Trade deal optimism for US farmers mostly confined to soybeans

 In Newsletter

Issue No. 103

Assets covered: CBOT Soybeans Futures, CBOT Corn Futures, CME Kansas City Wheat Futures, CME Lean Hogs Futures, CME Live Cattle Futures
Countries covered: US, China

 

Major agricultural commodities are facing a remarkable degree of uncertainty right now as they are pulled between optimism for a trade deal between the US and China and the reality that talks could break down again as they have at several points over the last year.

 

The price of soybean futures have tracked those expectations to a certain degree over the last year – first crashing in the summer of 2018 as the first round of tariffs were imposed, and then rising earlier this year amid hopes for a deal in June.

 

Soybeans futures prices have now risen again along with speculation China could return as the major buyer of US beans. Our models have been predicting higher prices for several months, and we think the current rally has a good chance of sustaining for a few more months, which indicates solid market fundamentals apart from potential purchases from China.

CBOT Soybeans Futures price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

Markets were excited when the White House said earlier this month that China pledged to buy $40 billion to $50 billion of US agriculture products as part of a preliminary trade deal. That number is highly unlikely in the short term as it would be much higher than the amount of US farm products China bought even before the trade war began. 

 

Even if there is an improvement in the trade relationship, there may not be a big impact on commodities beyond soybeans, as US prices of corn and wheat face downward pressure from plentiful supplies and cheaper competition in the international market.

 

Corn prices have fallen from early summer highs, and we see them trading mostly sideways through the end of the year.

CBOT Corn Futures price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

We see significant downside risk for wheat prices, represented by CME Kansas City Wheat Futures in the chart below. Wheat prices have risen some in recent weeks as weather impacted the US harvest, but the long-term macro challenges of plentiful supply and competition in overseas markets from cheaper Russian wheat should continue to drive prices lower.

CME Kansas City Wheat Futures price forecast through December 2019

CME Kansas City Wheat Futures price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

One bright spot is beef. We expect live cattle futures prices to turn higher through the end of the year, partly due to some mean reversion and also on the chance that there could be an uptick in exports of US beef. But any agreement with China will have very little actual impact on the beef market, as the US exported only $60 million worth of beef out of $8.33 billion in total beef exports last year.

 

The signs of progress in trade talks has helped to generate some optimism, but the direct impact may be limited, with prices still driven mostly by structural issues and domestic concerns.

CME Live Cattle Futures price forecast through December 2019

CME Live Cattle Futures price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.