When It Comes to Grains, Geopolitics Matters

Sometimes I feel I need a boat to do my spraying. The last week here in Southwest Ontario has been very wet and I’m in that “hurry up and wait” mode. Give me that hot weather they are predicting and lots of sun and I’m sure those wet fields will dry up in a hurry. I’ve got about 500 acres of soybeans that need some attention.

Of course spraying soybeans might be a little bit easier than marketing those beans in 2018. After a high of $10.42 on May 29th, today we sit at $8.89 a bushel. $1.53 drop in futures over the last month has been a bit of a wake-up call for many of us that were looking at that critical pricing period leading up to July 4th. Tomorrow, we will get the USDA report, one of the big three USDA reports of the year and typically one with explosive futures price movement. However, you have to wonder this year whether the tariff twitter war with China has taken some steam out of any explosive price action Friday.

I will be writing extensively about the commodity price action in the next few weeks. We all know that July 6th looms as a deadline for US tariffs on Chinese goods and a likely retaliation from China on American soybeans. So one can make an argument that July 6th might represent a day more important than the USDA report tomorrow. There is also the July 4th weather forecast, which is also instrumental in telling us whether the crop is made. Simply put, most of us have been here before.

It’s pretty clear to me that our market price behavior at the present time in 2018 is so different than we’ve seen before. For instance, you have read in this column that December corn topped out in early July last year and on June 18 in 2016. In 2018, minus Argentina there wasn’t much fundamental reason for that change. However, we all know that it did and it brings me back to the point, “geopolitics matters”.

This is not a black swan, that mythical name given to a market factor that comes out of nowhere to simply change everything. In 2018, the geopolitics changed, where we had an American President very aggressively go after two of its best customers, Canada and China in the trade realm. From an agricultural perspective, we all know that China buys most American soybeans. There was always nervousness about this, but when words became real from the American administration, the market became awash in negativity with end-users pushing toward the door. The result was a very steep price decline at a time when at least new crop prices tend to be much more buoyant.

Of course now we are in flux and nobody really knows what is going to happen. We have seen premiums for soybeans at Brazil ports rise and this will spur much production there. In the next few years we are likely to see a Brazil soybean crop approaching 140 MMT. However, nothing is ever so neat and tidy as that. Nontraditional buyers of American soybeans will likely show up and even the Chinese themselves. Simply put, everybody loves a bargain price and soybeans are at ten-year lows. In other words, let’s not go overboard with bearishness. Needless to say, all of this has been so unpredictable and especially unnecessary. Maybe it’s, “the art of the deal”.

In many ways, it’s something that I didn’t believe would come true. I say that even though as early as late 2016 I was making presentations across Ontario that it was likely. Predicting price action going ahead into July under this current scenario is such a flyer. In more traditional years, we’re into the long slog till harvest. This year, sure, we’ve got Mother Nature to deal with but things might not turn out in any way like they look now.

I say that because the China US relationship is so critical, so is the Canada US relationship and if that go south, were probably in quite a heap more trouble. If the American administration follows through with some of the more aggressive threats that have been bandied about in the media it would get pretty rough around here. No, this is not the War of 1812, but we have never heard Canadians described in such disparaging ways from a US administration since then.

I hope someday that we can look back and remember how we all began singing “Kumbaya”. However, that seems whimsical now. Expect rough sledding ahead in our markets. And remember, always, when it comes to markets, geopolitics matters.

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