Typically, Chinese purchases of American soybeans picks up in the autumn, due to timing of harvests. If this is an important factor in the recovery of US soybean prices, one would expect futures for November delivery of soybeans would reflect that fact. As of today, they don’t.
Figure 1: Soybean futures for November delivery, accessed as of 25 June 2018. Source: ino.com.
Some commentators have tried to explain recent movements in front month futures as a function of new information regarding weather and general demand conditions. In this post, I discuss the fact that futures prices have moved down along the entire curve, from front month to back month, suggesting current weather conditions were unlikely to be prime driver. (By the way, a mere 10 days ago, as noted in this post, the November price was over $30 higher).
This suggests to me that in the absence of a dramatic reversal of the trajectory in US-China trade relations, the soybean producers of America will sustain a negative impact to their income stream this year. It is possible Mr. Trump could direct USDA to bail out farmers, although this would not be costless to the US Treasury.
I hope Mr. Trump will also consider a bailout of US dairy farmers should all the dairy tariffs come into place. Also, I think the motorcycle industry needs a bailout. Or protection. Should Chinese retaliation strike the US wide-body jet industry, I hope Mr. Trump will also intervene there. There is also the question of how US corn/maize sales will be impacted if the US should withdraw from Nafta; I hope Mr. Trump will also consider bailing out the corn farmers of the US, who through no fault of their own will be suffering depressed prices…
Question: Are we winning yet?
PeakIgnorance thought this was profound:
http://www.scmp.com/news/china/diplomacy-defence/article/2152109/why-china-cant-count-brazil-fill-soybean-gap-its-trade
“Boycotting US soybeans by turning to Brazil’s bumper harvest seems like an ace in the hole for Beijing, since soybeans alone account for 10 per cent of total US exports to China. Moreover, destabilising US agricultural exports could turn the traditionally conservative and soy-dependent American Midwest against the Republican Party in November’s midterm elections. After all, China’s gargantuan market accounts for 65 per cent of global soybean imports; thus, without being able to offload its harvest to China, the economy of the US Midwest would essentially risk collapse. But can China count on Brazil to substitute US soybeans? The answer is no. First, seasons alternate between the northern and southern hemispheres. So while US soybeans are harvested from late September through November, Brazilians gather in their soybean crops from February through May. This distinction means the recent sabre rattling between Washington and Beijing has taken place during the Brazilian harvest-and-export season, when abundant supplies enable Chinese companies to avoid US imports. Indeed, Chinese buyers cancelled 60,000 tonnes of soybean shipments from the US in April, according to the USDA. They are likely responsible for the cancellation of at least another 580,000 tonnes and upwards of 949,000 tonnes during May, according to industry insiders. They also made a strong run on the Brazilian market during March and April, bringing windfall profits for Brazil’s exporters even while prices on the Chicago Board of Trade were on the volatile but negative trend that followed the initial beating this year of the drums of trade war. This dynamic will shift after September, however, when Brazilian harvests are mostly exported, and international buyers must turn instead to US supplies. Second, total annual demand for soybeans in China exceeds Brazilian export capacity. In fact, it exceeds global export capacity, excluding the US crop. At 97 million tonnes, China’s soybean imports in 2017-18 account for 30 per cent of total production in the rest of the world, gobbling up almost the equivalent of total production in the US (119.5 million tonnes) and Brazil (119 million tonnes). But Brazilian processors must crush at least 43 million tonnes of their soybeans domestically to supply the country’s world-leading livestock sector, leaving only 76 million tonnes for export. That is 21 million tonnes short of China’s demand. The next largest producer, Argentina, produces merely 37 million tonnes, down from 57.8 million tonnes last year due to severe drought. To meet the needs of its domestic processors and European demand for soy oil and meal, however, Argentina is already tapping its stocks, leaving almost nothing for China. Brazilian stocks are also very low, hovering below 2 per cent of domestic supply since 2013.”
Of course market participants already know all of this. And future prices have factored all of this in. What is news is the trade war. If this author is claiming that no one else realizes that the Chinese will pay more for soybeans – he is not following this discussion. Of course American farmers will still receive less. Something called the incidence of a tax (tariff). And all this long winded recitation of data every market participant already knew does not make an economic model. Sorry but this was not a profound discussion at all.
Pgl, correct: ” Sorry but this was not a profound discussion at all.” The article implies there will be a 21 million tons shortage for US farmers to fulfill: “That is 21 million tonnes short of China’s demand. ” That will be a reduction and the market has already priced that in provided nothing in the negotiations changes.
However, if the negotiations end, then these futures prices will reflect those new data. If there is a weather anomaly in any other producing market then these futures prices will reflect those new data. If there is a serious reduction in planted acreage or if harvest yields are diminished then these futures prices will reflect those new data. Do you see a trend here?
Today with these prices farmers and granary operators are reducing offers for sale, another effect of these factors. Has anyone even mentioned this effect? So whose profit is being reduced? The answer is simple futures traders who were caught long with their contracts. Even they have remedies before the Fall harvest season.
No one questions that many others will be hurt financially, if these negotiations drag out.
“itf the negotiations end, then these futures prices will reflect those new data. If there is a weather anomaly in any other producing market then these futures prices will reflect those new data. If there is a serious reduction in planted acreage or if harvest yields are diminished then these futures prices will reflect those new data. Do you see a trend here?”
Did you finally read an economic text book? Congrats! Now read Fama’s 1970 paper. Of course if there is relevant new information, markets react. Ah but I got the Efficient Markets Hypothesis a long, long time ago.
The point old dimwitted one is that already existing information does not tell us what PeakIdiot wants you to believe. But you still think this lying dimwit is making a point? Seriously?
Pgl,No, I think you do not understand the market. Quoting me and then not realizing that is the core of what I’ve been saying these many articles indicates your failures. Not mine.
Wow! And you call others names????
I understand the market. Menzie is doing a great job of explaining its reality. But you constantly have to argue with him with all sorts of weirdness that has left us scratching our heads whether you get what all of this means.
Pgl, “I understand the market.” You have shown just the opposite on numerous occasions in this series of articles. The weirdness is the insane focus on the short term tariff impacts on futures prices. Futures are highly leveraged short term contracts gambling on price changes. They churn during these period of price change. Will they adjust? Yes, and we have defined the factors causing those adjustments which includes tariffs.
You have yet to understand those positions.
Wait…… Wait…….. Wait I SAID!!!!! “Princeton” Kopits has a weather report he wants to show you. Plus, there’s this new idea called “arbitrage trading” that “Princeton” Kopits has invented and wants to introduce to all financial economist PhD guys. “Princeton” Kopits says in this current context of soybeans trade it has some freakish connection to this exotic unknown place he calls “Brazil”. Menzie, you are going to be so excited when you see this!!!! “Princeton” Kopits has even given his new concept a diminutive name!!!! “Arb”. Menzie, is this EXCITING or what?!?!?!?!?
If Menzie Chinn was John McLaughlin, and CoRev, Ed Hanson, “Princeton” Kopits, and “rtd” were the panelists, it might go something like this:
https://www.youtube.com/watch?v=6sdVx5gQz6w (of course the panelist played by Kevin Nealon would have to be “rtd”)
I still can’t believe Jan Hooks is dead.
https://www.youtube.com/watch?v=8ecKXrjiHEs
Nothing against Tina Fey, but if comedy was one-on-one basketball, Jan Hooks would do a facial slam dunk on Tina Fey. Right at this moment I can’t think of ANY female cast member of SNL as good as Jan Hooks was. Now we have Sarah Silverman doing poo and wee-wee jokes like she’s in 4th grade and Amy Schumer doing sex jokes like she’s a high school sophomore. Congrats Schumer, because of your body type you’re “relatable” to girls sneaking snacks. Great, call the rest of us when you know what a good screenplay looks like.
MenzieQuestion: Are we winning yet? Who knows who and how much impacted. Can you answer that question re: soybeans?
BTW, no one has questioned that the negotiations and the threats and implementations of tariffs has not affected prices. Why are you beating this to death? If you believe its all about the tariffs go tell that to Argentinian farmers. Remember with soybeans we are talking about a semi-storable, fungible international commodity.
The questions is “soybeans”??? Do not play Jeopady as the host would have to throw you off the set.
“no one has questioned that the negotiations and the threats and implementations of tariffs has not affected prices.”
Your fellow right wring tolls certainly are. But yea – they are “no one”.
Pgl,”Your fellow right wring tolls certainly are” show me! I think your ideology has clouded your reading comprehension again.
@CoRev
For someone who for months (years??) has exhibited an utter contempt for reading a college electives level textbook, it seems strange you would be mentioning reading comprehension to someone who has attempted, through illumination of the topic, to raise your level above the Dodo bird.
https://goo.gl/images/xGrguH
@ CoRev
Gee, CoRev, why don’t you ask Menzie the same question in a different way?? After the economic and (more importantly to Trump, political ramifications) of these tariffs come to full fruition, when Sonny Perdue and Trump finally hop into bed with the soybean farmers, and after Sonny Perdue and Trump double-team to give the soybean farmers an open head wound from banging the farmers into headboard so hard, and Sonny Perdue gives hundreds of millions of US taxpayer dollars in government subsidy checks to the soybean farmers, “Who is Menzie going to believe, Sonny Perdue and Trump….. or his ‘lying eyes’ ??”.
Excuse me but CoRev is so all over the map that I think we all have lost WTF his real question was. But I’m sure he will write all sorts of conflicting stuff in his efforts to clarify WTF his question really was.
Pgl, “Excuse me but CoRev is so all over the map…” specific examples please. Provide the exact comment and context showing how CoRev is so all over the map. Your ball!
I find it interesting that the current Nov. future price is essentially the same as it was a year ago July. And the futures price showed a substantial downturn (not nearly as large as the current one) from a previous high. Got to INO and click max.
If I knew anything about futures trading, which I do not, I might think the current price is close to a technical bottom and buying in might produce quite a profit.
Never ever take my buy and sell advice.
Ed
Menzie,
The fact the entire soybean curve cost moved together, doesn’t really suggest anything other than the fact that beans are at or near full carry. Full carry is the cost of storage/interest. In certain commodities, like WTI oil, carry can go beyond a typical full carry storage calculation, but only when storage at Cushing Oklahoma effectively runs out. When the curve is at full carry, and the front falls, the back follows, otherwise someone could buy the front month, pay for storage, and generate risk free arbitrage. Feel free to check out charts of the USDA weekly crop conditions/progress at the link attached.
https://www.nass.usda.gov/Charts_and_Maps/Crop_Progress_&_Condition/2018/US_2018.pdf
Also, I’d highlight the fact that on a crop year basis, Brazil typically exports ~50% more beans than the US, though the timing does vary given different harvesting times. The notion that China will buy soybeans from Brazil, without other buyers being forced to turn to the US for their import needs defies the arbitrage and basis trading that are the backbone of agricultural trade. Attached is the USDA’s recent World Agricultural Supply and Demand Expectations (WASDE).
https://www.usda.gov/oce/commodity/wasde/latest.pdf
While you can find the USDA’s expectations for the US and World in the body, I thought this paragraph might be instructive.
“Soybean production is up 0.7 million tons to 355.2 million mainly on higher production for Brazil. A higher trend yield for the 2018/19 Brazil soybean crop reflects harvest and yield results for the 2017/18 crop, which is increased 2 million tons to 119 million. With higher production, soybean exports for Brazil are revised up for both the 2017/18 and 2018/19 marketing years. Ending stocks for Brazil are also increased with higher production and a lower crush estimate for 2016/17.”
Frankly, I can’t think of a good that would be less affected by tariffs than soybeans and corn given their ubiquity and interchangeability. The only major hurdles are that it could make trade a little less efficient (timing/shipping distance).
mp123, thank you for your knowledgeable comment, although I think it will go over the heads of many of the economists/pseudo economists commenting here.
Lean hogs made a pretty big drop today. 2%. Now, I had noticed before that the moves in lean hogs were much more positive than the moves in soybeans and corn. Not so today. I’m assuming that this (the lean hog price drop individually) is due to the market giving more credence to the Canada and Mexico responses to NAFTA exit, than to China “negotiations”. Or maybe just part of the general day’s downturn?? Guess I should wander Bloomberg and see what they say.
The question is: are you tired of all this winning yet?
I werz tired, now I’m downrit fatigyooded.
I think it’s all these thar pre-poobisent Furnerz in “ICE” cages asking fer dare mama. It’s got me all fatigyooded.
Vasyl, Russian/slavic? Winning is determined when the race/game ends. Give it time to unwind.
Soybeans are just being pounded, down 15-18% compared to a more neutral valuation. Much of this is probably algo trading driven, but it reflects the anxiety of traders in the business. Everyone is fleeing the category.
I would guess this will turn into a buying opportunity, as soybeans have traded down all along the curve, and I don’t expect the tariffs to last years. At the same time, it’s a huge thumbs down from soybean investors on the trade war.
steven, different topic. what are your thoughts on nat gas futures (henry hub) over the next year? i can peg a power contract to monthy (end of) futures, and it looks as though the nat gas futures are probably not going to rise any more than current. and if they were to drop, my contract improves each month. do you see nat gas rising over the next 12 months? thanks
Not my area of expertise. Sorry about that.
thanks anyways.