Grains

The corn market just can’t catch a break. Heading into the March 29 Prospective Plantings and quarterly Grain Stocks report, corn was already seeing some short-term demand drop as massive flooding in the Midwest has compromised 13% of the nation’s ethanol production capacity. Corn prices were hit with a double whammy in the USDA reports—big acres and big stocks. USDA expects U.S. farmers to plan 92.8 million acres of corn, which is up 4% or 3.66 million acres from last year. Additionally, USDA pegged corn stocks at 8.605 billion bushels, up from 2018 and roughly 2.5 million bushels more than the trade expected ahead of the report. “The last thing we need for corn right now was a bearish acre number for corn,” says Greg Lumsden, Cargill product line leader. “The market obviously is taking that extremely hard.” Following the reports’ release, corn prices dove 15¢. “Today in the market is looking at some got short-term demand slowdown, big stocks and big acres,” he says. “If we carry these stock numbers through to new crop, we could be looking at well over 2 billion carryout again. Unfortunately, what we saw today—especially on corn—is going to shift the whole price structure 10¢ to 15¢ lower.” USDA predicts U.S. farmers will plant 84.6 million acres of soybeans, which is down 5% from last year. The decline in soybean prices were less than corn. “You've got a little bit more muted reaction from soybeans, as the acres are certainly helpful and there was a little relief stocks weren’t higher.” Lumsden says farmers should keep the Prospective Plantings report in perspective. “We always try to look at what do we think the USDA is going to say? And, then what do we think ultimately will get planted? That's typically two different things.” With these reports behind us, Lumsden says the focus of the markets will now be trade. “Everybody is tired of talking about it, but it is going to continue to dominate,” he says. “The reason I say that is it we're entering in a period where normally you'd be building risk premium by saying, we've got to plant a crop again this year. Well, we're so far away from that, and while we could be potentially delayed, we've got ample moisture profile out there and nothing fundamentally is exciting out there.” He says the markets are dominated by technical and high-frequency traders that are emboldened to drive this market lower, and today's report is just not going to change that. “The funds are so short, and after today's report they may be approaching a record short position,” he says. Farmers should have sales in place to cash in on market spikes, Lumsden suggests. “Producers really need to key in on is just the basics of grain marketing, and you need to have firm bid offers in the system,” he says. “The market can spike faster or further than you think, but you have to remember we have record corn out there and farmers are so under-marketed that the head pressure can really tamp down those rallies. Take care of some business and get some bushels sold.”

China says it's blocking some imports of canola from Canada out of fears of insect infestation. The move comes amid tensions over Canada's arrest of a Chinese tech executive. Some believe it’s an attempt by China to gain leverage with Canada. China cited only "harmful organisms" for suspending the imports and didn't identify what those might be as well. A China foreign ministry spokesman saying the decision is well-founded. Canadian officials say they have not identified any pests or bacteria of concern.

The “beer war” sparked by the Super Bowl is still making headlines today. The National Corn Growers Association (NCGA) said it seized an opportunity that Sunday. A situation that could have turned into a negative slew of press releases and news articles, turned into a positive newsmaker for corn growers across the country. Now, NCGA is learning from a situation that caught the Association by surprise. “About two weeks before the Super Bowl we had a board retreat and one of the questions the facilitator asked one day as a warm-up question was ‘What would you do if money was no object?’” said Jon Doggett, CEO of NCGA. “Someone said ‘let's have an ad at the Super Bowl.’ Well, we had an ad at the Super Bowl, and we caught it just right. Our first couple tweets caught it just right. We had 3 million impressions on our tweets. That's more than we've had on all of our tweets combined over the years.” The tweet NCGA posted Super Bowl Sunday is still gaining traction, with more than 3,300 retweets and 9,400 “likes”. “It was interesting; within ten minutes after that ad first aired, we had our first tweet out,” said Doggett. “Within ten minutes after that I had an email from a senior executive at Anheuser-Busch saying ‘hey we need to talk.’ We could have waited until he next day and put out a press release and said ‘we're really mad,’ and it would have done nothing, but we had fun with it, and that's what it's all about.” Momentum from Bud Light’s Super Bowl ad didn’t stop that Sunday. MillerCoors stepped up to the plate the following week, welcoming NCGA leaders to Colorado with a delivery of beer. “We built a relationship there that we hadn't had before,” said Doggett. “We're trying to do the same with Anheuser-Busch. We had a documentary filmmaker who wants to talk to us about a film he wants to do about whiskey. I mean those are the kinds of things that I think we really have to center ourselves around.” Doggett said instead of negative rhetoric about agriculture and corn, the ad sparked something positive, and built momentum on which NCGA wants to continue to capitalize. “There's so much positive that we have to tell,” said Doggett. “We have to find a new way to tell it. Let's expand these opportunities for corn farmers. Let's have some fun at it, let's do it in a professional fashion. Let's bring as many people along with us as we can while we're doing it.”

National Economic Council Director Larry Kudlow says progress has been "terrific" in trade talks between the U.S. and China. He says a deal is on the horizon. There are reports a 150-page document is being readied. There are also reports China has made offers to strengthen its laws in several areas identified by U.S. officials. We're also hearing, under enforcement language pushed by the Trump administration, China would not be allowed to retaliate with tariffs. That's if the U.S. reapplied tariffs on China, due to trade agreement violations, but our Washington insiders say there's been no confirmation China has accepted the U.S.-written enforcement language. Last week, President Trump took to Twitter, saying he has asked China to remove its tariffs on U.S. farm products, such as pork and beef, adding that removing the tariffs "is very important for our great farmers-and me!" The President also alluded that if China lifts its tariffs, he may reciprocate in short order.

The importance of Japan as a trading partner for U.S. agriculture was the focus of a Feb. 22 panel discussion at the USDA Agricultural Outlook Forum in Arlington, Va. U.S. Meat Export Federation (USMEF) Economist Erin Borror explained that Japan is the leading value destination for both U.S. beef and U.S. pork, with 2018 exports expected to reach $2.1 billion and $1.65 billion, respectively, when year-end data is available. But Borror also cautioned that the competitive terrain in Japan has gotten steeper for U.S. red meat due to Japan’s preferential trade agreements with Australia, the European Union, Canada, New Zealand, Mexico and Chile, and this situation will worsen unless the U.S. secures similar access terms with Japan. Borror noted that U.S. beef export value per head of fed slaughter averaged a record $320.72 in 2018, up 14% year-over-year and shattering the previous high ($300.36) set in 2014. Japan accounts for one-fourth of this total, or $82.75 per head. The ratio is similar for U.S. pork export value, which averaged $51.46 per head slaughtered in 2018. Japan accounted for $13.18, or 26% of the total per-head value. She also explained that beef and pork make up a significant portion of U.S. agricultural exports to Japan. The projected $3.92 billion in combined red meat product exports represent about 30% of the $13 billion in total U.S. ag exports to Japan, second only to grains and feeds. Furthermore, Japan’s red meat consumption is likely to expand at a faster rate once the benefits of lower import duties are passed along to consumers. In South Korea, for example, the tariff rate on U.S. beef has dropped by more than half since 2012 under the Korea-U.S. Free Trade Agreement, and U.S. beef enjoys a tariff rate advantage over its competitors. Most pork from the U.S. and other major suppliers enters Korea at zero duty. Red meat is now more affordable and accessible for Korean consumers who have responded enthusiastically, with per capita consumption setting new records. A similar development in Japan will only benefit the U.S. beef and pork industries if they are on a level playing field with competitors. Without a U.S.-Japan trade agreement, potential losses for the U.S. meat industry are substantial. On a per-head basis, Borror estimates lost export opportunities for U.S. beef will reach $18.70 by 2023 and $42 by 2028. For pork, the per-head loss is projected to be $4.55 by 2023 and $7.06 by 2028. U.S. exporters are already feeling the effects of tariff disadvantages of 11 percentage points for beef cuts and 6.4 percentage points for beef tongues and skirts. For pork, the most immediate impact is on processed and value-added products, where tariffs are quickly being phased to zero. This is already eroding U.S. market share for important products such as ground seasoned pork. Japan’s imports of U.S. ground seasoned pork were valued at $288 million last year. “Unless the U.S. and Japan can quickly reach a trade agreement, lost opportunities will mount as Japanese companies seek more value-added, further processed products from suppliers such as the EU and Mexico,” Borror explained. “Decisions that are being made today will transform the business and without clear indications that the U.S. and Japan will reach an agreement, the U.S. industry is likely to suffer permanent losses in market share and related investment. Japan is irreplaceable as a trading partner, given its demand for high-value chilled pork cuts, and it is seen as an increasingly important market for value-added pork. At a time when U.S. companies are looking to produce more value-added and branded products, the industry cannot afford to miss these opportunities in Japan.” These lost export opportunities also carry serious implications for U.S. agriculture and the rural economy. Exports to Japan are estimated to directly support more than 4 percent of the jobs in the meat packing and processing industry. Absent a trade agreement with Japan, an annual cost of $5.2 billion in direct economic losses to other businesses and industries will result in the top 15 meat packing and processing states. Over the next 10 years, an estimated 23,600 jobs outside the meat industry would be lost in those 15 states. Joining Borror on the discussion panel were Jeffrey Schott, senior fellow at the Peterson Institute for International Economics, and Ben Conner, vice president of policy for U.S. Wheat Associates. Borror also addressed the USDA Outlook Forum on Feb. 21, covering a range of topics impacting global red meat trade. These included the spread of African swine fever (ASF) in China, which has the potential to increase China’s need for imported pork. ASF’s expansion in Europe also impacts global trade, as some countries have suspended imports from European Union member states in which ASF is confirmed. Borror also detailed the impact of ongoing trade disputes on U.S. red meat exports, including imposition of retaliatory duties on U.S. pork by China and Mexico. China also increased the duty rate for U.S. beef last year, and Canada imposed retaliatory duties on prepared beef products imported from the United States. Retaliation has weighed less heavily on U.S. beef exports, which were record-large in 2018 and surged by more than $1 billion over the previous year. Pork export volume held steady with the record pace of 2017, but export value was pressured greatly in the second half of the year, following retaliatory actions by China and Mexico. Borror explained the retaliatory tariffs have been paid by the U.S. pork industry as prices for hams, picnics, feet and hocks – key items for export to Mexico and China – were down an average of about 20% from June through December last year, and this translated into year-over-year losses of $11.75 per head. Industry losses, just for these products, amounted to $860 million.

This year is going to challenge pork-exporting countries around the world. The principle reason for this is a broad-based weakening in global economies which will weaken total demand for meat and likely marginally shift some beef and pork meat demand to cheaper poultry. Weak economies mean weak purchasing and economizing on food purchases, especially meat. A look at China’s economy The bellwether nation leading us into a weak 2019 is China, where a steep decline in the rate of growth of Gross Domestic Product (GDP) was recently announced. The size of this reported economic slowdown has not been experienced in almost 30 years. Factory output of durable goods (cars, washing machines, tech etc.) has fallen sharply due to lackluster demand. It is reported that the Chinese real estate market in many cities is substantially overbuilt, trapping apartment and condo owners in recent purchases now selling for substantially less. China is the key influencer of the wider Asian economic activity and its slowdown is rolling into Indonesia, Vietnam, Korea and even Japan. This is expected to keep any growth in meat imports uncertain to unlikely, despite an ever-enlarging African swine fever (ASF) geography that further complicates forecasts. Pork demand in China Unfortunately, Chinese demand for pork may weaken due to falling economic activity that’s causing lower current incomes and uncertain future incomes. We can expect a temporary shunning of pork until its safety is assured and believed by Chinese consumers. Herd liquidations will flood the market with cheap pork for many months. This, combined with weak demand, will keep imports lackluster. Poultry is not big in the Chinese diet but is growing quickly among the more health-conscious young generations. Global poultry is expected to top record 2018 production this year, giving price-sensitive consumers temptations to substitute out of higher cost beef or problem pork for lower cost chicken. Global pork production is expected to be at record levels again this year barring the escalation of ASF or its migration to new production areas or major producing countries. Will U.S. demand be enough? The big bright spot for U.S. pork producers is the continued strength of our economy. Record levels of employment and gains in real income have been small but are breaking a long-term period of stagnation. This is helping fuel record domestic meat consumption. Resurgence of the popularity of low-carb diets in the form of the keto diet is gaining significant traction. But unlike the Atkins rules, the keto diet proscribes smaller total portions of protein and a remarkable 70%+ of the diet coming from fat. Unfortunately, optimistic domestic demand is offset by what appears to be big challenges and lower expectations for U.S. pork export sales in 2019 as compared to last year due to the sinking world economy. The Federal Reserve took back a sizeable piece of their multi-year easing of interest rates which had driven real rates to close to zero in response to the 2008 market collapse. This caught many producers by surprise as their adjustable loans and lines of credit recently notched up a tick or two. Gaining back the ability to provide liquidity to the market during the next major downturn through lowering interest rates is a critical tool in maintaining U.S. growth and prosperity, and it is hard to lower rates below zero.