Corn, wheat and soybeans saw a price pop this week on news China made a big purchase of U.S. corn. USDA confirmed China bought 686,000 MT of corn for delivery to China. Of that total, 371,000 was in purchases of old crop.
Mike North of Vault Ag says while the big buy starts to move the trade conversation in the right direction, it’s not enough to absorb a growing balance sheet.
“The more that we should realize from China in terms of purchases, not only the closer we get to that export number, the better we can feel about the balance sheet, which continues to grow between a loss of the ethanol and this big crop coming our way,” says North.
Arlan Suderman of INTL FCStone says the soybean purchase from earlier in the week made sense, as China needs soybeans to fill the gap from August until new crop Brazilian beans are available. He says China also needs to be buying pork to fill a void, but he says the corn buy is a different story.
“Their previous purchase of corn had been primarily for new crop delivery, meaning they really don't need it, but corn is cheap right now, says Suderman. “So, there's some advantage to them buying corn that is really cheap. And right now, it's running a better than $1 cheaper than the prices they're seeing there in China comparably. So economically, it works, but they have enough corn.”
Suderman says the corn buy may have been more of a “PR move,” as a way to convince the U.S. that the trade deal is still intact. That’s as the White House made clear this week the current Administration is frustrated over the lack of progress of the Phase One agreement.
“I think that actually the tensions provide some incentive for them to make purchases at a time when commodities are cheap and when internally in China, the people who really believe in holding big reserves are starting to gain more power after the coronavirus and some of the risks they had in supplies earlier this year,” adds Suderman.
North thinks there are incentives across the board for China to make some large buys of U.S. ag goods, and that includes building back up their domestic reserves. He says the biggest reason, however, may be lower U.S. prices; not just the price of corn, but also other goods like pork.
“China buying pork has been a big conversation as we look at processing capacity versus Chinese interests,” says North. “We'll see how that plays out, but pork could be a big player. Dairy will also be a big player as they buy whey and other milk protein sources for their feeder pig industry. “
North thinks soybeans could also be a future buy for China.
“There are a lot of opportunities that are born out of some of these current scenarios,” says North “We just have to wait to see how we come to the table with them. I think Arlan is right, I think we have a little bit of a two-sided reason to try to get some deals done.”
Market strength this week came from not only more buying interest from China, but the talk of a frost/freeze to hit much of the Corn Belt. Suderman says even with possible damage, the U.S. is still facing a large balance sheet of corn for the 2020/2021 crop, which USDA will give its first forecast on the new crop balance sheet when it releases its report next week.
“The trade is going to assume the damaged corn, 'we'll just replant some of it and we'll still get a big crop,’ that's kind of the assumption,” says Suderman. “Wheat, you can't come back to the freeze damage quite so much. But with the corn side, they're still thinking the supply is big and we need a lot more demand. And that's going to limit the upside, particularly until we see Tuesday's numbers.”