Politics drive erratic grain price swings

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soybean exports
Beans are loaded on a barge at the Agland/Heritage Ohio River terminal (Farm and Dairy file photo)

Pity the trader or farmer who has to make market decisions in the current political and economic climate. Economics shows us too much supply from two huge back-to-back crops, and the biggest pile of corn at this time of the year ever.

Politics brings us a potential trade war with a huge customer that has hurt grain and livestock prices. Grain fundamentals and political fear have given us volatile prices, as traders seek to predict, on a given day, what prices should be.

Greatest fear

Which fear is the greatest on a given day? Do we worry about the supply, or do we worry that the potential trade war with its saber rattling will degenerate into actual large tariff problems.

President Trump has declared that the trade war is not to be feared, but that we have already been in a war and have lost it. In his view, past administrations for decades have allowed unfair taxes on our goods going to China until our annual trade deficit worldwide is now more than 500 billion dollars a year.

Last year $375 billion of that was with China, which highlights the problem. For agriculture, the problem is that our economic sector is the shining light in the trade imbalance.

In 2016, we exported $21 billion of ag products to China. That included $1 billion of soybeans, and $713 million of pork. The U.S. started the trade crisis by increasing tariffs on certain Chinese imports, such as solar panels.

Metal tariffs

Then came aluminum and steel tariffs. The Chinese have answered by announcing the intention to put tariffs on grain and pork. The good news is that much of this is posturing so far. The tariffs are not in place, and the early wrangling is part of “The Art of the Deal.”

The reality is that the Chinese have been allowed to flourish with high tariffs on our products, and it is hard to put that genie back in the bottle. We could live with equal tariffs if we could get back there.

The mixed news for farmers afraid of the trade issues that are developing is that, in grain, we have a world market that is well-defined. On the one hand, China can make our soybeans too expensive to import.

On the other hand, they will not actually cut soybean imports, just those from us. Traders will switch cargoes around to other origins, and the soybeans will actually trade. This will not be efficient in some cases, so there may be cost involved.

Any costs will likely come right off the farm prices. So, farmers will bear some cost. The “mixed news” scenario may not hold as well for pork producers.

I suspect that changing origins there is not nearly so efficient, and may affect the price more. When China first announced the intent to raise tariffs on soybeans and pork, the market took a knee-jerk dive to the bottom.

May soybean futures lost 77 cents between the second and fourth of April. The April 4 low was 99 cents below the Feb. 2 high of 10.82-1⁄2. The bounce in the old crop beans has been fast, however.

Recent highs

This Tuesday morning, April 10, we have traded as high at 10.543⁄4, and are now at 10.513⁄4.

The November new crop was to a high of 10.60 on April 2, and that is actually the highest we have been. After that we dropped to 9.97-3⁄4, but we have shrugged that off. Corn futures have actually been relatively stronger than soybeans.

We are currently trading, on Tuesday morning, almost 3.90 on the May futures. The recent high was back on March 23, at 3.95-1⁄4. The low after the trade break was 3.72. December new crop futures are higher, and traded 4.16-1⁄2 Monday.

That is actually a contract high. So, after all the excitement, soybeans are near the high and new crop corn is at the high. So far we have seen a lot of worry, but grain farmers may get through this.

Will it limit the high? Maybe.

Can this go the other way? Yes. So far, we have only seen talk, and this is the scary result.

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Marlin Clark is an associate of Russell Consulting Group, with a local office in Williamsfield, Ohio. Comments are welcome at 440-363-1803.

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