Know the numbers
Rafael Pagnoncelli explained the impact the current trade war between the United States and China is having on the corn, soybean and other agricultural trades at the recent annual Dundas Soil and Crop Association meeting. Glover photo

CHESTERVILLE – Navigating the exchange markets of foreign exchange rates and determining what’s hot to buy and sell can be a tricky minefield to step through.

During this year’s Dundas Soil and Crop Association update meeting, Rafael Pagnoncelli, managing director of treasury and financial risks, La Coop fédérée, gave a helpful presentation on what to look for in 2019. The big hit of the presentation was the price developments in the grain markets – and how they haven’t been able to regain their levels since before the trade war.

This past Dec. 2, both the United States (U.S.) and China agreed on a trade truce following the G20 Buenos Aires summit in Argentina. The U.S. then removed the threat to impose tariffs on the last $267-billion in Chinese goods.

Both the U.S. and China hold $50-billion in tariffs at a 25 per cent rate since July, while the U.S. holds another $200-billion in tariffs at a 10 per cent rate and China with $60-billion at the same rate.

However, on Feb. 24, the U.S. was threatening to increase the $200-billion of tariffs from 10 per cent to 25 per cent on March 1. This deadline was quickly extended.

The state of whether the tariffs remain after the trade deal are still unknown.

According to Pagnoncelli, China would like them to be removed completely while the U.S. would like to keep some of them in order to ensure that China remains compliant.

“The two presidents are already talking about presenting a deal today, tomorrow or very soon,” he said. “Then the two presidents would meet to sign the deal. Things are moving very fast and that’s a positive.”

Chinese vice premier, Liu He was in Washington the first week of April to continue talks in drawing closer to a final trade agreement. Unfortunately, both sides are still haggling over how to implement and enforce the agreement.

U.S. President Donald Trump was scheduled to meet with Liu He on Thurs., April 4 for further discussions.

According to Trump’s electoral base, they are very unhappy as agricultural producers have suffered greatly due to difficult economic conditions with average farm incomes falling to near 15-year lows.

“The market is waiting on a meeting confirmation between Trump and Chinese President, Xi Jinping,” said Pagnoncelli. “The sooner talks are in motion, and if they are productive, we could move a step closer to that goal.”

Due to the recent trade war, the market remains uncertain.

Soybean trades are still waiting for a resolution of the conflict. Corn is being pushed down by an increase in expected acres in the U.S., with a slow-down in demand and an increase in stocks. Wheat is currently down following tough competition from abroad.

Pagnoncelli explained that, after being absent for several months, China purchased American soybeans as a gesture of good faith, with a total of 11.72 million metric tons purchased since Dec. 13.

“The new sales have helped,” he said, “However, the delay with the other years is important and the South American harvest is coming up soon. The USDA is still too optimistic in forecasting only an 11.9 per cent drop in U.S. exports this year while exports are lagging by 28.6 per cent at this time.”

Through visuals, Pagnoncelli showed that demand for soybean crush is increasing steadily but exports are lagging by approximately 225 million bushels.

“A resolution to the trade war could spur additional exports,” he said. “But with South American supplies coming online soon, the increase could be limited. Unless there is a trade deal, it would not be surprising to see the USDA lower their exports estimate which should push ending stock higher. Maybe one-billion bushels?”

In the matter of corn and wheat, corn exports are near their five-year high combined with lower prices – China is not considered a global player in this market. Wheat is close to their five-year average, with the U.S. having to fight hard for new businesses due to strong competition coming from Russia and the Ukraine.

“All estimates of demand are down including ethanol, animal feed and exports, causing an increase in ending stocks,” said Pagnoncelli. “Ethanol production is running below 2018, but inventories are continuing to rise. The production’s future could be bright if year-round sales are approved by the U.S. government.”

Wheat, on the other hand suffered significant losses since mid-February – but did manage to find a bottom somewhere with very low winter-kill risks in the U.S., the U.S. cutting prices to find export and an abundant quantity of wheat in the world (ie. Russia and Ukraine).

To summarize in Pagnoncelli’s March quarterly stock report, there is 296 million bushels more corn than expected while soybean inventory has increased due to a lack of exports, which was anticipated by the market. Wheat has remained mostly unchanged compared to the previous years.