U.S. Grains Hanging On Every Word About Trade Progress With China

With the exception of wheat, U.S. grains markets are broadly in positive territory. That’s the good news.

What is not so good are their daily moves—which, since the start of the year, have often been dreary, underperforming to their potential. Moving sluggishly, often with few leads—especially during last month’s government shutdown when weekly crop reports from the U.S. Department of Agriculture weren’t available—these markets could still spring to life with just one word: China.

Promise Of Trade Deal Jolts Grains Around

The promise of a trade deal between the world’s two biggest economies, which remains a promise after multiple meetings held by U.S. and Chinese negotiators, have yanked soybeans and corn prices around, preventing them from rallying despite evidence of strong purported demand.

Soybeans 5-Hour Chart

Futures of soybeans are up less than 3% on the year on the Chicago Mercantile Exchange. Corn contracts are barely 0.1% higher.

Wheat has so far posted the largest move of the three, down 7% on the year, a phenomenon caused by bumper harvests from strong European and Australian yields.

Notwithstanding that, traders report that China is in the market for all three of those grains and more—if the trade deal with the U.S. can materialize.

China Needs Lots Of Grains...But Needs Trade Deal First

Jack Scoville, vice president at The Price Futures Group in Chicago and author of the brokerage’s daily grains report, wrote in his latest summary:

“China is apparently willing to buy a lot of U.S. agricultural goods, with some wire services stating that it could buy between $45 and $50 billion each year."

"Wire services said that China had offered to buy another 10 million tons of U.S. soybeans as a goodwill gesture. It was reportedly looking for soybeans yesterday, but would need to buy corn and wheat as well.”

Scoville also makes clear that prospective Chinese buyers have no problem locking in these commodities—if not for the complication posed by the 25% duty Beijing has maintained on $50 billion worth of U.S. agricultural imports since last summer in its tit-for-tat tariffs war with Washington. Soybeans, corn and wheat fall under those duties.

The U.S., for its part, has a 10% levy on $200 billion of Chinese imports and was on the verge of raising those taxes to 25% at the start of this year when the two sides decided on a three-month ceasefire on Dec. 1 in order to negotiate a trade deal.

Trade Talks Progressing—Not Enough To Prompt Significant Rally

With less than a week to that deadline, U.S. President Donald Trump pledged to hold off on further hostilities, as negotiations seemed to be going well. Though not well enough to reach a deal, apparently. On Monday, the U.S. president reported that trade officials on both sides were "very, very close" to a resolution that "could happen fairly soon, or it might not happen at all". Trade sources, however, said Chinese negotiators were having issues meeting some key demands from the U.S.

Scoville outlined the problem in his note:

“The intellectual property rights and forced technology transfers as well as Chinese structural reforms remain key sticking points and will need much more time to be negotiated.”

At Tuesday’s closing, soybeans’ front-month May futures settled a touch higher, at $9.1762 per bushel. For the year, the contract is up 2.6%.

Mixed Calls On Soy, Corn And Wheat

Technical analysts on Investing.com have a “Strong Buy” call on May soybeans, projecting a top-end, or Level 3 Fibonacci resistance, at $9.3516.

But specialist intelligence service Farm Futures was more conservative on soybeans in its in a mid-February outlook.

Senior market analyst Bryce Knorr said in that note:

“U.S. commitments to China are down by as much as 550 million bushels. That’s just too large a hole to overcome, at least this year.”

Corn's benchmark May futures settled up 0.1% at $3.7588 per bushel in Tuesday’s session. For the year, the contract is up 0.2%. Technical analysts are “Neutral”, projecting a Level 3 Fibonacci resistance at $3.8430.

In another sector outlook published on Monday by investing research website See It Market, Marcus Ludtke, vice-president of Sitos Grains and Commodity Marketing Company, commented:

“Corn continues to trade in a tight range in early 2019. But there’s a lot going on with the fundamental picture.”

“Count me in the camp of those still not seeing the economic justification for a 2.9 million planted acreage increase in corn for 2019.”

Wheat 5-Hour Chart

Wheat futures for May settled up 0.2% at $4.6888 per bushel on Tuesday. For the year, they are down 6.8%. Technical analysts have a “Strong Sell” on May wheat on their daily outlook, with projecting a Level 3 Fibonacci support as low as $4.5246.

Knorr wrote in a separate Farm Futures outlook from Feb. 13 that wheat had a “bright, shining moment last summer”, when threats to crops across Europe and into the Black Sea and Australia raised hopes that the time was right for the U.S. to begin selling lots of the grain to a hungry world.

But yields overseas—outside of northern Europe and Australia—turned out better than expected, and those sales by and large were slow to materialize, Knorr wrote, adding:

“Business finally picked up as the calendar flipped to 2019, but it may be too little, too late for a wheat market on the verge of life support.”