Rest of the Story: Damage Control

August 1, 2018 10:01 AM
 
The precipitous slide in grain prices has stopped due to recent political moves. I break down the big impacts on the markets.

I’ve made statements in various media including this column that if President Trump and Ag Secretary Perdue were going to do something to offset the retaliatory tariffs and mitigate some of the financial strain put on U.S. Ag by China and other entities, time was running out. Labor Day would be too late as the effects of finding a storage home for ending stocks and this year’s crop may bunched together, creating more unnecessary double harvest price pressure than otherwise would result. 

President Trump got a lot of pressure from his own political party regarding the importance of the Ag vote. The fall elections are not about electoral presidential votes, but about maintaining a majority in the House and Senate with an outside chance that a majority may be increased. Fortunately for agriculture there are two senators from each state regardless of size; ND has just as much clout in the senate as New York, California, or Illinois. Thank goodness for the foresight of our forefathers. 

Thus, the Agricultural Reset of $12 billion was announced, with three major tenants of whom we are all familiar. The one of most immediate interest to most of us is the monies allocated to grains, of which soybeans is expected to get the largest magnitude. While calculations are being made to decide the amount, that early announcement along with a few days later the agreement with the EU on trade that arguably will increase U.S. exports to a non-GMO collection of countries, has had so far a positive effect and stopped the precipitous slide in prices giving technical indicators a more positive bias. 

Weather is adding support as well, as the rumor just after 8:30 a.m. today regarding the desire of China to open up talks again. The economic indicators out of China are beginning to reveal some negative pressure which helps support my comments in one of the early columns that showed that from a non-Ag perspective, China needs us more than we need them. This is where the U.S. has the advantage and is keeping pressure intact. 

While one can argue that there may not be as much gained in the EU agreement as President Trump would have had us believe in his follow-up speech in Iowa, it certainly wasn’t a setback. Add in market expansion monies and one could conclude that our ability to capture more market share has been enhanced as well. The $12 billion allocation will likely be paid out sooner or at least some announcement of a more accurate amount may come sooner as doing so is not only politically expedient, it is needed for cash flow calculations and to help lessen lender anxiety.  

I have my own idea of what may be a reasonable and rational approach to the soybean calculation but with weather such an important determinate to U.S. supply, it is likely to the advantage for our government to see the August and September monthly revisions to their supply and demand outlook. Should prices rise into harvest, one might expect the financial benefits of the $12 billion offset applied to soybeans to lessen, but a payment of from $1.25 to $1.50/bu looks justifiable plus some justifiable rationale for the basis levels out of the PNW/N. Plains should China be an absent buyer this fall.  

On another front, there is emerging a real concern of the global wheat supplies of a couple major exporters that could more than just a short term effect. Russia and France are having production reductions that are no small matter. Currently, according to statistics discussed at our Beaver Creek, Colo., Conference last week, the EU soft wheat harvest looks to be down nearly 7 mmt from last year (260 mil-bu) and the Russian hard premium wheat down 18 mmt (675 mil-bu). The recent rises in the Matif Wheat (French) and Black Sea Wheat has led the CME and Mpls futures to more of a sense of urgency) manner. Egypt recently purchased wheat at a pronounced increase over the week previous and shed it mannerism of rejecting bids and pulling away from the market. This time the price was paid with little if any argument. Perhaps they can recall what can happen if Russia (President Putin) decides to protect domestic supplies in the best interest of food security. 

To put things into perspective, the total production of wheat in the U.S. is about 51 mmt this year in comparison to about 757 mmt globally. If we take China out of the mix, global production falls to a little over 600 mmt, but that is still 10 times that of the U.S. Last year Russia produced 85 mmt of the kind ND raises and the EU 151 mmt of the variety Illinois grows and is traded on the CME. Furthermore, the drop in Russian production of 18 mmt represents 2/3rds if our ending stocks. The EU shortfall is another 260 million. 

I have often associated the U.S. as a residual supplier and a small fish in a big pond. When conditions are right, holding three years of low priced premium wheat by my father back in ND when I was growing up makes him look more like a sophisticated marketer than most on the media today. Not only do most advisories/research firms not have skin in the game, but often get complacent.  More money will be made this year on “old” inventory than most made in the last few years growing the stuff.  Kenny Rogers had it right, “you have to know when to hold’em and know when to fold’em”. 

Of further interest is what the potential wheat phenomenon that is evolving could have on the planting mix in the U.S. If indeed there is a story not only in corn as global stocks have fallen, but now in wheat, there opens up alternatives of crops to plant that we haven’t seen in years. As of last week Friday, Spring Wheat was already more profitable than soybeans in the coming year at current prices, and likely the premium hard winter wheat is more desirable in Kansas than corn or soybeans.  Perhaps we will see a reset in planting intentions next spring that will confuse, and confound the market? 

Absent China as a major buyer of US soybeans we could see a drop in soybean acres of 4-5 mil-ac an not create a shortage due to large stocks that are expected.  We could easily see 2-3 million acre increase in spring and winter wheat at the expense of “something”, likely soybeans.  If the U.S. corn yield stays at 176 or less, that crop might compete well drawing more acres out of soybeans in the Midwest.  

Conclusion: In the long run we may see a more level playing field in not only tariffs but a more level playing field where we aren’t tied to the hip by someone that is of questionable friendship (China for example). We know by studying psychology that those that depend on others resent being dependent and it is inherently an underlying focus to someday become independent.  

Certainly, China wants things to their best advantage, but we may or are in the process of breaking the cycle of being dependent on one country to by the lion’s share of our soybeans. In the same vein we may be creating an imbalance of supplies of wheat that may have longer term effects than we now appreciate. We shall see how it all comes out, but certainly we’ve paid our soybean dues and are being rightly compensated for doing so. I expect other entities and business enterprises will be required to do the same or learn a difficult lesson. 

The updated charts as of the close on July 31, reflect the necessity of being proactive in capturing the downside on the irrational exuberance of traders as well as knowing when to hold’em (accept risk--exiting hedges) and when to fold’em (pass off risk—selling futures or cash contracting). As eluded to in this column we have done respectfully well in 2018. The updated charts below bear witness to the volatility and opportunities won or lost. You can easily comprehend the amount of dollars lost or saved depending on which side of the market you were on during the last 60 days.

(Click to enlarge the charts)

 

November 2018 soybeans

 

December 2018 corn

 

December 2018 wheat

If your marketing advisor wasn’t forward thinking or felt his/her head spinning when contemplating the obvious and it cost profitability, perhaps Gulke Group can help?  

Contact us via info@gulkegroup.com or phone 480-285-4745 or 707-365-0601. 

Good Marketing,
Jerry Gulke

 

Read and listen to more from Jerry Gulke at AgWeb.com/Gulke

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