Aug 7 – The Trade War Reaches a New Intensity

Grain markets are mostly in the green as they rebound from trade war volleys tossed between Washington and Beijing over the past week.

“My intensity is my greatest strength. It’s also my greatest weakness.” – Jeff Van Gundy

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Aug 7 – The Trade War Reaches a New Intensity

Grain markets are mostly in the green as they rebound from trade war volleys tossed between Washington and Beijing over the past week.

Monday afternoon’s crop progress report from the USDA showed a decline in U.S. corn conditions and the fact that we’re nearing a month of no improvement to the country’s soybean crop.[1] For this week of the growing season, corn good-to-excellent (G/E) ratings are usually 70% while soybeans are 63%. However, the USDA said Monday that this year’s corn crop is 57% G/E (down 1 point week-over-week) while 54% of U.S. soybean fields were rated G/E (unchanged week-over-week).

The trade war is competing with crop progress reports for attention

As the table above shows, the U.S. corn and soybean crops continue to be tracking about 1-2 weeks behind their average development. Add in some smaller acreage numbers expected in next week’s August WASDE report and you’re looking at some potentially small production numbers. One datapoint to keep in mind though is that the largest reduction in corn acreage made by the USDA from the June WASDE report was just 2M acres back in 2013. [2] Arguably, those looking for as much as a 7M-acre reduction are throwing caution to the wind.

At a macroeconomic level, the U.S. Federal Reserve lowered their benchmark interest rates last week in part because of their confidence that inflation is at tolerable levels. [3] This in mind, the Wall Street Journal is reporting that restaurants and food brands are finding U.S. consumers are indeed willing to pay higher prices these days. [4] Notably, Chipotle said that they are seeing no resistance to the higher prices that they started charging a year ago.

Trade War Ratchets Up Another Notch

Last week, the U.S. stated that they would tax the remaining $300 Billion of Chinese imports not already subject to taxes. In response, the Chinese weakened their currency, the yuan, and let it fall to its weakest level since 2008, in addition to telling its state grain-buying agencies to halt all agricultural imports from the United States. [5] Ironically, some really good analysis from the team at ClipperData notes that there’s basically no way for China to only rely on South American and others and not buy soybeans from the U.S. this year. [6] Said non-American countries just can’t meet the demand that China still has, despite the African Swine Fever possibly culling the Chinese pig herd by half.

With a currency war basically on the table, Bloomberg quoted one fund manager as saying China “has effectively weaponized the exchange rate” and by purposely letting the yuan weaken, “suggests that they have all but abandoned hopes for a trade deal.” To understand some of the implications of the People’s Bank of China setting the exchange rate below the norm of 7 yuan to 1 U.S. dollar, Investopedia has a great recap. [7] With the yuan devalued, President Trump immediately accused the Chinese of starting a currency war, which was accompanied by the U.S. Treasury labeling China as a currency manipulator. [8]

With the tit-for-tat trade war activities, President Trump tweeted out on Tuesday that “China will not be able to hurt” American farmers and that he’s supported them this year and will do so again next year. [9] President Trump is. of course, referring to the assistance payments made to American farmers to help mitigate the cost of the trade war with China and weak grain prices in general. The interesting note here though is that, to date, payments to said U.S. farmers are about $1 Billion lower than expected. [10]

What to Watch (Other Than Trade War Updates)

Once we get past next Monday’s August WASDE report, the focus will almost immediately return to watching the weather forecasts; any developments in the trade war with China will likely be secondary as the market isn’t all that optimistic that a resolution will be found soon. Forecasting firm Empire Weather says that the first frost will be around the normal time of year, meaning mid-September for the Northern Plains and late October in the Southern Plains. [11] Frost is certainly becoming a hot topic at coffee row as the crop is, as mentioned, quite variable and mostly a week or two behind in development; heck, more than half of the U.S. corn crop was planted after Memorial Day at the end of May!

Something else to watch for will be local basis levels, especially for corn. There is certainly a lot of corn still stored on the farm, especially in the Western Corn Belt (which is also where there is less production concern). [12] While an early freeze could certainly catapult corn prices higher, after the August WASDE report next Monday, corn prices could certainly be pressured by weather and the emptying of bins ahead of Harvest 2019.

Speaking of the August WASDE report, we might see the USDA update some demand numbers, especially in the ethanol and feed use line items. [13] While corn prices on the futures board have fallen about 8% in the past month, they’re still up nearly 10% year-over-year. With the higher price point, livestock producers in the U.S. have been substituting alternative feedstuffs like buns/bread rolls and old pet food and buns instead of corn into the daily rations of their animals. [14]

There also continues to be the option of feeding more wheat since, as shown above, the U.S. winter wheat harvest is nearly finished. East coast livestock operators are also importing more corn from cheaper options like Brazil. As mentioned in last Friday’s FarmLead Breakfast Brief, feed barley prices have dropped off considerably and is certainly a more affordable option in Western Canada compared to a month ago!

To growth,

Brennan Turner
CEO
FarmLead
TF: 1-855-332-7653
contact@FarmLead.com
@FarmLead on Twitter

At 7:05 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3292 
CAD, $1 CAD = $0.7524 USD)

Sept Corn: +2.3¢ (+0.55%) to $4.063 USD or $5.40 CAD
Sept Soybeans: +3¢ (+0.35%) to $8.48 USD or $11.271 CAD
Sept Soybean Meal (per short ton): +$0.40 (+0.15%) to $297.70 USD or $395.69 CAD
Sept Soybean Oil (cents per lbs): +0.16¢ (+0.6%) to 27.72¢ USD or 36.85¢ CAD  
Sept Oats: +3.3¢ (+1.2%) to $2.69 USD or $3.575 CAD
Sept Wheat (Chicago): -0.3¢ (-0.05%) to $4.838 USD or $6.43 CAD
Sept Wheat (Kansas City): +0.3¢ (+0.05%) to $4.183 USD or $5.559 CAD 

Sept Wheat (Minneapolis): +1.3¢ (+0.25%) to $5.233 USD or $6.955 CAD
Nov Canola: -2¢ (-0.2%) to $10.14/bu / $447.10/MT CAD or $7.629/bu / $336.38/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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