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276162

Investors Digest More Bearish News, Analyst Says

China is starting to ‘squeal,’ analyst says.

As we start another week, it seems the rhetoric has turned up a notch between China and the U.S., with many developments the past few days. 

News has broken today that the Trump administration will impose a 10% tariff on $200 billion in Chinese goods on September 24 and raise it to 25% at year’s end. This was a decision that was mulled over for the weekend and finally got ironed out Monday. 

The gradual imposition of the tariff is a slight modification from the original plan, and also a few items were exempt (about 300) after testimony was submitted by American businesses.  

More tariffs are threatened, another $267 billion, if China retaliates as it earlier said it would. It is unclear if China will cancel or postpone the talks originally scheduled for next week in response to the imposition of the new tariff, but it seems it’s almost expected that it would. For years, the U.S.  complained in words about Chinese trade policy and intellectual property, and for years nothing got done. So, the only thing the Chinese seem to understand is actions, not words.    

We note that China is starting to squeal a little more about the whole tariff idea, now that it can't retaliate other than with words. So, it finally might be starting to hurt a little more. The U.S. has been very patient up to this point, basically allowing China to hit us tit for tat. But with $135 billion bought from the U.S. to China, and $505 billion bought from China to the U.S., China just doesn’t have the same powder in its tariff gun. 

And the U.S. is finally getting around to using some more of its powder. For agriculture, we are hurting now that this game with China has started. But to waste time now without maximum pain put on the Chinese economy is only more painful.   

Meanwhile, the U.S. is making agreements with other countries, with Mexico a done deal already, and Canada very near a deal (their large dairy tariffs are the holdup), and the EU an agreement in principle. Once three out of four trade deals are done, the absence of one with China and the huge impacts of the $135 billion and $505 billion tariffs will eventually take its toll. We may not have a deal with China by the end of the year, but it might be close.

At the Big Iron trade show in Fargo early September, we asked attendees if/when they thought a U.S./China trade deal would commence. About 20% of farmers thought it would be done by the end of 2018, about another 20% said "never."  About 40% thought it would happen in 2019, and the other 20% thought it would be from 2020 to 2025. So there is a great deal of uncertainty in farm country over how long this dispute will last, and therefore the impact of it as well.  

This is an important market question, as the bear market might only turn to a bull market when the China/U.S. trade dispute ends. 

If that takes three months, we might go down in price three more months. If it takes a year, we might go down a year. If it takes two years, prices might be under pressure for two years. If it takes much longer or never, the market might be sagging for up to five years. The reason is we have lost essentially a 25-million-plus-acre customer, and it can’t be replaced immediately. To generate that much additional business (even with a 10% to 20% price discount we have now), it will take a lot of time.  

Meanwhile, the 10- to 15-million-acre shift in acreage from soybeans to something else is going to depress the price of something else. And even with a 15-million-acre reduction in soybean acreage, we still will be building stocks. So, the day a deal is done with China, price trends might reverse and go higher a long, long time. But until then, we might continue to struggle.  

China is also feeling some pain, and it will get much worse if a deal isn’t done soon. Just like U.S. PNW ports are losing tons of money not working, Chinese soybean crushing plants are also quickly going to start accumulating losses.  

Without soybeans to crush, profit margins are low and losses high. Hog feeders in China will need soybean meal they likely will no longer be able to get soon, and problems will develop. So the pain of this U.S./Chinese trade dispute is being felt in many areas, and for Chinese users, will quickly get much worse.    

Crop progress and conditions were out yesterday, with corn at 68% rated G/E (unchanged) and soybeans at 67% rated G/E (-1%). Both yield models rose moderately, with corn up 0.54 bushel per acre to 179.12 (vs. USDA at 181.3).  Soybean yield estimates rose 0.06 bushel per acre to 49.72 bushels (vs. USDA at 52.8 bushels). Corn is 93% dented (7% ahead of normal), 54% mature (18% ahead), and 9% harvested (3% ahead).  Soybeans are 53% dropping leaves (+17%), and 6% harvested (3% ahead).  

Other crops show sorghum at 26% harvested (3% behind), 12% harvested sugar beets (4% ahead), 97% harvested HRS wheat (5% ahead), 96% harvested barley (1% behind), and 13% planted winter wheat (1% behind). 

Overall, it is still an early year for most crops, and the fall thus far has been nearly ideal for most areas. Harvest will accelerate quickly now, with soybeans and corn coming off fields fast in the next 30 to 45 days. 

So far yields have been good in most areas, and outstanding in others. 

Frost is no longer an issue as most crops have reached or nearly reached maturity. 

So, it’s just a matter of drying down the crops enough to justify harvest. Weather forecasts are still mostly warmer than normal the next two weeks, but now there is a wet forecast to go with it (above-normal precip). 

So, we’ll have to deal with the good (heat) and the bad (wet).   

But U.S. farmers are the best in the world, and if anyone can harvest in difficult conditions, the U.S. farmer can.


Ray Grabanski can be reached at raygrabanski@progressiveag.com.  
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Ray Grabanski is President of Progressive Ag Marketing, Inc., the top Ranked marketing firm in the country the past 8 years.

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