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Grain stoarage bin

Belief in China trade deal requires conviction

Is your confidence in Phase One trade deal an astute market assessment, or pursuit of a unicorn?

Market analysis is an elusive process – sometimes it feels scientific, other times it’s just luck, and in the end, it’s nearly always a humbling experience for anyone who is honest about assessing performance.

Even good analysis isn’t always the only ingredient on the formula list for success. I have lost plenty of money being correct, only to fall short in the execution process, or the money management process, or the controlling of emotion process.

The reality is, market analysis must include a process that not only anticipates the future, but is also able to recognize when it arrives well disguised.
Phase One confidence vs the temptation to lose hope
On January 15, the U.S. and China signed what’s called Phase One trade agreement. It was scheduled to take effect no later than Feb 15. Yet, each day without a sales announcement between those two dates only increased trader despair and certainty that China would never honor Phase One. The marketplace continually has been telling us to give up on Phase One.
This weekend, we saw China announce that they will accept tariff exemption requests for approximately 700 U.S. products, beginning March 2, including for U.S. ag products. That seems to me to be a good sign that we are moving down the Phase One pathway. Might we have to wait until March 2 to get sales announcements? Maybe, but I think Chinese buyers have been laying groundwork for several weeks and I believe they have full confidence that they will be able to import U.S. ag products without tariffs. Therefore, they are likely to proceed down their negotiating pathways. We are getting much closer to sales announcements. And, if you think that it will be “sell the fact” when the first sales announcements are released, then you really don’t have any conviction in Phase One. Because another $12 billion to $16 billion in purchases during 2020 will not be achieved in the first announcements. No, we will likely be functioning throughout 2020 with a backdrop of potential for Chinese announcements at any given time—they will be frequent in 2020.
Recent sideways trading activity in corn
The past several weeks have been painful for corn bulls. We have seen price action appear poised for an upsurge of follow-through, only to be disappointed with the next day’s performance. Since the first of the year, we have experienced six distinct periods of weakness where prices peered over the cliff’s edge into the abyss, only to retreat away from the edge. If you were bullish corn, it took conviction to avoid selling on those days when the market peered over the edge.
Last Thursday and Friday were the last of the six periods I am pointing to with the end-of-the-month just ahead and producers facing the roll or price decisions with basis contracts; this bull blinked and lost conviction and warned of downside risk being too great to ignore.

Alas, Sunday night rolls around and we have China rumblings and prices again retreated from the cliff’s edge.

This is a classic example of how emotions, head fakes, and the weight of trader sentiment can weigh on grounded convictions, even when the market is still in its very, very narrow range and nothing has really changed.
Fear vs. reasoned concern
Many producers are fearful of enlarged 2020 U.S. corn acreage. This has been a constant backdrop since August and as the calendar advances, this fear builds momentum and conviction.

Is this a legitimate fear and a legitimate market-moving storyline, even if it proves factually correct? China could easily import 320 million bushels of U.S. corn during the current marketing year and do it again the next year, and none of such business is in the current USDA balance sheets.

Such a purchase represents 2 million acres. Such a purchase could also spur more aggressive user buying from other global participants.

And, if China is really going to achieve the $16 billion in additional U.S. purchases, it won’t be done with “reasonable/explainable” purchase quantities, but instead it will be purchase quantities that exceed trader expectations. It will be purchase quantities that imply China is building stocks, not just importing demand requirements.

My point is that the large 2020 U.S. corn acreage fears might not be warranted, even if they prove to be true.

What about soybeans?

This same exercise we just did for corn could easily be duplicated for soybeans. Can you imagine how tight U.S. soybean carryout expectations can get if or when China begins to buy U.S. soybeans in a manner consistent with accomplishing Phase One? USDA lowered carryout levels last week by 50 million but didn’t factor in any Phase One influence.
Many have expressed concern during the past several weeks about China’s continual buying of South American soybeans, but no U.S. soybeans. Well, if you were China and you knew that you were going to buy both, do you think it would best serve your ability to buy as cheap as possible by doing the U.S. purchases first, or the South American purchases first? Exactly. And that is why we have seen China’s buying pattern unfold as it has.

These South American purchases do not at all suggest that China won’t fulfill Phase One. But it might be that we will eventually look back and say these South American purchases were actually a tipping of the hand that the U.S. purchases were inevitable, and that Phase One will involve enlarged overall demand, not just shifting of origins.
Success in this business is difficult and very elusive. It requires conviction, but it requires adapting a process that builds conviction.
In the end, we can be our own worst enemy. In the end, it is not USDA that we should focus on trying to “fix.” Instead we must constantly be involved in a process of trying to fix ourselves, even if we don’t realize we need fixing at a certain point in time.

In reality, we need the most fixing when we don’t even realize our need to be fixed!

Duane Lowry
Senior Risk Manager and Market Research Director
Silver Creek Commodities
Twitter= @DuaneLowry
Phone/text= 563-419-1300
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