April 4 – Soybean Prices Plunge as China and USA Play Chicken

Good Morning!

Soybean prices are leading grain markets lower this morning as China announced import taxes on 106 products, including soybeans.

“The key to everything is patience. You get the chicken by hatching the egg, not by smashing it.” – Arnold Glasgow (American publisher)

graincents-trial

Soybean Prices Plunge as China and USA Play Chicken

Chicago is burning.

China is saying they didn’t start the fire, but that US President Trump did.

Grain markets are down hard this morning, led by soybean prices, as China has announced import tariffs on many goods, namely soybeans. [1]

Overnight here in North America but during the day in China, the Ministry of Commerce there said it plans to impose a 25% import tax on major US agricultural products: soybeans, wheat, corn, corn, cotton, sorghum, tobacco, and beef. [2] There are 106 total products on the list of US goods that China is planning to tax. The list that includes chemical, aircraft, and high-tech goods. China’s tariffs match the tariffs put on $60 billion worth of Chinese goods announced by US President Trump two weeks ago. [3]

I’ll dig in a bit more on the tariffs later, but this sort of battle between the world’s two largest economies increases the potential risk for global recession. It has many negative effects, with the ripples felt in almost every other economy around the world, both developed and undeveloped. And as bravado and protectionism become more important than intellect, there are more than a few economists warning of a global trade war, with many countries playing “tit-for-tat,” and the World Trade Organization becoming overwhelmed with complaints.

The last key point is that China HAS NOT set a timetable for when these tariffs will be implemented, meaning that the tariffs are NOT IN PLACE yet. Thus, the door is open for negotiations, and we’ll see what sort of politics President Trump is really willing to play and how well the people around him are at playing chicken.

The only problem is that each side – both China and the US – view each other as the biggest chicken.

Where Do Soybean Prices Go Now?

America’s soybeans sales to China last year was worth about $14 billion. Sorghum was next in line at nearly $1 billion. This is mainly to aid the seemingly unlimited demand that China has for feedstuffs, as China’s pork sector continues it’s “boom” moment.

Knowing that we must understand catalysts to the upside and risks to the downside, we told our soybean GrainCents readers last week that soybean prices would fall about 5% if China implemented a tax. This would be the short-term effect. And that’s what we’re seeing this morning.

But we know that with uncertainty comes volatility! For example, look at weather premium getting built into the market: prices trade wildly but can gap higher with more unknowns about how a crop is going to perform (read: the potential size of supply).

The opposite happens when geopolitical risk is introduced: prices trade widely but tend to gap lower with more unknowns about how much trade can occur (read: the potential size of demand).

That being said, there certainly is a risk-on approach to today’s markets, namely soybean prices. The market is trying to determine what the new price equilibrium is for American soybeans. For the record, limit down is 65¢ and the market could’ve done that, but it hasn’t…yet.

Looking more long-term, we also explained in mid-February to our GrainCents soybean readers that Chinese consumers would be the real losers in a US-China trade war that included soybeans. Specifically, we stated, “the ban would drive up the cost of current operations and potentially deter investment and expansion in the industry.”

Anything Else in Grain Markets You Should Care About?

Not really.

This will dominate headlines for the next few weeks, and it’s unlikely that next Tuesday’s April WASDE report from the USDA will reflect this updated situation. But it shouldn’t! The tariffs are proposed, not implemented.

China will need to import more soybeans from somewhere, and the most likely option is Brazil. Other options could include Canada, Chile, and Paraguay. Argentina probably doesn’t get into the game in my opinion because their domestic crush industry will consume the “tiny” 40 – 42 million tonnes or so of soybeans that will be produced there in their drought-riddled year.

Conversely, Brazil is booking soybean exports at a record pace, says AgResource. Brazil’s sales commitments are up about 5% from this time a year ago with 26.2 million tonnes now contracted. This would equal about 41% of all expected Brazilian soybean exports in the USDA’s current 2017/18 target of 70.5 million tonnes.

Garrett mentioned in Grain Markets Today that wheat prices had a pretty good day yesterday. Kansas City HRW wheat prices led the way, up 17 cents, while Chicago SRW wheat prices gained about 11 cents, and Minneapolis HRS wheat prices were up about a dime. As I mentioned in yesterday’s Breakfast Brief, grain markets were initially headed higher as winter wheat crop ratings were the worst since 2002. Those gains have been erased now this morning in wheat prices as geopolitical risk are trumping bullish crop conditions (pun intended).

Overall, demand is more important than supply at this point, given the large supply of corn, soybeans, and wheat already in the world. Canola prices are certainly taking some heat this morning as well, but this is something we acknowledged last week and our timestamped canola sales plan nailed the move.

Join us at GrainCents today for free 3-week trial for any of the 12 crops that we provide coverage on and start understanding the risks to the downside compared to the potential catalysts to the upside.

To growth,

Brennan Turner

President | CEO
FarmLead
TF: 1-855-332-7653
contact@FarmLead.com
@FarmLead or @GrainCents on Twitter

At 7:10 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.2833
 CAD, $1 CAD = $0.7793 USD)

May Corn: -12.5¢ (-3.22%) to $3.760 USD or $4.825 CAD
May Soybeans: -42.0¢ (-4.05%) to $9.960 USD or $12.781 CAD
May Soybean Meal (per short ton): -$11.00 (-2.89%) to $369.00 USD or $473.52 CAD
May Soybean Oil (cents per lbs): -6.2¢ (-0.20%) at 31.72¢ USD or 40.7¢ CAD  
May Oats: -6.3¢ (-2.69%) to $2.263 USD or $2.903 CAD
May Wheat (Chicago): -8.0¢ (-1.75%) to $4.495 USD or $5.768 CAD
May Wheat (Kansas City): -5.8¢ (-1.19%) to $4.790 USD or $6.147 CAD
May Wheat (Minneapolis): -8.0¢ (-1.37%) to $5.75 USD or $7.379 CAD
May Canola: -$4.30 (-0.82%) to $11.843/bu / $522.20/MT CAD or $9.229/bu / $406.935/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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