KSU Weekly Grain Market Review: Grain Market “Law of One Price” Will be At Play in U.S.-China Trade Dispute

Weekly Grain Market Review (KSU Ag Econ) for July 6, 2018

Question of the Hour in World Grain Markets:

How Will the “Law of One Price” Work Out for Grain Markets in the U.S.-China Trade Dispute?

By definition, “The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration. The law of one price is another way of stating the concept of purchasing power parity. The law of one price exists due to arbitrage opportunities.” (Source: Investopedia, https://www.investopedia.com/terms/l/law-one-price.aspFeedback)

In regards to grain markets, here is more explanation:  “In case the two markets both produce and can trade a commodity in either direction the law of one price states that the price difference should be smaller or equal to transport and transaction costs.”

There are a number of studies in the grain markets within the last 10-20 years that appear to indicate that the Law of One price DOES hold in the grain markets in the long run, but that there may be short term (from several weeks to a month or so) during which prices may be “out of line” or “not aligned economically” in a manner that would otherwise be dictated by differences in transportation costs, exchange rates, or I would add, time, storage, or possibly even quality.

So, how do these definitions of the Law of One Price relate to the current situation in U.S., Chinese and World grain markets?  It seems that with 1) flexibility in the directional flow of grain, 2) the inflexible needs of domestic users of grain in terms of timing of usage and location of processing plants and/or livestock feeders, 3) the risks associated with point #2 and varying risk averse attitudes and approaches of domestic U.S. and foreign users, 4) the short term inflexibility of supplies coupled to the long term seasonal ability to adjust production plans, and other factors, that in the short term, grain markets may tend to be reactive, if not possibly over reactive to such an issue as tariffs on grain imports placed on U.S. soybeans, grain sorghum and other commodities by China.

However, past the initial reactions of the markets – to a degree rationally driven by short term needs of grain users, but to another degree perhaps driven by fear of the unknown in a risk averse environment, if not a herd mentality – there will be volatility in the grain markets.  In other words, it could be a challenge to figure out to what degree grain price volatility in the midst of a major trade dispute such as this between China and the U.S. should rationally affect grain prices.

There is a fair amount of confidence that grain markets will eventually readjust to changes in the directional flow of grain in international trade, and that livestock that has to be fed and processing plants that have to run will eventually receive their supplies.  But the period of adjustment could “try the mettle” and “test the courage, patience, and managerial ability” of both producers and users of grain, both in the U.S. and in China.

Finally, the reverberations from this event will likely persist and force themselves upon the grain markets over the next 1-2 years at least, as high soybean prices for export in South America may pull more Brazilian and Argentine acres into production for export to China, competing for corn acres in those countries, and affecting the decisions of U.S. corn producers in 2019.  And these speculations on future cropping patterns in response to the current U.S. – China trade dispute are only beginning.

Likely this trade dispute will eventually be settled – possibly by fall 2018 as China will need U.S. soybean supplies after South American supplies have run short.  If the trade dispute is settled by the U.S. 2018 soybean harvest, then the U.S. will likely ship soybeans to China directly.  If it is NOT settled by that time, then China will still need soybeans, but some form of trans shipments or substitution of inventories on an in and out basis via other countries may occur.  These and other questions will likely “roil up” the grain markets for months to come.

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Grain market summary notes, charts and comments supporting the Weekly Grain Market Review presented in the KSU Agriculture Today radio program to be played on Friday, July 6, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

The recorded radio program will be aired at 10:03 a.m. central time, Friday, July 6, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the July 6th recording will be available afterwards at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

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Weekly Grain Market Review (KSU AgEcon): Kansas Cash Corn and Wheat Basis Retains Strength Signalling Underlying Demand

Although Corn and HRW futures have declined sharply in the last few weeks, basis levels for corn and wheat at various Kansas locations have retained their strength – signaling underlying demand.

On the days ahead of the June 29, 2018 USDA Grain Stocks and Acreage reports U.S. grain markets have been “weak“.  CME JULY 2018 corn futures closed at $3.45 on Thursday, June 28th – trading in a range of $3.38 3/4 to $3.59 3/4 since June 18th.  CME JULY 2018 Hard Red Winter Wheat futures closed at $4.53 1/4 on Thursday, June 28th – at the very bottom of the trading range of $4.53 1/4 to $5.00 1/2 since June 19th.  Similarly, CME JULY 2018 soybean futures closed at $8.61 1/4 on Thursday, June 28th – trading in a range of $8.77 to $9.05 1/2 since June 18th.

Although the futures markets have been declining, cash basis levels for corn and HRW wheat in Kansas have displayed a large amount of variability across the state.  Corn basis levels in several Southwest Kansas locations are $0.03 to $0.10 under SEPT 2018 Corn futures – a positive event considering the weakness in futures prices.  Corn basis levels in Northwest Kansas are still $0.36-$0.40 under JULY 2018.  Overall, western Kansas cash prices range widely in June 28th, from highs near $3.49-$3.51 per bushel in Southwest Kansas to lows in the $3.05-$3.09 range in Northwest Kansas.

Central Kansas corn prices ranged from $3.10 to $3.28 per bushel, with basis levels being $0.17 to $0.35 under JULY 2018 Corn.  Conversely, Eastern Kansas corn basis was relatively strong, with cash prices of $3.45-$3.50 at major terminals in Topeka and Atchison, with basis being even with or $0.05 over JULY 2018 Corn futures.

Ethanol plant cash bids for corn in Kansas early in the day on June 28th were $3.52 1/2 to $3.82 1/2 on June 28th, with basis ranging from even with to $0.30 over JULY 2018 Corn futures.

Summary Thoughts on Kansas Corn Basis: The upshot of all this for corn, is that in locations near demand centers in Kansas (i.e., cattle feeding in southwest Kansas, processors in northeast Kansas, and ethanol plants throughout the state), cash corn basis levels are holding up well in spite of the recent declines in CME corn futures prices.  This is a positive market indicator of underlying demand for corn in this western Corn Belt state.

Wheat basis bids in Kansas have been strong – moving to the positive side ABOVE JULY 2018 and/or SEPT 2018 CME Kansas HRW wheat futures contract price in most central Kansas terminal locations, and strengthening from recent levels in western KansasCentral Kansas cash wheat bids ranged from $4.59 to $4.78 1/4 on June 28th, with basis ranging from $0.01 over to $0.25 over CME JULY 2018 Kansas HRW Wheat futures.   Eastern Kansas terminal bids in Topeka and Atchison were in the range of $4.43 1/4 to $4.53 1/4, with basis of $0.10 per bushel under to even with JULY 2018 futures.  Western Kansas wheat cash bids were in the range of $4.23 to $4.48 per bushel on June 28th, with basis of $0.30 to $0.25 per bushel under SEPT 2018 Kansas HRW Wheat futures.  These basis levels in western Kansas are stronger than had existed coming through the winter months of late 2017-early 2018.

Summary Thoughts on Kansas Wheat Basis: It seems that the cause of strength in Kansas wheat basis numbers depends on both prospects for a smaller 2018 Kansas and U.S. hard red winter wheat crop, and market demand for higher protein levels.

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Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program that played on Friday, June 29, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter

The recorded radio program will be aired at 10:03 a.m. central time, Friday, June 29, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the June 29th  recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

 

KSU Weekly Grain Market Review: Strong HRW Wheat Basis, Country-Level Grain Exports, and Corn Belt Dry Areas Persist (via NASA-Grace)

Grain market summary notes, charts and comments supporting the Weekly Grain Market Review presented in the KSU Agriculture Today radio program to be played on Friday, June 22, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_06-22-18.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, June 2, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the June 22nd recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

KSU Weekly Grain Market Analysis: Falling Grain Markets on U.S.-China Trade Issues and U.S. Crop Prospects

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, June 15, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_06-15-18.pdf

The recorded radio program was aired at 10:03 a.m. central time, Friday, June 15, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the June 15th recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

KSU Weekly Grain Market Analysis: Possible Soybean Market Scenarios for “New Crop” MY 2018/19

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, June 1 will be available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_06-01-18.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, June 1, 2018 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the June 1st recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

KSU Weekly Grain Market Analysis: Focusing on Ethanol and Bioenergy Costs-Returns

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, May 18, 2018 are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_05-18-18.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, May 18 on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 18th  recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

KSU Weekly Grain Market Analysis: “Kicking off” 2018 Grain Trends with the May 10th USDA Reports

Grain market summary notes, charts and comments supporting the Grain Market Update presented in the KSU Agriculture Today radio program to be played on Friday, May 11th are available on the Kansas State University www.AgManager.info website at the following KSU web address:

http://www.agmanager.info/sites/default/files/pdf/KSRN_GrainOutlook_05-11-18.pdf

The recorded radio program will be aired at 10:03 a.m. central time, Friday, May 11th on the K-State Radio Network (KSU Agriculture Today Radio) – web player available. A copy of the May 11th recording will be available at the KSU Agriculture Today website.

Following are sections of the Working notes for this week’s radio program up on the KSU AgManager.info website…

Key USDA WASDE & Crop Production Results in May 2018

Daniel O’Brien, Extension Agricultural Economist, Kansas State UniversityMay 11, 2018

The May 10th USDA Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports presented some positive news for corn and actually even grain sorghum markets, a question on harvested acreage in U.S. HRW wheat markets, and an optimistic view of soybean markets for “new crop” MY 2018/19.

A. Corn

A projection of 14.040 billion bushels (bb) corn production in the U.S. in 2018 with ending stocks of 1.682 bb (11.53 % Stocks/Use) are positive signs for market direction in the coming year. Ending stocks would be down sharply from 2.182 bb (14.8% Stks/Use) in “old crop” MY 2017/18 (ending August 31st). U.S. corn prices are forecast to be up from a range of $3.25-$3.55 ($3.40 midpoint) in “old crop” MY 2017/18 to $3.30-$4.30 $3.80 midpoint) per bushel in “new crop” MY 2018/19.

The largest surprise for feedgrains was the World corn projection of 159.2 mmt ending stocks (14.6% stocks/use) for “new crop” MY 2018/19, down from 194.9 mmt (18.2% stocks/use) in “old crop” MY 2017/18, and from 227.5 mmt (21.5% stocks/use) in MY 2016/17. So, the U.S. and World corn markets are forecast to “tighten up” appreciably, providing support for U.S. and World corn market prices.

Therefore, IF any shortfall occurs in 2018 U.S. corn production (i.e., something less than 174.0 bu/ac with production closer to 13.5 bb), then U.S. corn markets have the potential to move sharply higher in Summer 2018.

B. Grain Sorghum

The USDA left unchanged its forecast for U.S. grain sorghum supply-demand and prices for “old crop” MY 2017/18 which was surprising given the trade issues with China that are occurring.  However, for “new crop” MY 2018/19, the USDA did lower its projections of 2018 Sorghum production (343 mb – down 21 mb), and exports (165 mb – down 80 mb), but raised Food, Seed and Industrial Use (100 mb – up 55 mb), while leaving Feed and Residual Use unchanged (80 mb).

Grain sorghum ending stocks-to-use of 7.8% were unchanged, while prices were projected to be in the range of $3.10-$4.10 (midpoint = $3.60 per bushel) – up $0.40 from $3.20 midpoint in “old crop” 2017/18. So, even with the negative impact of the Chinese-U.S. trade dispute on U.S. grain sorghum exports, prospects for Sorghum prices are improved in the coming marketing year.

C. Wheat

The USDA projected Kansas hard red winter (HRW) harvested area of 7.3 million acres, up 724,324 acres from the implicit estimate of the 2018 Kansas Wheat Tour completed a week ago (i.e., 6,575,676 acres harvested in Kansas). So, the question of the percent harvested acreage for the Kansas wheat crop in 2018 remains to be answered. Using USDA and Kansas Wheat Tour projections of 37.0 bu/ac yields for Kansas, this difference in harvested acres amounts to about 27 million bushels, which would lower the 2018 U.S. wheat production forecast to near 1.790 bb.

The U.S. wheat supply-demand balance sheet may be in for other adjustments in the upcoming June 12th WASDE report, as U.S. wheat exports may fall as much as 25-45 mb short of the USDA forecast of 910 mb in “old crop” MY 2017/18 – leading to larger “old crop” ending stocks and “new crop” beginning stocks, and keeping U.S. wheat ending stocks in “new crop” MY 2018/19 at at least 950 mb, with ending stocks-to-use above 45%.

World wheat ending stocks are still projected to be historically large, although weather concerns may negatively impact Black Sea region, Australia, and elsewhere in the World.

D. Soybeans

A projection of 4.280 billion bushels (bb) soybean production in the U.S. in 2018 with ending stocks of 415 mb (9.4% Stocks/Use) are positive signs for market direction in the coming year. This ending stocks number is forecast to be down from 530 mb (12.7% Stks/Use) in “old crop” MY 2017/18 (ending August 31st).  U.S. soybean prices are forecast to be up from $9.35 in “old crop” MY 2017/18 to $8.75-$11.25 ($10.00 midpoint) per bushel in “new crop” MY 2018/19.

A point to consider is that the USDA has projected U.S. soybean exports to be 2.290 bb in “new crop” MY 2018/19, up sharply from 2.065 bb in “old crop” MY 2017/18. This seems like a questionable forecast given the odds of a large soybean crop in South American in 2019 and improved competitive export prospects. So, the U.S. soybean ending stocks forecast for “new crop” MY 2018/19 seems low, which if ultimately raised later could result in a lower U.S. price than the $10.00 projected by the USDA.

World soybean projection of 86.7 mmt ending stocks (24.2% stocks/use) for “new crop” MY 2018/19 is down from 92.2 mmt (26.9% stocks/use) in “old crop” MY 2017/18, and from 96.4 mmt (29.3% stocks/use) in MY 2016/17. So, just as for corn, the U.S. and World soybean markets are forecast to “tighten up” appreciably by the USDA.

And, IF any shortfall occurs in 2018 U.S. soybean production (i.e., something less than 48.5 bu/ac with 2018 production closer to 3.8-4.0 bb), then U.S. soybean markets have the potential to also move sharply higher (just as for the feedgrains).