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Chip Flory: USDA Shows It Will Follow, Not Forecast

For each analyst saying China will make significant purchases of U.S. ag products in 2020, there are a dozen naysayers.

It’s become popular to assume the worst; there was no stronger evidence of that than the quick death of an 11-year-old bull market in U.S. stocks. The worst-case thinking – like assuming little effort by China to meet the terms of the trade agreement – makes it difficult to “turn off the selling” in grain futures.

Demand Must Be Documented

USDA’s World Ag Outlook Board (WAOB) showed in its February and March reports it will be a follower, not a forecaster, of China-driven changes in demand for U.S. products.

In late February, China made big purchases of U.S. sorghum, prompting a 15-million-bushel increase in sorghum exports. That was partially offset by a 10-million-bushel cut to estimated sorghum feed and residual use, but carryover is now projected at just
35 million bushels. That means exportable supplies of sorghum are tight, which should encourage Chinese feed-makers to turn to U.S. corn to meet needs.

But there was no sign of optimism in WAOB corn usage estimates. Corn exports were left unchanged from the month earlier at just 1.725 billion bushels. In March, WAOB shifted a small amount of soybean use from residual to seed, but also left exports unchanged.

Clearly, we should not expect USDA’s Supply and Demand Reports to reflect increased demand from China until after the demand is documented.

A Cloudy Outlook

COVID-19 concerns only confuse the outlook. Fear took a bite out of economic activity and disrupted supply chains around the world. But, as of mid-March, there’s been little proof of actual export demand destruction for ag products.

However, there was energy demand destruction. More work at home means less commuting and social distancing means less travel by road and air. Saudi Arabia and Russia pounced at the threat, starting a pricing war that further clouded the economic outlook.

Equity values and commodity prices moved fast in March. Equity values plunged, but ag commodities showed some resiliency. Products threatened by social distancing (think beef) struggled, but a transfer from defense to offense in the commodity world will happen quickly when COVID-19 fears subside.

If you have 2019 crop in the bin, enter price orders at your elevator that will automatically lock in a price when hit. While market volatility had erased much of the 2020-crop price premiums, price-orders for cash sales or hedges should still be established.
You can’t follow price action with marketing decisions. Plan now to capture good prices in a fast-moving market.


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