Chinese Commodity Demand Helping Lift Ag Prices
A BY JOHN MILLER
s recently as July, farmers here and across the US were anticipating a prolonged period of low commodity prices given the perfect nature of US crops, a generally well-balanced world agricultural supply and demand situation, lingering negative Covid19 effects on the economy, and uncertain trade relations with China. Since that time, we have seen some deterioration in US and world crop conditions. An expanding drought across the US Western Plains coupled with a very active and sometimes destructive hurricane season (think valley cotton) rapidly reduced national estimates of plenty to one of supplies tight enough to warrant higher prices. In addition, too-dry conditions for a good start to both wheat across Eastern Europe and soybeans across South America only added to the growing sentiment that 2020 global supplies would end up being well below expectations. Evidence was also growing that governments worldwide were starting to relax Covid19 restrictions on travel as both gasoline and ethanol demand began recovering, reaching more than 80 percent of pre-Covid19 levels by summers end. Using corn futures as our guide, you can see from the chart below that even though these market-friendly stories were developing throughout the summer, prices remained at historically low levels until late September. Part of the reason for the subdued price reaction is that up to this point the marketplace was dealing with a mostly supply-side phenomenon that would take time to fully understand. For example, with the Midwest harvest and South American planting season both months away, weather could turn more favorable. Therefore, speculators were reluctant to lean heavily into ownership. What changed during September that led to the abrupt price increase you see happening across the month of October? This answer relates to a sudden and significant increase in the demand for US commodities by China. This unexpected demand from a country that we were not sure would try to meet the terms of the most recent US-China trade agreement helped add an important demand side feature to other concerns in the agricultural marketplace. The concerning supply side issues getting reinforced by unexpected demand ultimately grabbed the attention of the speculative community and led to corn prices exceeding $4.00.
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Ag Mag THEAGMAG.ORG
Let us continue to look at corn to get a sense of where we are versus last year. From the chart titled “Weekly US Corn Export Sales”, you can see from the dark blue line that this past weeks sales of over 100 million bushels far exceeds the 20 million bushels sold this same week last year. Even when you consider that 2019 export sales were very low due to the US-China trade dispute, it is hard not to be impressed when 2020 is compared to the 5-year average range shaded in blue. It is true that some of our traditional customers like Mexico have increased purchases of late, but is has been the 15 million metric tons of unexpected corn purchases from China so far this year that have captured the imagination of speculators. The export numbers are even more dramatic with looking at soybeans. The “US Soybean Export Sales to China” chart shows that by October 22nd of this year Chinese firms had already purchased upwards of 26 million metric tons of soybeans, far surpassing the entirety of the past two years and almost matching the entirety of 2017. It is likely that by years end, Chinese purchases of US soybeans could set a record and help draw down US excess supply to rationing levels. After suffering from the hog herd reducing affects of the African Swine Fever since 2018, and a fall off of consumer demand due to Covid19, China is working overtime to rebuild their hog herd in anticipation of a post-Covid19 marketplace that is expected to include sharp increases in consumer demand, especially for pork and the soybean oil used for cooking. In addition to greater US corn and soybean sales, sorghum has also seen a sharp increase in exports to China. From the “US Milo Export Sales Progress” chart, you can see how the weekly sorghum export sales since the beginning of the marketing year in September has far exceeded the 2019 sales pace, and the USDA projected pace for the current year. The cumulative weekly sales of almost
