In last week’s column I mentioned that I would give it 65% odds an agreement or framework, 25% odds that a surprise deal will be done and 10% of a bust. The following are some bullets of the agreement/framework:
- The U.S./China talks led to an agreement to hold U.S. tariffs in place and not escalate for 90 days while further negotiations continue for a total trade pact. Apparently the 90-day grace period started December 3 so that means March 3 brings on another deadline.
- China would start to buy U.S. grains/oilseeds energy, industrial and other products. A China negotiating team is already scheduled to visit the U.S. in mid-December. Details of the buying are being negotiated, but as mentioned last week, the previous $60 billion of corn, ethanol, DDGs and soybeans offered last May could be the blueprint.
- China will put fentanyl on the controlled substance list to help control production and export.
- China agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft.
- From perspective on the China side of the meeting, nothing yet confirmed except that there are no increases in U.S. tariffs and negotiations continue? In fact, they said nothing in the state-run news about a 90-day grace period with higher tariffs if no agreement? There was no report of reduced tariffs or promises of bigger imports. There is still a 25% tariff on all U.S. grain and oilseeds that will likely have to be removed before any trade takes place. China news did report that an aim of the trade meeting was to remove all tariffs? Trade there believes there was an agreement reached in principle but cannot act in cash until there is an announcement removing China tariffs. Their futures market was 1 to 2 pct lower as trade thinks the door to imports is opening.
- USDA Secretary Sonny Perdue said late Monday that while it’s still undetermined whether China will remove tariffs on U.S. soybean imports, he expects them to resume buying U.S. soybeans by early January because of limited supply from Brazil before their next crop. He expects negotiators over the next few days to determine whether soy tariffs will be removed. The market will anxiously be anticipating such a move.
- The commerce department in China stated Tuesday afternoon that it thought implementation within 90 days was doable.
- President Trump has stated he got very good assurances from China and the outcome of the negotiations will be very good for farmers.
- The press/media/negative producers/pseudo analysts and general doubters/haters continually find something wrong with day to day evolution of the meeting. So, markets are going to trade up and down like they normally do, but likely with increased volatility.
- Markets are basically put to bed (in storage) with the crops still in the field merely representing part of the ending stocks that won’t be used anyway other than being carried forward to 2019/20 marketing year.
Bottom Line: What is agreed to between two heads of state is one thing—then comes the grunt work of working out details of what is agreed in principle between those heads of state. Thus, it is a natural course of events to take a lot longer to accomplish a complex new trade environment (deal) that the media or individuals realize or want to believe. It is important to understand that there has been a change in market psychology.
Remember the media and most analysts believed 9-10 months ago that the tariffs would be short lived, and they were long and wrong. Subsequently, another massive crop in the U.S., reductions in demand by China to try to reduce dependency on both North and South America all turned prices lower and market psychology negative. Coincidentally grains and oilseeds seem to have posted a pre-harvest bottom some weeks ago, with market psychology turning more positive than negative.
Probably the most exciting development regarding the tariff talks was the reaction in the price discovery mechanism, more commonly depicted in price charts, especially soybeans and the soybean complex (soy oil and meal), and corn as well.
Soybeans: The day after the tariff dinner, soybeans surged higher, gapping above the old overhead resistance leaving it thus far behind as if to say, “there is a new market ahead”. The price-gap higher has not yet been filled after an attempt to do so Monday night and in Tuesday’s trading. That is a good thing and has allowed the 3-, 5-, 9-day moving averages turn up posting a buy signal of its own.
It is now key that $9.37, yesterday’s low, hold. It would not be good for the price to retreat again back below that level which corresponds also to $9.00 in January which has even longer-term connotations. Soybeans need to rally back above and sustain prices above $9 in order to give some semblance that the market believes in the evolution of U.S./Chinese trade neutralization. Lots of headwinds including the huge carryover for this and next year.
Market price reaction will help give us a clue! Coincidentally this is the time of the year where the soy complex starts to watch weather in the Southern Hemisphere.
If you are concerned about these markets both from a short term and long term perspective, give us a call and take advantage of our three months for the price of two offer. Phone 480-285-4745 or 707-365-0601 or email info@gulkegroup.com for more info and to attend our Client Only Dec. 13-14 Chicago Outlook Conference (agenda below). I will do the wrap-up of the conference and give my perspective of the outlook for commodities for 2018/2019.
Good Marketing,
Jerry Gulke
Read more columns from Jerry and listen to audio reports at AgWeb.com/Gulke
