Beaten down markets do eventually recover—it just takes time. Normally, the trigger is a sudden realization that demand for low-priced commodities is much better than anticipated. In reality, there’s nothing sudden about demand growth. Not only does it take time to build the demand, it takes time for the market to realize the demand has been built.
However, in the current situation, “sudden” could turn out to be exactly the right way to describe an increase in demand. Tariffs are holding back export demand, especially for soybeans to China. The tariffs on U.S. ag products moving into China, Mexico, Canada and a few other countries are in retaliation to the U.S. tariffs under Section 232 on steel and aluminum. A trade agreement with Mexico and Canada has been struck, but it still must be ratified by all three countries. And even then, tariffs on U.S. ag products moving into neighboring countries could remain in place until the steel and aluminum tariffs are lifted by the U.S. But, when trade relations with Mexico and Canada return to normal, expect a relief rally.
The dispute with China took on a different tone in early October. Vice President Mike Pence delivered what sounded like a Cold War address on China. Chinese leadership responded with resolve to not address trade issues until after the mid-term elections in the U.S. Many China-watchers don’t anticipate any meaningful talks with China until next year.
It’s difficult to judge the social climate in China, but that might be the key to how quickly China agrees to talks with the Trump administration. China’s battle with African swine fever continues and another outbreak of avian influenza was confirmed in early October. Prices for Chinese goods, especially food, are on the rise. The government also moved to free-up bank reserves to stimulate economic growth. An increase in food supplies and cheaper pork prices would likely keep civil unrest at a minimum, allowing the Chinese government time to deal on intellectual property rights and other non-ag issues clearly at the foundation of the conflict.
If China would bend on tariffs on U.S. pork and soybeans, the relief rally would be sudden and potentially significant. That’s why many grain marketers want to maintain flexibility in fall 2018 strategies. Corn and soybean markets are offering to pay farmers to store until later (the carry in these markets). To capture the carry, farmers should consider a hedge-to-arrive (HTA) contract for spring or summer 2019 delivery. An HTA locks in the price (captures the carry), but leaves basis open. Soybean basis has been trashed by the lack of demand from West Coast ports this fall, but an easing of Chinese tariffs would bring the West Coast back into the game, supporting basis across the country. Many are also adding an “inexpensive” long call position above current futures values for flexibility and to guard against a sudden relief rally.
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