Optimism sprouted in the market late this week on rumors — and then confirmation — China is buying U.S. ag goods. USDA reported China purchased 756,000 tons of corn and 756,000 metric tons of wheat for delivery during the 2019/2020 marketing year and 340,000 tons of hard red winter wheat for 2020/2021 marketing year delivery. Wheat growers were pleased to see positive news finally come through.
“The U.S. Department of Agriculture [USDA] confirmed Chinese buyers purchased 340,000 metric tons, or about 12.5 million bushels, of U.S. hard red winter wheat for delivery in the 2020/21 marketing year,” says Dave Milligan, president of the National Association of Wheat Growers and a wheat farmer in Cass City, Mich. “NAWG also hopes this is just one of several steps toward implementation of Phase I of the new U.S.-China trade deal. China is one of the largest buyers of U.S. wheat, and we hope the new U.S.-China trade deal will restore the export opportunity that was building in China for American wheat farmers.”
While the purchases were confirmed by USDA on Friday, University of Missouri economist Seth Meyer says even rumors of those buys were enough to move the markets into the green on Thursday.
“When you look at the export report, which wasn't so dramatic on Thursday, it was enough for a little bounce just from the Chinese showing some interest,” Meyer says.
That interest turned into concrete purchases, which gave the markets even more momentum. It was a nice change for farmers who stared at prices in the red all week as COVID-19 concerns grasped the market.
“I think the markets are trying to deal with the uncertainty,” Meyer says. “You've been talking weather [on U.S. Farm Report] so far today, and it's a similar situation. In weather you look for an analogue: ‘Is it a year like previous years when it comes to planting?’ Folks are struggling to find an analog to this COVID-19 impact. Is it like the Great Recession? Are there impacts in the supply chain? That's what folks are struggling with.”
If there’s one thing the market doesn’t like, Meyer says, it’s uncertainty, and the markets are faced with many uncertainties right now. He says it’s also bleeding into the ethanol markets, as the industry fears less driving means a drop in ethanol demand.
“While the RFS and what everybody talks about is quantitative, you have to remember, within a given year, it's a percent,” he explains. “Every 1% less gasoline demand means the actual RVO [renewable volume obligation] falls by a percent.”
As ethanol and gasoline demand declines, it’s putting pressure on the ethanol industry, Meyer says. The other cut is coming in the form of higher prices, which is bad news for ethanol. Higher prices could force some ethanol plants to either slow or cut production, he adds.
Cattle futures were also seeing more price pressure early in the week, with a group of senators and the National Cattlemen’s Beef Association (NCBA) urging Congress to provide financial aid to producers who are seeing significant business losses. Meyer thinks the price pressure in cattle is due to concerns about the long-term implications of COVID-19.
“When you look at box beef prices, and things like chuck for hamburger, those prices are jumping,” he adds. “In some ways that makes sense. People are buying that at the grocery store, and they're also getting it through the drive-thru. At the same time, when you look at live cattle and cash prices, those are softer. The futures prices are even softer yet saying the slaughter folks are worried about their ability to process those cattle.”
Meyer says the potential slaughter plant closures could be driven by labor shortages, but it goes beyond that. He says distribution disruptions or other changes in the supply chain could also impact beef demand.
“I think you're getting what's a bad price spread for producers because, in the short-run, there's some demand for these products, but the producers aren't able to benefit from it because there's concerned about the ability to process.”