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Trade Tensions Hit Farm Prices and Profits

Farmers in the U.S. and around the world benefit from free trade and global economic growth. Since the trade spat has turned into a trade war, grain prices have dropped by 15% to 24%.

Trade tensions started to increase with China in January 2018. Since then, the U.S. grain markets and the Chinese stock market have both turned sharply lower. In July, the nearby soybean market closed at the lowest price level since December 2008.

The trade war has also been hard on U.S. farmers and the Chinese economy. China is a huge exporter into the U.S. When exports slow, employment and corporate profits fall. 

The best example of this is in the Chinese main stock market, which can be monitored with the Shanghai Stock Index. 

The Shanghai stock market has been trending lower since the highs posted in January 2018. The index hit a major low in January 2016 at 2,638. From that low, prices rallied to the major high in early January 2018 at 3,587.

As trade tensions have increased with the U.S., the stock market has dropped sharply. Now, the index is down 24% from the January high. Meanwhile, the nearby soybeans traded down over $2 per bushel (about 24%) from the high made in the first quarter of 2018.

cbot-corn-weekly-august

You can see the major low in nearby corn at $3.01 in August 2016 and the next major low in late August 2017. The high this year came in during the middle of May at $4.10. The low in December 2017 came in at $3.35. It looks like corn bottomed one month early in 2018. 

2 important questions

1. What are some of the key price levels to watch to know where the market is likely to bottom?

To fully answer this question, I’ll want to review my long-term price cycles and look at when these reversals are likely to develop. 

For the nearby corn futures, the long-term chart shows a series of possible support levels. The first is the December 2017 low at $3.35. The next is the 2017 low at $3.28. Then the major support on the chart is the 2016 low at $3.01. The last two years, prices have bottomed on the last trading day of August. That is when all of the delayed price grain was forced into the market. This year, I expect the low to come in two to four weeks ahead of that key time period. It would be unusual – but not impossible – for the low to come in the same week for three years in a row. 

A review of the long-term soybean chart shows that in July the nearby futures closed below the November 2015 low at $8.44. The next major support now is at the December 2008 low at $7.76. It has been interesting to note how well soybean meal and soybean oil prices have held compared with the hard down move in the soybean market. The main reason for this divergence is that commodity funds have much larger positions in the soybean market compared with the positions they are holding in the soybean meal and soybean oil markets. The ideal time for soybeans to bottom is from late August to early November of 2018. 

2. What will signal the low? I watch and review the monthly USDA Supply/Demand Report. Even with all of the trade tension and political negotiations going on, the monthly reports continue to show growing global demand for grains. Global soybean demand remains especially strong.

The most obvious signal of a low would be if the U.S. can first work out trade agreements with Mexico and Canada, and then sit down and start talking with China.

Since I am not a politician and no one will call me the day before this develops, I will watch my charts. The first hint that an agreement is in place will be the first day that prices close above the previous two days’ high. The confirmation of the low will be a close above the two previous weeks high. After this very hard down move in prices, I expect a V type of bottom to develop. 

soybean-weekly-august

This is the weekly chart of the Shanghai Stock Index (in blue) and the U.S. soybean market (in black). You can see the major low at $8.70 in the soybean market in early 2016. You can also see the rally to $11.76, the sell-off to the lows in June 2017, and then the plunge to new lows in mid-July. Look at the close correlation of U.S. soybean prices with the Chinese stock market. The first month-to-month higher close will signal a possible major low for both. 

FINAL THOUGHTS

During times of low grain prices, it is important to take the emotion out of your marketing decisions. I was trading and farming during the Carter grain embargo. Talk about a fast and hard punch to the gut.

This escalating trade war has been more like a slow-moving train wreck. You think it cannot get any worse and then the next day, it does.

Keep in mind that these low grain prices will not hurt your income if you are able to wait it out and sell.

Use the cheap CCC money this fall to wait for a postharvest basis recovery and hopefully a 30% to 50% retracement in the futures market. 

I clearly remember how devastating the prices and profits were right after the grain embargo in January through March of 1980. Then some weather problems developed in the summer of 1980, and it was off to the races. Be patient. Do not panic. 

NOTE: Trading of futures and options has substantial financial risk of loss and is not for all investors.

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