Late 2019 activity by the Trump administration and Congress appears to have eased some trade tensions, offering perhaps a glimmer of hope for U.S. agriculture to reverse some of the depressed commodity prices that have burdened markets for the last few years.
Delta Farm Press asked University of Tennessee Institute of Agriculture Extension economist Aaron Smith to weigh in on how much trade talks have moved markets and how other factors also are affecting commodity prices.
"We need to keep in mind that prices typically appreciate during the winter, so separating out trade-related price increases and those attributed to seasonality, managed money, and basic supply and demand factors is very difficult," Smith says.
He responds to six questions producers should consider as they make 2020 marketing decisions.
1. Cotton, for instance, buoyed by some supply and demand news as well as movement on the China trade talks, appears to be moving closer to 70 cents. Does this seem to be a trend supported by easing of trade tension or is it a blip?
The rally in cotton comes from a combination of factors. There is a small boost from the positive progress in trade talks with China, maybe 0.5 to 1.25 cents. We saw a bump in futures prices when Phase 1 was announced and then a pull back, which may indicate details and confirmation of China’s intended purchases are required to maintain a trade bump.
The primary driver in the August-December rally has been supply and demand. Estimated 2019 production has been reduced 2.31 million bales from the August WASDE to the December WASDE, a 10.3% reduction. This compares to the increase in the March futures over the same time period of 13.5%. This is an oversimplification of the many factors that cause price change, but the reduction in U.S. production has been important for improved prices.
Moving forward, an advance into the low 70s is not out of the question, but neither is a retreat below 65 cents. Further adjustments to the size of the U.S. crop and global cotton demand for U.S. exports will dictate price direction for US producers.
2. What about other commodities? Soybeans and corn are also up on more positive trade news. How should farmers react to these current movements?
Trade progress with China will affect corn less than soybeans. Specific details on the Phase 1 agreement regarding China purchases of agricultural products could result in an additional bump for soybeans. The specifics of the purchases of agricultural products will be very important if a price increase is to be realized/maintained. Generalities regarding purchases are unlikely to move prices substantially.
Making marketing decisions based solely on trade news is probably not in a farmer’s best interest. Sticking with marketing basics (have a marketing plan --- know your cost of production, know which marketing tools you are comfortable using, mitigate downside risk, evaluate basis opportunities, use incremental sales, make sales when the market presents a profitable opportunity) rather than trying to predict price movements is important to a sound strategy.
For crop in storage, farmers should seek strong basis opportunities as the variability in production across regions has created a high degree of variability in basis offerings.
3. How about the USMCA? Immediate effect on cotton and grain markets?
Not likely, the agreement, in principle has been around for about a year, so I don’t see an immediate response in markets. This is not to say that the agreement is not incredibly beneficial to agriculture; however, I look at USMCA as a long-term benefit, not a short-term price shock.
The bigger risk regarding USMCA for agriculture was not having free/fair trade with our neighbors to the north and south. Finalization of this agreement provides mitigation of the downside of reduced agricultural trade with two of our largest trade partners. The major benefit of a finalized USMCA is trade rule predictability and steady growth over longer time periods.
4. Other looming trade issues? EU? Others? New opportunities?
Putting China aside, I suspect that EU and post-Brexit Britain will provide some challenges/opportunities in 2020. Longer term, negotiation of bilateral/multilateral trade agreements with many countries in Southeast Asia, the Middle East, and India represent an opportunity for agriculture, given large, growing middle class populations in those regions. Africa could also provide opportunities; however, greater challenges exist in this region than in others.
5. Do we still have work to do to regain markets lost during the trade disputes?
Yes. China is the big question mark at this time. Brazil’s growth in agricultural production and infrastructure investment, domestically and from Chinese companies, creates a more competitive environment for many agricultural commodities, specifically soybeans and cotton for Mid-South producers. Whether the U.S. can regain the market share lost to Brazil in China remains very uncertain.
6. At this point, how should farmers approach marketing strategies going into 2020 planting season?
As mentioned before, farmers need a marketing plan. Farmers should pencil out a cost of production (the more accurate the better). This allows marketing decisions to be made knowing profit and loss potential.
Evaluate available marketing tools that you are comfortable in using; forward contracts, managed products, futures, options, and storage should all be considered. Set realistic targets for sales. For example, setting a price target of $5 corn on the harvest futures is very unlikely to be realized prior to planting.
Price incrementally or set specific times to price a certain amount of production. Pricing all of your production at one time can result in feast or famine profitability scenarios. Do not let profitable opportunities pass you by.