing is always an issue but the timing of tariffs and Chinese retaliation couldn’t have been worse. Absent of a tariff and given current weather concerns odds are we’d be seeing prices significantly higher going into last week’s report.
Trading results thus far of most big commercial firms showed they also didn’t do their due diligence and should continue to be called out on missing the $2 downdraft. Worse yet, the attempt to use the U.S. farmer’s desire to be patriotic and suffer the consequences of being a pawn of China in this tariff war and the administration’s attempt to offset tariff financial pressure has lost sight of the fact there is a huge basis adjustment due to loss of PNW business that is NOT part of crop insurance nor part of the calculations thus far in the tariff adjustment final result.  Whatever is the outcome of the “adjustment payment” it will likely be eaten up by a wider basis, especially in the N Plains areas. A soybean crop on 12 mil-ac relies significantly on the PNW for export access and now will compete with the rest of the U.S. for exports out of the Gulf, likely affecting my basis in Illinois and yours as well.    

Bottom line now for soybeans is a carry-in to 2019/20 crop year of 785 mil-bu telling the producer to reduce acreage 8-10 mil-acres in 2019. Each million acre reduction is about 50 mil-bu--you do the math! A half billion bushel reduction in both N and S American production is needed. Little time left in the U.S. to materially affect yields, so likely up to S America to produce a bust in seven months.  

Corn suffered a collapse as well. While the media rhetoric has been on falling U.S. and Global ending stocks, prices continued on the defensive. What isn’t being discussed is that the new carryover exceeding 1.6 bil-bu is predicated on record or near record usages in order to keep carryover below 2.0 bil-bu. Should the trade war affect global economies or make our U.S. currency that much stronger, the problem magnifies. Furthermore, corn acreage doesn’t have to compete with soybean the tariff situation has taken care of that. A corn increase in 2019 by 4-5 mil-ac keeps carryover comfortable. The market is slowly coming to grips with  the paradigm shift that is taking place in agriculture. 

USDA didn’t respond with another big cut in EU or CSI wheat as the trade had hoped and the fear of being short wheat going into the report proved costly; however, the situation in Europe and the CIS hasn’t changed. We now need an admission from Ukraine and/or Russia that it has run out of exportable stocks. Market knows U.S. wheat plantings will be up hugely next year with a lot of soybean acres going to winter wheat and likely spring wheat in N Plains as well. Full season soybeans with a “7” cash price in front of it doesn’t work well anywhere but work double cropping behind wheat. Interior basis is terrible in the soy states and worse as we work to N Plains. For the first time in memory we may make more on the futures carry and basis gain than we ever did in a similar oversupply corn situation. On-farm storage management will pay dividends again. 

I mentioned months ago that if we thought China wasn’t preparing for just this type of eco/political situation some time ago, that we were naïve. Perhaps we are naïve again in thinking someone or something besides weather can remedy this situation. Timing is everything in marketing and as we have found out, political actions can be ill-timed as well. The questions now become will the Ag Sector pressure increase on Trump to ease tariffs and strike a side deal at least for Ag that will decouple that sector from intellectual rights and rethink the Chinese proposal to buy $70 billion worth of Ag and Energy that he refused a couple months ago?  

If China can get along without soybeans for the next three months, odds increase their total demand from all sources drops further and they make it to S American production next March. Conversely, a resolution of trade deals by late fall would open the door to Chinese buying U.S. beans but by this fall the S American incentive to plant expanded acres could make it too late and China wins with cheap beans in both hemispheres and worse yet, the world finds out there are substitutes and efficiencies in protein demand that most analysts didn’t have a clue about six months ago and likely currently still remain naïve regardless of what USDA expresses in their reports. Time is of essence as the clock is ticking.
Markets have fallen to technical levels that have offered  some support given the collapse we saw Friday. Cheap prices offer opportunity for buyers to come to the trough and we need to see that in the export report Thursday, and for crop ratings next week to reflect the fact we’ve seen serious deterioration perhaps in both corn and soybeans. As mentioned before, we need proof of Russian and Ukrainian concerns of being able to export wheat at levels estimated and for global buyers to fulfill their needs by coming to the U.S. for cheap prices, as the Black Sea Region is still the cheapest for quality wheat. 
While you contemplate the current fate of agriculture and that of your personal enterprise, I have listed below some details from Friday’s report showing rationale behind their estimates as well as the 2018 state-by-state breakdown versus last year.  
As you can see, there were still some lofty yields in areas of dryness and heat.  While Missouri has already taken a hit in both corn and soybeans, ND and SD; KS had small reductions but the rest of the U.S. had not. The corn crop is well ahead of schedule suggesting a collision course with disposing of old crop in time for new crop harvest and basis levels in a lot of areas reflecting that fact. You will likely build a grain bin for someone again this year, it might as well have been you. 

All one has to do is review current positions of major newsletters and market advisories to see the poor coverages thus far. In talking to farmers around the major growing areas, I suspect cash forward contracts are much higher than reflected in the media. We’ve been dealt a different hand under eco/political circumstances beyond our control and it reminds me once again that “costs are local, and selling prices are global”.    

For those who took advantage of our earlier offer to try our daily comments/advice, thank you and congratulations. For those who did not, if we can be of assistance contact or phone 480-285-4745; 707-365-0601  

Best Regards,   

Jerry Gulke  


July Ag Summary
July Ag Summary(2)

U.S. Corn Production By State



U.S. Soybean Production By State



U.S. Wheat Production