Market Strategy: Back To The Basics

January 3, 2019 08:00 AM
The problem with China likely started in 2017, with the rejection of U.S.-sourced soybeans due to foreign material, protein content of meal and the outright slowing of the unloading process in China.

Soybeans were the main topic of my columns in 2018. Rightly so, as I believe soybean prices directly and indirectly affect most other grains. This is true for the traditional corn/soybean states, but especially so for the northern Plains, where the majority of soybeans are sold to China. However, we all have skin in the game, including the non-farm sectors who aren’t receiving compensation. If there isn’t an export outlet to the Pacific Northwest for the nearly 7 million acres grown in North Dakota and 5.7 million acres grown in South Dakota, those soybeans will find their way to Midwestern crushing plants.

The extra wide basis of a $1 or more than normal is price-competitive with my Illinois soybeans (and perhaps yours). A minus $1.60 in North Dakota leaves quite a margin for transportation to crushing plants in central Illinois or even to the Gulf. Ironically, I am competing with myself as I also have farming interests in North Dakota.

The Backstory. The problem with China likely started in 2017, with the rejection of U.S.-sourced soybeans due to foreign material, protein content of meal and the outright slowing of the unloading process in China. No doubt President Donald Trump’s pre-election rhetoric on trade was taken to heart after the election. China was likely preparing for a tariff event before it started. What they were unlikely to accept was Trump is not a “talk tough but carry a white flag” leader of days gone by. A byproduct of the tariff dinner on Dec. 1, was he wanted China to buy soybeans in comparison of what they would have otherwise done and show good faith that they weren’t going to hold the American farmer hostage. Farmers were the ones who were singled out in the tariff tit for tat. 

We have to have a line in the sand. So, depending on what is calculated by whom, a reasonable scenario would be that had there been no tariff by China, our ending stocks for 2018/19 would have been somwhere between 560 million bushels and 600 million bushels. The difference between USDA’s current 956 million bushels in ending stocks leaves about 396 million bushels that could be labeled a direct cause of China’s 25% tariff. 

Some think tanks suggest even if we would get 100% of the non-Chinese business that South America can’t fill, we’d likely come up short by 10 million metric tons of what we lost in Chinese business, or 375 million bushels. That is coincidentally within a “rounding error” of the 396 million bushels calculated above. Trump doesn’t care what China does with the “significant amount” purchased—just get it out of this country and off our books. Odds are China will use some, but likely have their government reserve agency buy it, charge the tariff and then rebate it back to the agency—a net-zero problem.


Who Won The Tariff War? On the surface, there is something for everyone. Trump keeps his promise to farmers, making soybeans whole by paying the $1.65 tariff reconciliation. The U.S. and China will hold the bulk of global stocks to cushion a production problem. China breaks the back of the Brazilian basis play, and it will be back to the U.S. and South America competing for who will sell soy products the cheapest. It looks to me like a pseudo win-win for both governments. China gets its beans at competitive prices, while the U.S. makes a point and holds some of the global surplus.  

The supply and demand outlook will be less influenced by a slight crop problem in either hemisphere, but concerns don’t disappear. Now it’s up to U.S. acreages and yields. We have proven either hemisphere can have a 350-million-bushel to 500-million-bushel shortfall, and no one is talking El Niño, yet! Hopefully we are back to the basics of price discovery. 


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.



“Who won the tariff war? On the surface, there is something for everyone.”


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Spell Check

1/4/2019 08:47 AM

  Spot on Jerry. the only influencer in the SB price from tariffs is the speculative influence. stocks-to-use, dollar value, are just two others that come to mind that are big influencers lowering our prices. Sadly we have some in the Ag economist field that always like to start their papers with the tariff influencer and totally dismiss the dynamics of the other influencers on price.


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