Jerry Gulke: Post-Tariff Macro Implications

07:00AM Jan 24, 2019
Economists have tended to focus on U.S. stats, largely ignoring the macro global impact of the reaction by China to U.S. tariffs and China’s retaliatory tariff on soybeans.
( AgWeb )

Economists have tended to focus on U.S. stats, largely ignoring the macro global impact of the reaction by China to U.S. tariffs and China’s retaliatory tariff on soybeans. There are basically three key questions that may or may not be answered by the March 1 target for an agreement.

We did not have China’s back against a wall, and they did not have to come to the U.S. for their soybean needs. Global year-over-year increases in their demand has slowed from 95 million to 85 million metric tons. The assumption that China’s soybean demand was going to grow at a trendline of 5% to 8% per year has been proven erroneous with clarification dependent on two other items.

Will China buy 5 million to 10 million metric tons of soybeans for the 2018/19 marketing year? What will they do with them? If they are purchased for reserve to make President Donald Trump happy, then China acts like a central bank for soybeans, and U.S. stocks stay near 900 million bushels (see the table below). If they put purchases on the market, demand assumptions rise to around 90 million to 95 million metric tons and the reduced usage rhetoric was a smoke screen. This is highly doubtful.  

If the soybean tariff goes away, then it is back to business as usual with global supply and demand governing. Soybeans will be sold by the lowest seller, not the least-cost producer, adjusted for currency relationships.

Soybean prices for November 2019 recovered in January, to levels seen just before the tariffs caused price deterioration. The chart below shows what-if scenarios regarding acreage reductions. The average trade guess is a drop of 4 million acres. But, 6 million acres is possible, and a 10-million-acre drop is necessary. Even a return to slow global soy demand suggests taking at least three to four years before U.S. stocks fundamentally support $10 beans again, baring a weather shock reducing 500 million bushels in either hemisphere. 

Prior to the tariff, July corn futures have tended to respect the $4-support level, as there was the on-going concern to produce enough soybeans to supply an ever-increasing Chinese demand. Post tariff, that all changed. The $4 futures price has become overhead resistance, as competing for acreage with soybeans has been thwarted. It isn’t a matter of corn adding acres in 2019, it is a matter of how many acres of corn move from beans to corn. A poor fall preparation of tillage and nitrogen application as well as a 20% increase in nitrogen costs likely has more to do with acres than any other aspect. A perceived yield reduction makes a 6-million-acre increase tolerable. But only a 2-million-acre increase is not. 

What will Trump do? When making a deal buying land or machinery, I knew certain details enabling me to make an on-the-spot deal acceptable for both sides. I hope our trade reps understand what a good deal is.  

Supply and Demand


Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc, a market advisory firm. Contact him at (707) 365-0601 or Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.