Marketeye delivers China buying answer

[marketeye]

So, awhile back, I was asked the following question. Actually, I was asked to find out the answer to this question. I floated the question to one of my favorite trader sources in Chicago. The anonymous source responded with an answer and much much more. You might grab a cup of coffee and enjoy the musings on the market from this longtime trader. I'm not saying that you will agree with everything mentioned, but I find the information very interesting. I hope you do as well.  First the question from rickgthf:

"My question for you, Mike, would you be able to detect if the Chinese were buying soybean futures on the lowdown in order to establish the price before actually announcing purchases? Who normally handles the China soybean trade? Would anyone know if they started buying for the Chinese account?"

The answer is spelled out in the following reaction from the anonymous Chicago trader source.

First it’s a misnomer to think of China as one buying entity.  True there are some state sponsored companies like Sino-Grain that at times get preferential treatment, for instance they may receive licenses to import duty free for state reserves etc.. There is no coordinated effort amidst buyers to time trading or shipment beyond usual market forces is our experience.  Estimates are there are over 50 entities actively engage in importing soy beans, product into China.  Like all commodity players their economics tend to move in unison as margins open up or shut down to bring in soybeans. 
 
For the most part they respond to their own economics and have a lot of challenges.  They have long transport times from South America and the US.  They have pipeline constraints in lifting cargoes off the US PNW(pacific northwest) as well as other ports and in off loading in Chinese coastal ports.  They have long lead time in moving grain from their ports into interior crushers and commercial feed facilities.  Their forward markets domestically are not very mature so you can imagine buying US or South American beans and shipping and processing over a 2 or three month time line to hit a spot bid in the Chinese feed market.  That is a lot of risk. 

So, they tend to buy basis first to get in line at a port then buy freight.. then fix the price via futures some time between on and off load over a 6 week time frame at minimum. Because of the long lead times the Chinese merchant would rather buy supplies into a rising domestic bid. 
 
That has been hard to do given the ASF out-break that decimated their hog herd (240 million animals).. for example US standing herd on hogs is near 77 million head.  That diminished their crush by 9 mmt of soybeans internally on a trailing 12 month time period. 
 
The Coronavirus is not demand destruction as much as a “pipeline disruption” for a variety of markets.  Because they lost so much animal production due to ASF they have needed to replace the 9 mmt of lost crush with 2 billion lbs of vegoil imports.  Mostly palm oil.  Palm oil prices dropped dramatically over the last month as have soybeans.  The drop puts default risk on high alert for those in the middle of transacting imports. 

The Chinese trade authority apparently handed out “force majuer” waivers that we assume are being applied to some inbound shipments in effort to cancel or delay cargoes.  The government essentially put on travel restrictions and extended the holiday which means not everyone came back to work last week, adding to the disruptions.  Bloomberg carries a story suggesting many crushers took down time over the Lunar New year holiday and are slow to come back up. 
 
There is no replacement for Chinese soy demand.  Brazil is harvesting soybeans now and the majority of that crop will hit the market in the next 6 weeks with Argentine following a month later.  All is in the balance sheet so we are not changing numbers from current USDA balances but the timing for US to participate is not very good, trade deal or not. 
 
23 countries have the virus now and we assume it’s a drag on global growth. 
 
I don’t think there is any issues with dry bulk grain on quality.. S Korea and Japan can take diverted cargoes.. but we don’t typically sell China corn, and although soybeans may get delayed, I doubt we see any cancellations. 
 
Post ASF and post virus quarantine and I assume we move China back to trend growth with a pipeline fill on top, so expect an active trade in soy as we emerge out of this.  But need to see virus out-break contained and a resurging bid in Chinese markets.  Watch the dalian soymeal trade for a sense of a come-back there.. 
 
US should do a good business into China the last half of July-December in 2020. 
 
My concern for the moment is we don’t add back enough bean acres this Spring.  Current insurance RP is being established about 70 cents below break even and if I only add back the 4-5 million acres of prevent plant to US soybeans.. then the 2020 Nov bean prices looks a dollar too cheap.
 
Corn on the other hand is not that interesting if I get 5 to 6 million acres back and we assume trend yields.  2nd crop corn in Brazil has heavy influence on whether we gain exports or not..
 
For the historical record…the US disrupted the feed markets when they mandated ethanol consumption for the domestic market.  The world responded to high prices with more acres in Brazil, Ukraine, Russia and Argentina.  The US struggle to be competitive when these countries are successful in growing a good crop.  Particularly when Brazil has a large 2nd crop.  That crop is being planted now and will be in position for export by August. 
 
The US has an export window from now until July.. but if Brazil has good crop they will compete with the US farmer off the combine next fall.  This is the new pattern that has developed in the corn marketing.  About 5 years now.. after Brazil expanded..
 
Phase one trade deal could help US corn if Chinese want to allow/promote ethanol imports .. there corn prices are above $6.50 a bushel.. but have import quotas keeping US corn out.. it protects small peasant farm population in northern China.. they produce and consume a lot of corn.. we think they are consuming more than they produce.. some estimates suggest that they will burn through government stored stocks within the next 3 to 5 years and we will eventually see them become a more consistent importer..
 
Remember the 1995/96 corn market.. the first time we hit 5 dollars.. that was Chinese importing for state reserves amidst a relatively tight world market..
 
But haven’t seen them since the early 2000’s.  
 
Bottom line, the US does business when we are competitive.. but other world origins have done a lot better in growing production because they have new acreage in Brazil and are catching up with modern practices and yields in places like Ukraine…  and devalued currencies is helping them stay competitive…

Remember our fuel mandates, our subsidy, and our cheap interest rates are helping US farmers earn a living and keeping their land owners equity intact but making us less competitive at high cost.. and cheap storage.. so the US is the grain reserve.. the world will tap when it needs to..
 
It’s the long term conundrum for the US market.. land at 10,000 dollars an acre in Iowa.. is competing with large consortiums in Brazil, Ukraine and Argentina that farm at variable cost.. land was aquired relatively cheaply..
 
Maggi brothers in Brazil expanded by clearing land at 300-600 dollars an acre.. and farms trades in forward production .. in other words they would barter for a % of the next 3 to 5 years of production.. and most of the expansion has been from very large land holders. 
 
A dollar break and currency re-inflation in other origins would help the most.  But that is most likely a function of energy prices, and stronger recovery in World GDP…. Not in the near term cards..
 
I am long soybeans but on an acreage idea and forward view of recovery to trend consumption in China over the next 2 years.. but only for a recovery to top of the recent chart..
 
A year of trend US yields in corn sort of keeps us in the $3.10-$3.60 range, and relying on subsidy..

What say you?

Mike

[wrightcattle]

Ntnt.... 

[rickgthf]

There's a week's worth of thinking-through all of it there to be done.  Just understanding the soybean trade from a soybean import merchant's perspective is worth a lot, in and of itself.

  Literally, there are two or three magazine articles worth of material there.

  Thanks very much,  great work.

[rickgthf]

Quote: "My concern for the moment is we don’t add back enough bean acres this Spring.  Current insurance RP is being established about 70 cents below break-even and if I only add back the 4-5 million acres of prevent plant to US soybeans.. then the 2020 Nov bean prices looks a dollar too cheap."

   Some time ago, I did a little research project comparing the spring insurance price with the fall harvest price and statistically, the spring price is a good indicator of the fall price except when a production problem interferes.

   However, the trade war, ASF, and now the pandemic has thrown everything out of wack. The thing is, the spring futures price is supposed to encourage planting but all the uncertainty about if & when the Chinese might buy again is working against that. 

   We very clearly saw last spring how the trade war soybean price shifted bean acres to corn and the late spring caused producers to shed bean acres and production.  Just think where the price of beans would be if we had the more normal 4.4 -4.6 billion bushels and all the China troubles as well.

  It will be a leap of faith or a contrarian's gamble to plant beans this spring.

[marketeye]

rickgthf,

Thanks. I'm glad that you can appreciate the insight. You're right, there are a lot of points to digest. Over the years, this source of mine has never disappointed. I hope all that read the post can appreciate it as much as you.

Thanks for the original question, by the way.

Mike

[BA Deere]

I don`t want to rain on the pessimists parade, but in 2019 my farm made more profit than my Wife`s job or my off-farm job.  It can be argued that my Wife and I don`t have very good off-farm income (I`d agree with that  🙂 )   But perhaps a day on the road driving that turned out to be a day fit for planting on the farm, might make more sense to more focus on making the farm even more profitable.

The farmer`s cashflow/profit problem now is because of long term decisions made during $7 corn and $13 beans.  If in 2013 you noticed the canary in your mine shaft dying and stopped buying and when things didn`t turn around in a V-bottom then sought off-farm income, I think you`ll be alright.

Farming`s always had challenges, it`s just now the decimal point is moved back a couple places and more zeros at the end of numbers.  The farm might not always buy your groceries, but I`m yet to see where a well managed farm won`t carry it own weight.

[wrightcattle]

Midwest crop rotation is 1/2 of it Beans,  1/2 Corn... Just stick w That. 

Beans will be quite a bit better property than the cynics spin.  MO. 

[sw363535]

"a misnomer to think of China as one buying entity"---Totally agree,    like thinking usda knows US agriculture. Has its mind around US production...... NO... it presents a possible scenario.  The most expensive government in the world guesses and projects.   So how does the government of a country as big as the US, with half the financial budget and 4 times the population speak with one voice.  It doesn't.  If we could get past the nonsense of projected imagery, we know that trade deals are primarily setting the rules of engagement and protocol that keep our citizens and theirs safe physically and economically......... stuff we ignored under the clinton improve the world at the expense of the US programs.  

50 entities actively engage in importing soy beans, product into China -----Wish the US could say that.  We are living under congressional imposed monopolies to large donors to political causes.  3 or 4 handle most of our exporting and importing.  No Competition is never good.

ASF out-break that decimated their hog herd (240 million animals),Because they lost so much animal production due to ASF they have needed to replace the 9 mmt of lost crush with 2 billion lbs of vegoil imports, ---    What did they do with all those soybeans that still came to port the last two years.---Seems amazing but doesn't account for the continued soybean purchases  and the price of pork map we keep seeing in the news --- It does not seem like a big varience from normal.... pork is never cheap in china and if there is no pork being produced there is no price only a shortage.  Meat is always at a premium.  If 2/3 of the hog herd died in the last 2 years soybean imports should have diminished by 60-70% of normal...... it did not.  Pork should be imported and raise the cost of pork somewhere else in the world -- it did not.  All those political talking points just raise questions.   Even the deaths from the new virus, do not exceed normal flu deaths this time of year.  Why the promotion of panic?

There is no replacement for Chinese soy demand ---  When China stops importing beans there will be a story.... not so far.

The acres discussion is very interesting....  in the fact that he is afraid of low prices creating less acres and less production to sell...... saying, "I don't care about producers financially failing by producing at a loss, I just need bushels to sell so we can make our margin"...but it is a very important topic for producers and we cannot expect traders or usda to take leadership here, unfortunately.  We are the worlds second or third largest producing area and the most expensive..... we have institutionalized the inflexibility of our costs through environmental legislation.  We have no choice but to limit our production one way or another.  ----- yet we are the worlds biggest economy and third largest population we need our useable supply.  We need a smarter populous, one that will pay to maintain production to internal need levels either by the price of food or subsidization.  But we have people who want an american standard of living and free education with third world food costs.  So it is a artificially high commodity price with direct transfer to producers or tariffs in large numbers. Or it is direct subsidization that we traded away in those old world order trade deals.

Or lets crash it......... let those land values fall where they may.  We are really in the drivers seat here.  We produce the 20%? of the world needed supply that should bring the highest price, the go to place when the world is running low........ lets store it, supply it, and rest it when storage is full.   Then drive up prices by sitting on that last 20% the world needs every year.  Not let them drive all prices down with our over production being dumped on the market every year. Production would still be at 70-75 % of normal.  Wouldn't take much price rise to cover the lower production.   Hard to fathom with usda not supporting american agriculture.  USda seems to want Farm failure.  Which way do they need to lean to make themselves look smarter than farmers??

No  idea would cost more than the trade deficit we have been handing to China Yearly  ---- lack of leadership.

I am long soybeans but on an acreage idea---   We are in sad shape when long time traders haven't got more than that to go on.