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4yrs ago Managed Futures blog.pricegroup Views: 273

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One of the questions I have been frequently asked by traders this year is how the ongoing “trade war” with China will affect grain prices, now, and moving forward. First, the trade negotiations have been ongoing not only with China but also Canada and Mexico as evidenced by the administration dropping the NAFTA (North America Free Trade Agreement) as we wait and wait for Congress to pass the much better for the US  replacement agreement, USMCA , (United States, Mexico, Canada Agreement). So, we have not only dropped NAFTA which was anything but free for the US we have also altered our trade deals with Europe to our advantage as well. Granted China is a portion, albeit a large portion of the current negotiations. Additionally, the agricultural markets are only a part of the trade deals but obviously the most important to our farmers and those in the ag business. Many other products have been subjected to and held hostage if you will by the tit for tat which are always a part of the back and forth additional tariff scenario on all sides. For the purpose of this report I will focus on what, if any, effect these negotiations may have had on specifically corn and soybeans. The hog market could be a big part of the potential deal also but due to the swine flu outbreak in China’s herds this year, the impact would likely be skewed and not reflect true consequences.

A bit of history will help to put the current situation into perspective. Over 30 years ago when many of these “deals” were struck the US was overly generous. China had not achieved economically or socially what we see in China today. China’s burgeoning population was for the most part very poor and the deals made at that time were to favor China export wise where many of their products were subjected to heavy tariffs in the US while we agreed to keep prices low for them as a way to help a poor struggling country. Ok, but what about the last 15 or 20 years. China is not in the condition they were years ago in large part due to the aforementioned advantages. Until the past few years their economy has grown by leaps and bounds while the US has not seen anywhere near the gains as China has from a GDP standpoint. As mentioned, this was known for years by the past 3-4 administrations but was never talked about and no one wanted to tackle this problem because of course as you have frequently heard, “Nobody wins a trade war”. No un truer words were ever spoken since the US was losing badly as evidenced by our continuing huge trade deficits. To a lesser degree the NAFTA trade deal was a bonus to a poor and struggling economically Mexico. This is merely context as to why we are in this place now and you may be surprised as to how little the current battle has truly affected grains.

I will be examining corn and soybean prices going back to their peak highs in 2012 through the current crop year. In August 2012, corn on the monthly chart reached a high of $8.43 3/4 per bushel while beans peaked in August 2012 at $17.94 3/4. The primary reason was a severe Midwest drought that spring and summer in key growing areas. This came on the heels of a less than stellar crop season for 2011-2012 in South America, our largest world competitor in the bean market. Following these all-time highs, the subsequent years brought the following prices.

After that peak at $8.43 ¾ corn dropped swiftly and went from a high of $4.88 in August 2013 to a low of $4.06 by January 2014 as prices crashed from their all-time highs. Then came a low of $3.47 ¾ by August 2014, low $3.46 ½ in August 2015, low $3.01 for August 2016, low of $3.28 ½ in August 2017, low of $3.40 ¼ in August 2018 and a low at $3.40 in August 2019. Except for seeing 4 months above or below these levels, corn has traded between $3.20 and $4.20 since July 2014.

Soybean prices saw a similar fate. From that high of $17.94 ¾ in August 2012 futures dropped to a low of $12.81 in September 2013, a low of $10.64 by September 2014, low at $8.58 in September 2015, low of $9.34 in September 2016, low of $9.35 by September  2017, low of $8.11 in September 2018 and a long time low at $7.80 ¼ this past May. We have traded a range of $8.37 to $9.50 since late May this year and currently sit at $9.18 for the lead contract.

The tariff wars began in a minor fashion in mid-2017 but didn’t really become a much talked about factor for corn and beans until the 2018 growing season and again during this past season. A quick scan of the prices shows no appreciable drawdown in corn prices as they maintained the same lower levels seen since August 2014, well before any talk of tariffs with China began. A case could be made that soybeans did suffer a bit this year but largely unsaid is that the past two years saw record bean crops at a time when South America is producing more beans that ever. This increased the yearly carryover which kept a drag on the following year’s rally attempts. Twenty five to thirty years ago South America was in it’s infancy as a soybean producer and are now on a scale with the US. These are certainly important factors as to this year’s slide to the $7.80 area. However, that was a short term, less than one-month anomaly and prices are trending to where they traded since 2015 in the $9.50 range.

The conclusion one draws from these price ranges is that the tariff wars give traders and analysts something to talk about but they have really not affected prices negatively except in the very short term and usually any news is gone from the market in a day or two. In the end supply and demand factors will determine prices, as they always do. Corn didn’t go to $8.43 and beans $17.94 because there was no tariff war. They exploded higher because of one of the worst US droughts on record which severely lowered crop yields, creating much more demand than available supply. And isn’t that the very nature of capitalism, where supply and demand set the price. That said grain prices tend to have fairly reliable patterns. In the spring we tend to get much rain in the Midwest. This can create a situation where planting is delayed and immediately a premium price is built into a spring rally. This can also apply to very dry conditions as we saw during the 2012 growing season. The difference is that the heavier rains in spring usually diminish and planting resumes as normal. The other side of the coin is that when dry in spring, it usually starts raining. This did not occur and that was the catalyst for the skyrocketing grains in 2012. For these reasons’ prices tend to rise early in spring, settle down, then tend to sell off in fall barring weather events as fresh product comes to market causing a short-term oversupply. This is what we have seen going back to 2013 and most likely going back to the 1970s. The above two factors are a dependable gauge as to price points and market action during the spring and fall. In the end the prices will move because of factors which have been reliable going back many years. Having said that I do not believe trade negotiations have caused grains to fall and I do not believe they will have any long-term effect on prices. Try not to get too caught up in the hype (think bitcoin) and use solid money management principles to always protect any position you may wish to trade.

 

 

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