Notes from the Ag Trade War: Soybean Futures

Soybean futures prices for July have been falling since early March, ever since Mr. Trump announced imminent Section 232 sanctions on steel and aluminum imports. Is the drop coincidental, weather/harvest condition driven, or trade policy driven?


Source: ino.com, accessed 7/9/2018. Orange dashed line at release of WASDE.

The argument that it’s primarily weather/harvest driven is pushed by some who have pointed to the publication of WASDE on June 12 (orange dashed line); prices did indeed dive afterward. But they were falling before, as well. And they continued long after the publication of the USDA’s World Agricultural Supply and Demand Estimates [WASDE]…

Futures prices fell at the one year horizon. Since soybeans can be stored for some time, it could be argued that the entire curve for futures should have shifted down, even if the weather or tariffs were considered to be temporary.


Source: ino.com, accessed 7/9/2018.

However, futures prices also fell at the two year, and three year horizons, as well. Now, soybeans are semi-storable commodities (although three years seems a little at the outer window for storing soybeans w/o too much loss to spoilage), so we could expect price effects for one or two years.


Source: ino.com, accessed 7/9/2018.


Source: ino.com, accessed 7/9/2018.

So, to summarize, we see a similar pattern in price drops, not necessarily associated directly with WASDE publication. What else is happenining over this time? Well, we were bombarded with lots of additional news regarding the imposition of tariffs against soybeans.

In addition, we have a near contemporaneous widening of the price differential between US and Brazilian soybean prices, as discussed in this post. Put the price decline over a set of longer time horizons, and a current widening of the US soybean (subject to tariffs)-Brazilian soybean (not subject to tariffs) spread, then the natural conclusion is that most of the price movements in front and back end futures are due to the increasing credibility afforded to scenario involving the imposition of persistent trade tariffs, with potentially long-lived negative impacts.

But of course, we cannot definitively rule out the manipulation by (1) the secret government/deep state, (2) or aliens, or (3) a conspiracy thereof.

33 thoughts on “Notes from the Ag Trade War: Soybean Futures

    1. Moses Herzog

      @ Bruce Hall
      We already know you’re a very dumb man. You needn’t work overtime to verify that for us.

      Reply
    2. 2slugbaits

      Bruce Hall The effect of the trade war on steel & aluminum equity prices is ambiguous. On the one hand, domestic tariffs by themselves would probably raise equity prices; however, Trump has launched a global trade war and other countries are retaliating with their own tariffs. For example, demand for grain carts like these (https://www.kinze.com/grain-carts) could be hurt if farmers suffer losses because of China’s tariffs on US soybeans. That means Kinze won’t be making or selling as many grain carts. That means less demand for US steel. That puts downward pressure on steel equity prices. Just one of many examples, but I think you get the idea.

      Reply
      1. Bruce Hall

        2slug,

        Sure I get the idea, but as the saying goes, “Nothing is ever as simple as it first seems.” We like to simplify complex interactions, but that can lead to unexpected results. Haven’t you often wondered why people with the same information make different financial decisions in the various markets? There is always an element of uncertainty, unpredictability, and surprise in even the most obvious scenarios.

        Still, it’s obvious that U.S. soybean growers are getting beaten up by China’s tariff and Brazil’s production capabilities. The question is what will those farmers bet on next year? Brazil can’t fill the world demand for soybeans, so if half of the U.S. farmers switch crops next year, prices could go back up. The Chinese government, which controls most of the production, has directed farmers to increase their production of soybeans, probably in anticipation that the tariffs could cause U.S. production to drop too far and leave China with shortages if they don’t produce more domestically. Then the question becomes: if Chinese farmers are growing more soybeans, what are they growing less of and does that create price increases on some other products next year? Or can China even make a significant gain in domestic soybean production? https://www.nytimes.com/2018/07/09/business/china-trade-war-soybeans.html

        Reply
        1. 2slugbaits

          Bruce Hall Over the long run (say one year out) it’s likely that markets will partially adjust to the tariff. US soybean traders will find new markets and supplies from other countries will increase. Still, the long run effects of the trade war will be to make global economic production less efficient over all, and that means everyone will be correspondingly poorer over all. Some of the negative shock to American farmers will partially recede, but in the short run American farmers are going to take a hit. So I agree with your comment that “U.S. soybean growers are getting beaten up by China’s tariff and Brazil’s production capabilities.” So we’re in violent agreement that the tariffs are especially bad news at least over the short run.

          The only argument for Trump’s trade war is the gamble that this is all a tough negotiating tactic of trading off short run pain for long run freer trade. Now I suppose you could imagine such a case, but I find that whole argument painfully naïve. For one thing, Trump has consistently argued against free trade going back at least four decades, long before he ran for President. And that view is consistent with the mindset of someone who has spent his entire adult life working in a zero sum NYC real estate market. I just find it incredibly naïve to believe that a 72 year old man would suddenly change his long held views on something as emotionally charged as free trade. Those who believe that Trump is a closet free trader are just whistling past the graveyard. Another concern is that I don’t think Trump is a very good negotiator. He’s declared bankruptcy multiple times because of monstrously stupid deals….buy high, sell low! He doesn’t have the personal discipline needed to play the role of master chess player. He’s addicted to the thrill of negotiating a deal more than he is in the actual results of the deal. Look at how he got completely snookered by the North Koreans. And don’t forget that the whole reason Trump got financially involved with Russian oligarchs 20 years ago was because conventional banks refused to do business with him because he had such a horrible track record when negotiating deals. Finally, Trump’s core supporters don’t want free trade. They voted for him precisely because he promised to kill TPP, to renegotiate NAFTA, to punish China and to support “fair trade”, which has long been a dog whistle term for protectionism going back to the old “voluntary export restraint” days in the 1980s.

          Reply
          1. CoRev

            2slugs, you were going so well until you fell back on your personal views and interpretations.

            I did have some problems of your definitions for short and long terms. Maybe they make sense for futures traders who almost never take delivery, but for the farmer/supplier your long term is their short term, because they have to deal in annual harvests.

            Yes, soybeans farmers who are forced to sell into this market are getting financially beat up, and those farmer not selling who are hoping and praying for a price increase are getting emotionally beat up. Farming is an international contact sport in today’s world.

          2. 2slugbaits

            CoRev for the farmer/supplier your long term is their short term, because they have to deal in annual harvests.

            Well, then you appear to be saying that farmers are going to get beat up for an even longer period than one year. Perhaps you’re right. I said a year because that gives farmers enough time to rethink what and how much they want to plant. The big news for farmers will come in January and that will be their basis for deciding what to plant next spring. But if you want to say farmers will be hurt by the tariffs for a lot longer than a year, then who am I to argue?

            Yes, soybeans farmers who are forced to sell into this market are getting financially beat up

            Forgive me, but this sounds like a completely different story from the one you were telling us just the other day. A few days ago farmers weren’t taking those prices and holding stocks in storage until Kingdom Come. Now you seem to agree that there are distressed farmers who are having to sell at a deep discount. At the margin some farmers will go under. Memories of the farm crisis of the mid-80s are still fresh in the minds of many farmers.

            Julian, we are violent agreement

            Does Julian know this?

          3. baffling

            2slugs, you have the patience of job to clarify the incoherence coming from corevs commentary. corev, you do understand how frustrating one becomes as you basically argue against yourself as the commentary grows longer? you have an excuse for everything, cliff claven.

          4. CoRev

            2slugs, don’t bite down too hard on that tongue in your cheek.

            Do you even understand your own gibberish? ” Now you seem to agree that there are distressed farmerswho are having to sell at a deep discount.” Yup, regrettably there are always some farmers in distress.

          5. 2slugbaits

            baffling you have the patience of job

            I try. Since I retired I started working with a local community college tutoring students (math & history) with special learning disabilities. I usually wait until I get home before banging my head against the wall. :->

          6. baffling

            “students (math & history) with special learning disabilities”
            2slugs, at least those students have a desire to learn, it is simply difficult for them. what is worse is a student like corev, who is ignorant and intent on spreading that ignorance to others rather than actually learning something new.

          7. CoRev

            Baffled, you have added so little to these discussions, I don’t understand why you even comment. I, also, am little surprised you didn’t understand 2slugs tongue in cheek comment, and took it literally.

            No, I never said nor implied: “Well, then you appear to be saying that farmers are going to get beat up for an even longer period than one year. …
            A few days ago farmers weren’t taking those prices and holding stocks in storage until Kingdom Come. Now you seem to agree that there are distressed farmers who are having to sell at a deep discount. …”

            To clarify, I then can assume 2slugs capabilities to teach are at the “students (math & history) with special learning disabilities” level, and that you are even below that, as you don’t/can’t teach even at that level.

            Now do you understand how easy it is to clarify gibberish when it is presented?

          8. 2slugbaits

            CoRev Yup, regrettably there are always some farmers in distress.

            But I’ll wager there are a lot more of those distressed farmers at $7.92/bushel than there are at $10.92/bushel.

            You seem to be the only one here who doesn’t see that you’ve completely contradicted yourself. Only a few days ago you were stressing the unimportance of currently low soybean prices because farmers could always store beans and wait for higher prices. Apparently in the meantime you’ve gotten the memo from GOP headquarters that it’s time to cry for the plight of farmers…presumably to grease the skids for that $30B bailout that Grassley wants. I’m not sure if this is evidence of cognitive dissonance or intellectual dishonesty. You tell me.

          9. CoRev

            2slugs, go back to the classroom, but on the student side, as you seem to be the totally misunderstand the real world. Have you been telling us there are NO farms/farmers living on the edge even when in past when citing margins and marginal farms? Which side of your mouth must we listen to? Did you even notice that no one argued against that reality?

            Please define distress for us, both emotional and financial! Now tell us how many soybeans are being sold at this reduced price and by whom and to whom. Once you’ve reached that conclusion do one more level of analysis to define when the contracts were closed and at what price(s). Remember the purpose of futures contracts with defined delivery.

            Why did you have to even note this obvious? “But I’ll wager there are a lot more of those distressed farmers at $7.92/bushel than there are at $10.92/bushel.” Emotionally or financially distressed?

            I am not sure this is evidence of your intellectual dishonesty. Why is it liberals have such a need to dishonestly discuss subjects?

          10. 2slugbaits

            CoRev Baffling is right. My comment was not tongue-in-cheek. It seems like the natural interpretation of you saying “for the farmer/supplier your long term is their short term, because they have to deal in annual harvests.” But if I’m wrong, then I’m sure you’ll be happy to provide us with a coherent interpretation. You should also give us a heads-up as to your position today regarding storage and distressed farmers. A couple days ago storage costs were no big deal and farmers could easily ride things out. Then yesterday it was a big deal and we all shed a tear for the farmers that voted for Trump. So which view is it today?

          11. baffling

            i think pgl is on to something. either we have multiple corevs on this site, or corev has a split personality. and i think it is a distinct possibility i can teach at a competent level to those with a learning disability, although i would claim that those who can effectively teach at that level are probably some of the best in the business. my guess is you have never, ever, taught anything, so your assessment would be without merit.

        2. pgl

          ‘Sure I get the idea, but as the saying goes, “Nothing is ever as simple as it first seems.” We like to simplify complex interactions, but that can lead to unexpected results. Haven’t you often wondered why people with the same information make different financial decisions in the various markets? There is always an element of uncertainty, unpredictability, and surprise in even the most obvious scenarios.’

          One thing is VERY simple. The price of a good (steel) is not the same thing as the equity price for a company. Of course you decided to confound the two – which is either very dumb or very dishonest. Either way – you owe this blog an apology for doing so before you utter another word.

          Reply
      2. pgl

        Of course if one makes steel in Korea and exports it to the US like Posco does, one would expect these tariffs to lower equity prices as this chart shows (Posco’s stock price):

        https://www.google.com/search?rlz=1C1GGRV_enSG790SG790&tbm=fin&ei=O6dEW8v3LJHb8APq-amwCA&stick=H4sIAAAAAAAAAONgecRoyi3w8sc9YSmdSWtOXmNU4-IKzsgvd80rySypFJLgYoOy-KR4uLj0c_UNknOSLOKNeADlOfhPOgAAAA&q=NYSE%3A+PKX&oq=posco&gs_l=finance-immersive.1.0.81l3.4468.5578.0.8596.5.5.0.0.0.0.242.538.0j2j1.3.0….0…1.1.64.finance-immersive..2.3.538….0.-2eYtgwRHXI#scso=uid_RadEW87bB6uM0wKey6LQBw_5:0

        Bruce never bothered to tell us what is in his equity index. Go figure!

        Reply
    3. pgl

      “NYSE American Steel Index”.

      Bruce??????????? This is not the price of steel. It is the equity price of U.S. steel companies which of course benefit from protectionism. Which was the Trump plan.

      Please do not lie to us this way as we are not as dumb as you think.

      Reply
  1. Moses Herzog

    I’m incriminating my own intelligence on this, for someone who majored in finance, but I didn’t even know they quoted 2–3 year futures on soybeans, or I would have been quoting those earlier to our boy-wonders Mr CoRev, “Princeton” Kopits, etc. See, no sarcasm here, that’s why I read this blog. I LEARN many things. Something I am not afraid to be open to or to confess to. Wish more commenters here could say the same.

    There are many important things to be gleaned here, one of which is a latter point Menzie makes in this post, is that much of this loss on trade could be permanent. What’s to stop China (and others) from permanently switching their soybean and commodities imports to Brazil, especially as Brazil becomes more efficient at producing these crops?? And the answer to that question is: NOT A G*DDAMNED THING.

    Reply
  2. Julian Silk

    Dear Folks,

    First, I would like to thank Bruce Hall for some good information, and also Menzie and James Hamilton, whom I find to be a very nice guy, for hosting the site.

    Second, this is a delayed comment on the previous argument by CoRev. Brazil’s growth is discussed in

    http://www.nationmaster.com/country-info/compare/Brazil/United-States/Economy

    and is not good, from what they are saying. This modest feature might be relevant, in that if Brazil’s growth were better, some of the improvement in Brazilian soybean prices might be due to it. That doesn’t seem to be the case.

    I am also looking at the exchange rates between Brazil and the U.S. These are shown in

    https://www.xe.com/currencycharts/?from=BRL&to=USD&view=10Y

    There is a dramatic shift in 2014, at what looks to be about the middle of the year (this shows up better on the 5-year graph). That shift would cause Brazil’s exports to increase, if I am reading it correctly, since the currency, the real, depreciated. That would have caused a shift in exports, granted. But the effect takes place over several months, until a low gets reached at about the beginning of 2016. So this roughly supports Menzie’s claims, but the timing seems to be a little off – not much – the Chinese traders could see the continuing depreciation and work around the international financial markets to do the trades. They could see the continuing fall, and might have held back waiting for the trough, as could other traders. It wasn’t a mystery.

    With this change, it is a very rapid change in price. So if I were trying to write an econometric model, the tariffs would be the thing that would seem to affect prices the quickest, unless there is an expectation of interaction between monetary policy and exchange rates, or a continuing expectation of increased exchange rates. So from what I can tell, absent a complete look at the data, and more knowledge about the commodity markets, which CoRev can exploit, as can others, this change, in terms of its speed, does seem to be due to tariffs, unless there is an expectation of further increases in their rates.

    One other thing. The tariffs do have an offsetting effect that occurs because of the exchange rates, which does play out over time. The U.S. traders who would purchase goods from China now recognize U.S. demand would fall, and so their demand for Chinese renminbi also falls. So the exchange rates would take part of any tariff back in terms of appreciation for goods in general. It is difficult for me to see how a general appreciation in the U.S. dollar, which would seem to make Chinese goods more attractive, although not so much as to offset the tariffs, would have a significant direct and immediate effect on soybean prices. So it’s not just the variables in question, but also the timing.

    Julian

    Reply
    1. Steven Kopits

      Julian –

      The increase in the strength of the US exchange rate in 2014 was the result of the collapse in oil prices caused by soaring US shale oil production. That the dollar appreciated is indicative of the notion that the capital account, not the current account, was decisive for exchange rates and that the US current account tended to float in a ‘comfort zone’ with a monthly deficit around $40 bn, as I recall.

      I think the impact of tariffs on the exchange rate is potentially complex, but it involves both trade and capital flows, to wit, emerging countries’ capital markets have taken something of a hammering lately.

      https://www.cnbc.com/quotes/?symbol=.SSEC

      I think there is little question that tariffs are affecting steel and soybean markets. With soybeans, part of the effect is psychological. There is no reason for 2020 soybean futures to be down, but they have been. The out-year contracts have recovered a bit in recent days, but the front end of the curve is still depressed.

      I am no fan of trade wars, certainly absent clear and well-articulated goals.

      Reply
    2. CoRev

      Julian, we are violent agreement: “…this change, in terms of its speed, does seem to be due to tariffs, …”. Thanks.

      Reply
      1. pgl

        Spoke too soon – THIS CoRev has not been following what is happening in the market place after all. We need a program to keep up with the various CoRev’s!

        Reply
      2. pgl

        Anyone who has done work as an economic expert in any litigation gets the “but-for-world” which essentially is what economic professors mean by “ceteris paribus”. Here is a nice discussion:

        http://www.competitioneconomics.com/wp-content/uploads/2016/11/Hastings-and-Williams-What-is-a-but-for-world.pdf

        Menzie has been very patients in trying to analyze the effect of trade wars in this fashion. Alas – the Usual Suspects do not get the “but-for-world” as they pull one bizarre argument out of their (but, but don’t say it please)!

        Reply
  3. pgl

    New post from Menzie on how steel prices have risen – which helps the equity of price for U.S. steel companies. OK – Bruce Hall tries to deceive us on aluminum prices as well by showing how the equity price for U.S. aluminum companies have risen. DUH! Of course had Bruce even remotely want to be honest with us, he could have provided us with a series on aluminum prices such as this one:

    http://www.infomine.com/investment/metal-prices/aluminum/5-year/

    Reply
  4. pgl

    “Yes, soybeans farmers who are forced to sell into this market are getting financially beat up, and those farmer not selling who are hoping and praying for a price increase are getting emotionally beat up.”

    Do we have a new CoRev here or what? That other CoRev kept telling us that the above statements had to come from some liberal who did not under “the market”. Of course that other CoRev clearly had no clue what the market was saying. Maybe this one finally does!

    Reply
    1. pgl

      “corev, you do understand how frustrating one becomes as you basically argue against yourself as the commentary grows longer? you have an excuse for everything, cliff claven.”

      Best comment of the day goes to Baffling. I see CoRev as a dog chasing its tail but Cliff Claven was a post man. So we have a dog chasing the tail of a U.S. post delivery boy!

      Reply
    2. CoRev

      Pgl, sigh! You comment is another indication of your reading comprehension. Unless the commenter is in complete agreement with you and going rah, rah for your liberal POV, their comments are discounted, misread and are an antagonist. The tribalism is sad.

      Reply
      1. pgl

        Your entire MO is tribalism. Now if you ever made a single coherent comment here – we might applaud you. But you write gibberish 24/7 and then blame the rest of us for noting how off the wall your comments are.

        Reply
  5. kushal kumar

    According to news reports in July , 2018 , China has cancelled all orders of North Dakota’s speciality food-grade soyabeans while trade war between the US and China has escalated. These circumstances have deeply upset North Dakota’s farmers, who are said to be most scared. Obviously these circumstances are closely linked to the US economy. It may be apt to bring out here this Vedic astrology writer’s alert of last year on 11 October , 2017 implied to the point in article – “Astrological probable alerts for the United States in 2018” – published in monthly Webzine of Wisdom Magazine from the US at wisdom-magazine.com/Article.aspx/4647/ on 1 December , 2017. The substance of the alert is that North Dakota State in the US could also have some woes tending to impact their economic condition during two months of July-August in 2018.

    Reply

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