Jerry Gulke: Post-Tariff Macro Implications

January 24, 2019 07:00 AM
 
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.

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 GulkeGroup.com. 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.
 

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Comments

 
Spell Check

Steve
Lubbock , TX
1/24/2019 12:15 PM
 

  More to the point, will China trust the US going forward? That appears to be an open question.

 
 
Brian L Forrest
Stratford, WI
1/24/2019 01:55 PM
 

  The damage to our markets could last for many years! We built these markets with our own check-off dollars and with a few strokes of a pen, they are wiped out with many of our competing countries more than happy to take over. I am a dairy farmer and soybean producer. This slowdown in export markets is absolutely economically devasting to my farm. I do not want to go back to the subsidized government payment farming but it seems like that is where we are headed. I cannot understand how at least half of my farming friends support this style of leadership?! Fear, intimidation, gambling with a lot of risk taking and luck can work well for a very wealthy man building hotels and casinos but leading a country with this style of leadership seems terrible to me. Issues are much more complicated than portrayed by he and his supporters and take collaboration, not threats! I challenge my farming friend to diversify where they get their information from. Fox and CNN are the two extremes. Public radio/tv are not perfect but are at least closer to middle of the road. The mistruths posted on social media just keep getting reposted every day without being looked into as long is it backs our line of thinking? No matter what side you are on, this is misleading and wrong.

 
 
Dan
Atkins, IA
1/24/2019 02:35 PM
 

  It has been very frustrating to me to see markets that took a generation to build to be destroyed in a matter of weeks. Agriculture will need to get back to build these markets like we have done in the past. I hope that its not wishful thinking that we will have learned our lesson and will not buy in to a demagogue as Donald Trump again!

 
 

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