MARKETS:
Monday Check-in
Post trade truce, a return to workaday fundamentals with a dash of Brazilian weather
Summary
- The China-US agreement is a truce that lessens disruption for now, but broader trade issues remain a potential disruptor.
- The agreement did contribute to soybean price gains.
- However, investors exiting positions have been a broader influence across markets, but that likely soon wanes.
- The action in the aftermath will calibrate prices to competitive, and likely somewhat lower, levels.
- Brazil’s underwhelming swing into the rainy season had left soybean and first-crop core regions unusually dry.
- Forecasters expect enough rain to douse any concerns.
- However, those forecasts need to be realised if the market is not to get a little nervous about Brazil’s crops.
So, there’s a US-China trade truce that includes soybeans. What’s next for grains and oilseeds? Grain and oilseed markets lack major issues to drive significant price changes. Brazil’s still inconsistent rainfall might change that. For now, though, market focus reverts to workaday issues of relative prices, trade flows, and positions.
TRUCE BE KNOWN
The agreement between China and the US is certainly only a truce. The truce is a recognition of global integration that allows the world economy to keep functioning. The West’s issues with China are unresolved, so the Trade War is ongoing. The agreement, therefore, pauses the crop-market trade issues for now. These issues can easily flare up again at any time. This possibility means that China’s commitments to buy US soybeans, beyond the current flurry, are uncertain. Therefore, even if there is no active threat to that flow, markets will remain sensitive to the ebb and flow of China-US relations. Additionally, efforts to build alternative markets for US soybeans are likely to continue.
For canola, there has been little movement on the Canada-China dispute. The two nations’ leaders have agreed to meet at a “mutually convenient time”. Such vagueness suggests that either or both are in no hurry. And that might simply be for practical reasons. The dispute is very much entangled in the larger Trade War, so making progress is difficult. Thus, markets will need to find alternative export destinations for Canada’s canola.
EXIT STAGE
Much of the price action over the past couple of weeks has been driven by investors exiting positions in our view. The pattern of relative gains mirrored what we knew about those positions in late September.
Soybean meal is the clearest example. Investors’ short soybean meal positions were, proportionately, very large. As were investors, likely short-near/long-far, spread positions. The result has been a 14-day winning streak for December soymeal futures. Such streaks are highly unusual in any market. For soybean oil, investors had a modest long position and a hefty spread position. And soybean oil prices have fallen modestly. The pattern in the grains has been similarly consistent with the positions. Both corn and wheat prices (SRW and HRW) have gained. Wheat has done better, consistent with the larger investor short and spread positions in those markets. For corn, the spread gains have been greater, consistent with the large investor spread positions. Looking forward, that position-driven price action will eventually peter out because the positions are finite. When is always a guess, but even more so currently because there are no position reports.
Soybeans have been the exception. Investors had a sizeable, but nowhere near extreme, short position in soybean futures. Again, consistent with the price move. But the trade truce would have required some calibrations to soybean pricing anyway. China buying US soybeans again is part of that impact. Perhaps more important is the removal of uncertainty along the supply chain. Freed from that uncertainty, markets are getting on with the task of matching producers and consumers. The price calibrations have been quick. US soybean prices, in anticipation and reaction, have jumped sharply. Soybean prices in the US and Brazil have converged. US calendar spreads have narrowed sharply. And internal US basis discounts have decreased. Not all of that pricing shift is likely to persist. China will, briefly, be a semi-captive buyer. Beyond that, US prices will need to revert to somewhat lower levels.
COMPETITIVE CALIBRATION
As will the rest of the grains and oilseeds. To the extent that US prices have overshot competitive levels, prices will need to retreat. Determining competitive price levels is unusually opaque, with little US data available. Corn prices’ break higher has been modest, and likely remains that way. Wheat’s bounce has been stronger, perhaps finally snapping the stick of weak momentum.
BRAZILINGERING
Brazil’s swing into the rainy season has been underwhelming. Rainfall is well down on normal. Each set of rainfall forecasts has only been partly realised, in amount and breadth. Weather forecasters are expecting more rain in the week or so ahead. If those forecasts are realised, then there is no problem. However, the recent pattern of rainfall ‘unders’ likely has the market a little nervous. A repeat, or drier revisions to, forecasts would likely provide some support for soybean prices.
