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Trade talks between the US and China seem to be going well since the G-20 in Argentina. Markets remain skeptical that any real progress can be made, however it is seeming more and more likely that China will buy some US soybeans. The question the market wants to know is - How much and when? The better question is - Will it be enough, and will it be in time?
The USDA has US exports projected to be down 6.2 million metric tons from last year, but at the moment our combined sales and shipments are 11 million metric tons below last year. The USDA has expected other countries to step up and buy more US soybeans due to more competitive prices, and they have, but they can not replace the worlds largest soybeans buyer (by a long shot). The USDA also expected that while tariffs on US soybeans would have a significant impact, China would still need to buy US soybeans either directly from us or through a middle man. So far, we have not seen this to any great extent.
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While the USDA has accounted for a sharp drop in US exports to China, they are still expecting a sizeable amount of US soybeans to find a home in China. As far as I can tell by breaking down the USDA's global balance sheet and the current year export sales report the USDA is forecasting roughly 11 million metric tons of US soybeans to go to China during this US marketing year. Right now, China is on the books (sales and shipments) for just 585 thousand tons compared to just under 20 million tons at this time last year.
What Does China Need?
African Swine Fever (or ASF) may be helping China cut back on their feed demand needs more than the USDA expected. We are not exactly sure how big of a problem ASF is in China or how many hogs have been lost as they are very protective of details. However, it is very interesting to note that China has come in to buy US pork in the last two weeks despite a whopping 62% tariff. This could be a sign that things are worse than they let on.
Between the unknown extent of ASF and China's estimates of their own soybean stocks (who knows?) it is possible that China might not need a huge number of soybeans to get them through till the South American crop is ready for export. Brazil will have some soybeans to harvest in January and will begin shipping at full force by the end of February barring any major harvest delays. The window of opportunity for the US to fill the needs of China could be closing quickly. My best guess estimate is that China could use 5-10 million metric tons sooner than later.
From what I can tell we need China to buy about 10 million metric tons just to catch up to the USDA's export forecast and keep the 955 million bushel (26mmt) ending stocks figure from rising further. This might be all China needs for now. I believe 10 million metric tons is not enough to dramatically change the balance sheet or outlook for soybeans. If China only buys what they absolutely need to get to the point where they can rely on Brazil, I think the market will end up very disappointed.
There is another scenario however, and I believe it is possible: China makes a splash. In this climate China may feel the need (as I do) to offer an olive branch to show their dedication to resolving this dispute. In this scenario China could buy 20-30 million metric tons for state reserves. While this gesture would just be a drop in the bucket towards closing the trade gap it could have a significant impact on the Soybean balance sheet and therefore prices. But, to have any real effect at least 10 million metric tons would have to be for this 2018/2019 marketing year (on top of the original 10mmt).
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This is why soybeans are stuck in a rut right now. We hear the positive trade news, this supports the market, but we also don't want to get ahead of ourselves because all this progress and talk could still end up very disappointing. At the same time soybeans are a very difficult sell because of the possibility of the second scenario I laid out above. While the second scenario might not be the most likely outcome because of the huge size and short timeframe, it could be a "silver bullet" for the soybeans market and that represents risk for the bears. It will be interesting to see how this plays out over the next few weeks.
Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried - (312) 277-0113. Also, feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit. Find me on twitter - @thetedspread
November Soybean Daily Chart:
Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or email@example.com
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
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