Q4 ends in optimism for trade, economy

CoBank said USMCA, China and improved global economics could help ag industry weather 2020.

A busy December in Washington, D.C., has yielded progress or a resolution on many issues: the U.S.-China “phase one” trade deal, the U.S.-Mexico-Canada Agreement (USMCA), agricultural labor reform and a federal spending bill. These will benefit the U.S. economy and agriculture more than most industries, according to a new quarterly review from CoBank.

“The fourth quarter is certainly ending with much more optimism on trade and the economy compared to how it began,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange division. “Resolution on the USMCA deal, in particular, will deliver a collective sigh of relief for many businesses across North America.”

The new year will start with a limited U.S.-China trade deal and ratification of USMCA. Immigration reform has also cleared the House, and CoBank said it has the potential to become law in the first quarter of 2020, although other sources question the Senate's ability to advance its own version in an election year. The preliminary phase one trade deal with China will likely add some level of certainty for businesses that are looking to invest. Specific details of the deal remain unclear, but the biggest winners in the limited agreement are expected to be the grain, animal protein and dairy sectors.

Reducing the temperature on trade tensions between the U.S. and China could help global trade, the report noted. Reports indicate that China has agreed to purchase $40 billion annually of U.S. agricultural goods. This would be an additional $16 billion above the established benchmark of $24 billion exported in 2017. This commitment has yet to be confirmed by China, but if proved true, the benefit to U.S. agriculture would be widespread, as soybeans would account for only a small portion of the increase. Improved agricultural exports would go a long way to bringing these markets back in balance.

CoBank pointed out that the world’s central banks have been doing battle with a slowing global economy by reducing interest rates. Those efforts should create a soft landing in the first quarter of 2020. “The U.S. economy will enter 2020 on firm footing, but cost cutting by corporations is exp

ected to drag on the labor market and consumer spending as the year goes on,” CoBank added.

Similar to the Federal Reserve Bank, many of the central banks in advanced economies acted to stem the decline in 2019 by lowering policy interest rates. In gross domestic product-weighted terms, the share of advanced economies that cut rates in 2019 is the highest since the financial crisis. “The size of these rate declines was modest in comparison, at 40 basis points, but the action will support an ailing global economy in early 2020,” CoBank stated.

Volatile weather, trade tensions and a strong U.S. dollar were the key themes affecting U.S. grain and oilseed exports and production in the fourth quarter. Corn and soybean prices weakened, while wheat prices rose as the U.S. Department of Agriculture’s resurvey of certain spring wheat crops led to a downward revision in production.

A challenging fall harvest in the heartland and slow grain exports will give way to increased plantings for corn and soybeans in 2020. Optimism over the phase one deal with China should benefit producers, input suppliers and exporters alike.

“Grain elevators are holding corn to capture carry but still struggling to acquire ownership from slow farmer selling and harvest delays,” CoBank stated. U.S. corn exports were down 54% year over year from Sept. 1 to Dec. 12, according to a report from USDA's Economic Research Service.

The ethanol industry experienced significant volatility in the fourth quarter. Higher gasoline prices led to improved margins in November before profitability fell to multi-month lows in December. December will be the 16th consecutive month of negative margins for the ethanol industry.

The late and slow harvest, coupled with cold weather, has reduced fall applications of nutrients and crop protection chemicals. It also has curtailed other post-harvest field activities. “This is all causing input inventories to build,” CoBank said. “The implication is that suppliers may need to reduce prices and/or provide growers with incentive discounts to clear the decks into the 2020 planting seasons.

That said, our market expectations of a meaningful expansion of domestic corn and soybean acreage in 2020 would support much higher demand for seed and crop protection inputs in 2020.”

The U.S. cattle and beef sector managed through what was a volatile third quarter driven primarily by an August fire at the Tyson Foods plant in Holcomb, Kan. Despite the large disruption in fed cattle capacity, other plants managed to make up for the lost capacity. The outlook for the cattle and beef sector is bright for 2020, with strong domestic and international demand plus minimal supply growth.

Pork production growth is expected to continue throughout the fourth quarter and most likely through 2020. With today’s hog futures reflecting good margins for hog producers, the expectation is for continued growth next year. Production is projected to increase 4.0-4.5% for 2019 and 3-4% for 2020.

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