Rest of the Story: China Framework Agreement

04:35PM May 22, 2018
Jerry Gulke_The Rest of the Story
( Lori Hays )

While some are probably in shock that we got at least an agreement in principal last week, the common sense I thought was lacking by politicians proved me wrong as there is indeed some common sense left at least as seen in the negotiations?  The important take-away from all this was in the detail of President Trump’s initial objective of having a reciprocal situation whereby we are not necessarily going to buy less “stuff and trinkets” from China, but that they will buy more of our “stuff” including Ag, and manufactured products (cars, planes, etc.) that would provide additional jobs.  It has been voiced by members of the trade group of sizeable increases in Ag.  Manuchin suggested a value of sales may increase 35% and Kudlow voiced that it would be feasible that sales could double over the next years.  Both may be optimistic of course but the bottom line is that last week the financial situation changed and we have drawn a line in the sand for support at last week’s trading that was in place prior to what appears to be a game changer, at least for corn.

The thought that a rising tide raises all ships suggests that increasing trade should be palatable to Republicans and even the Kennedy Democrats (if there are any left) would agree.  It was Kennedy that first coined verbally and politically that a rising tide lifts all ships.  I am sure China understands that and certainly the current administration knows as well.   So it was in the best interest of both parties to arrive at a framework agreement.

As far as Ag products go, energies were mentioned as a source for increased trade.  That could mean E-15 and that even straight ethanol moves off our shores in addition to LP, which has been moving in the past but looks more positive now.  Take a look at CHK (Chesapeake Energy) stock movement as well as Continental Resources and Valero as a clue of what was coming during the time the media was bent on putting out the most negative vibes in a while.  Ditto TV and radio analyst who suspected Ag was doomed again going along with Ag University economists who said not long ago we would be held hostage to overwhelming stocks of grains for years.   Economist can change their minds and I am sure they will but it will come slowly so expect a lot of doubters out there voicing a contrary opinion.   

I mention the above rhetoric that we have heard for more than six months including media advice to either sell every dime higher in corn as $4.00 was a level likely overhead resistance for some time.  Also wheat was a dog with no future.   Along with that was the idea to buy puts and roll them higher; you can imagine what that cost while corn rose 30 cents since Oct 31st and has moved through the proverbial $4.00 and sucked up most of the selling by producers.  Moving the physical commodity from weak (farmer) hands to strong (commercial) hands was typical of the beginnings of a bullish market, but most assuredly there is more corn in farmer hands that is for sale on increasingly higher prices making chewing through the expected carryover of 2.2 bil-bu.   

Probably the important thing is how much flexibility there is in producers strategy as the money to manage risk properly has likely been hampered by a dwindling supply of working capital.  Leverage works fine when it works positively, but can ruin the best laid plans when it doesn’t forcing financial decision by lenders and others that wouldn’t have happen in more acceptable times.  If many mega-size producers suffered the negative effects of leveraging the last few years, there will likely be a surprise in the June 30th updated planted acreage estimate.   I see a lot of soybean stubble yet untouched in areas that would otherwise have been planted to corn, but it is difficult to extrapolate that over a wide area when looking just out the back door.

One of the main ingredients in planting decision is profitability, NOT the analogy that we like to plant corn.  Traders and analysts who haven’t made a dime producing an Ag product like to use that analogy and it may have worked in times when all Ag products made money; not last fall however when most producers made their plans.  Lenders may have had a lot to say as well by showing a spreadsheet that reflects making as much money planting soybeans in the corn-belt and spring wheat in the N Plains while using less capital and spreading risk. 

The key question is whether or not there is/has been enough flexibility in marketing outlook to have benefited from the last six months and what may lie in the future.  Picking the top will be a lot harder than picking the bottom.

Those who took advantage of our trial offer will know we lifted significant hedges in all grains including wheat last week as we felt the risk was to the upside.  Not mentioned yet is any benefit to hogs, but one would think the middle class in China would prefer some USDA Inspection stamp on processed pork chops and of course beef steaks which have already been give a green light to China but not yet seen appreciable sales.  That would help Trump in farm states.

The key in these markets is flexibility, understanding market risk both in both up and down markets.  If I have a concern yet is what may become irrational exuberance should the market have become overly optimistic in Chinese coming back to our soybean markets with a vengeance.  Having said all that, flexibility to change ones opinion is important and I will use similar technical signals to re-hedge crop as after all it was those technical indicators and fundamentals that created the move to take profits prior to the agreement on a framework deal.  The devil is in the details so time will tell and indeed it will take time to work out those details.  Patience is likely a virtue in these markets, but keep your eye on export sales and actual loadings.  I’ll trust but will need to see verification soon.  So far so good!

If your broker/advisor has you sideways or worse yet upside down in the market, perhaps we can help. 

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