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A trade deal with China would give U.S. agriculture a much needed boost, but even without an updated pact with the overseas trading partner this weekend, ag economist Dan Basse is optimistic that 2019 will be a more favorable year for U.S. farmers.

"I wouldn't look for a trade deal to come out of negotiations this weekend at the G20 Summit in Argentina, but I'm hopeful President Donald Trump and Chinese President Xi Jinping, are going to keep talking, which will be uplifting for markets in Chicago and around the U.S."

Basse, president of Ag Resource Co.,  presented a global picture during a webinar sponsored by PDPW, that focused on the latest market trends and what they may mean for U.S. farmers.

"These are dynamic political times. If you think about markets from a big picture standpoint, you're going to be looking at heightened volatility, not just for the remainder of this year but I believe for all of 2019," he said.

Trade agreements

Basse says trade sanctions and trade agreements have been major talking points for the past year. While U.S. farmers and manufacturers have been watching the retooling of the NAFTA agreement between its Mexican and Canadian trading partners, most have been watching (and feeling the fallout) of the tariff war that has escalated between the U.S. and China.

"Last year China bought $19.6 billion worth of ag goods from the U.S., and was poised to buy an additional $70 billion in ag products," Basse said. "Now if the U.S. and China got together and created a trade deal that created $30 billion worth of ag demand annually, that would change the market substantially. In fact, I'm not even sure we could fill that demand from China."

If talks continue beyond the G20 Summit, a trade deal could be in the works by the second or third quarter of 2019, he said.

"I don't think the Trump Administration wants to head into the 2020 elections with China trade still on its back."

USMCA

The man tapped to head Mexico's finance ministry after Dec. 1 says officials are expected to sign a revamped trade agreement with the United States and Canada at the G20 Summit in Argentina this week.

Carlos Urzua said that "all possibilities" point to a signing in Argentina. The pact would then have to be ratified by the legislatures in all three countries.

Basse says, however, that there's a 25 percent chance that the renegotiated deal will be voted down by Congress.

"The U.S. Farm Bill is on the docket first to get passed in this lame duck session. The USMCA needs to get done. Mexico has to remove its 60 percent tariff on U.S. dairy products do that things can flow more freely," Basse said. "I'm encouraged by export demand to date, but I'm worry that these processes on trade could easily become bogged down."

Basse says his biggest concern if heading back to the drawing board.

"I would be concerned if this Congress doesn't vote for the USMCA and then the Trump Administration blows up NAFTA and goes back to the starting point," he said. "That would be very unsettling for the markets."

Cow numbers, production

This past year has been especially tough on dairy farmers who have endured falling milk prices and tightening margins that have forced hundreds of them to liquidate their dairy herds and exit the industry. Basse says 750 dairy farms could be erased from the agricultural landscape this year in Wisconsin.

"There's still more liquidation to work through but this is part of the process of getting the markets to turn around," he said. "We expect the cow inventory to reach bottom at 9.3 million head towards spring or summer next year."

Although dairy cull cow prices are at a seven-year low, fed steer prices continue to move upward.

"That spread between fed steer prices and cull cows is approaching $70," Basse said. 

Basse says the number of U.S. dairy cattle heading to slaughter is the highest since 2012, when corn was selling for $8/bu.

"Just recently Milwaukee Stockyards were telling people they had no more room to handle cull cows," he said.

While cow numbers are falling, milk production continues to move upwards with a gain of 1 to 2 percent over last year.

"The herds that have closed have not substantially changed our productivity just yet. But we are seeing evidence now as the seasons change, that milk receipts are coming down," he said. "We believe that this bottom that we're making now should be something of a lasting nature, where milk production starts to decline and we start to see move visibility in export demand going forward."

Global factors

Basse says that one of the reasons Class III milk prices cannot climb above $17/cwt. since 2015, is that the powdered milk market hasn't been able to get above $1.10/lb. 

"This has been a big drag on milk prices. Our butterfat demand and prices have been relatively good, so, if we're going to turn the milk markets, we need to turn the powder markets," he said.

Falling powder markets in the EU and diminished production among EU countries and Oceania (with the exception of New Zealand), have endured a decline in dairy stocks, thanks to an ongoing drought.

"This would be a positive for the powder market and powder market prices, and one of the reasons we're encouraged by the milk market," he said. "This should give us a possibility of milk prices moving slowly higher initially and gaining speed as we head into the summer."

Even with all the tariffs this year and trade debates, Basse says U.S. exports have seen a growth of 7 percent.

Opportunities, pitfalls abroad

Basse says other factors including falling currency, weather patterns and diseases could provide opportunities for the U.S. going forward. Thanks to a glut in cull markets and ramped up production, there's an overabundance of red meat on the market that should carry over into 2020. 

"That's not going to change, but there's a disease in China--African Swine Flu--that is impacting the hog industry. China currently has 600 million head of hogs, and according to our modeling, they could lose 80 to 100 million head sometime in the next year," he said. "This could be a pressure point to get China to open up markets."

While the Chinese have allowed their currency to depreciate 9 percent, Basse is concerned over the possibility that the Chinese government may stimulate it's economy through currency and artificial means.

"If a trade deal isn't  reached, they could provide that stimulus by providing extra money to the banks and banking system," he pointed out.

Basse also stressed the impact of climate change on the planet and the ag industry.

"Climate change is going to produce either a globally favorable or unfavorable environment," he said. "So in the grain and feed markets you are going to see much more dynamic price action than you've seen before. Just don't fall back and let feed prices that are cheap, historically speaking, get away from you."

Grinding upward

As the milk markets begins grinding slowly upward, Basse says that there is the potential for Class III milk prices to rise above $17/cwt. late next summer. 

"There's a 30 percent chance in our modeling that we could even go up to $18/cwt. as we head into the 4th quarter," he said. "Some of this will depend on President Trump and his trade to move us to a different plateau so that we can brighten our landscape for U.S. dairy. We still need that new demand driver.

"But even assuming we don't get a deal between the U.S. and China, this is our outlook nonetheless," he added.

Associated Press contributed to this report

 

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