Soybean prices are as low as they’ve been in a decade, and corn prices aren’t any better.
Last week I delivered a presentation on the topic of agricultural trade in the Trump Era to farmers in Northeastern Montana, and the theme I hammered was the role uncertainty plays in the markets, and how President Trump’s sharp rhetoric about the “rules-based post-war international order” has injected a degree of uncertainty into the marketplace not seen in quite some time.
The U.S. Department of Agriculture noted back in August that soybean prices had hit nine-year lows, shedding nearly $2.00/bushel in value in roughly a month’s time (see figure below). Looking at current cash grain prices – $7.90 in Central Illinois as of last Thursday – it’s clear that projections of a large crop this harvest haven’t given marketers any reason to chase prices higher.
What role does the Trump Doctrine on trade play in all of this? Well, consider the United States’ global market share in recent years as one indication. As the Economic Research Service noted last week, the U.S. simply isn’t capturing any of the growth in the global grain trade (see figure below).
Since 2000, the U.S. has captured roughly a third of global wheat exports and 70% of global corn trade, but as global exports have gained momentum over the past two decades, U.S. trade has held fairly steady.
“The emergence of new low-cost producers and exporters in the global wheat and corn markets reduced the U.S. share of grain exports and transformed global grain trade,” ERS researchers explain. “Competition from Russia, Ukraine, and Argentina has weighed down U.S wheat exports share, while Brazil, Argentina, and Ukraine are driving down the U.S. corn export share. “
Is that a direct repudiation of U.S. trade policy? No, of course not. However, consider that if the U.S. willingly makes itself less competitive at a time when it’s already facing stiff competition from major producers such as Brazil, well, things aren’t going to get better for U.S. exporters.
Take a look at this price comparison my Informa colleague Peter Rohde published last week, plotting U.S. and Brazilian soybeans delivered to China against one another (see figure below).
“While U.S. soybean to non-China destinations this marketing year are up 100%, it is not enough to replace China and we at Informa believe it will be difficult to come close to last year’s export levels,” said Tom Scott, Global Director of Informa’s Agribusiness Consulting Group. “This of course leads to the huge carryout and low price outlook.”
Placing a 25% tariff on U.S. soybeans has not only taken the U.S. producer out of the ballgame with respect to China, but it’s also given Brazil the opportunity to capture huge chunks of marketshare that would likely be going to the U.S. Here’s how Brazil is doing, according to USDA Foreign Ag Service data:
So the U.S. share of exports to China are off 10 percentage points year-over-year, while Brazil’s share is up 18%!
Last week’s World Ag Supply and Demand Estimates (WASDE) gave producers no reason for optimism with regard to price – production is expected to be plenty large to keep prices mired around $8/bushel. With respect to corn, a record-large supply is expected to find willing export customers abroad enough to see corn hover around $3.50, with exports up 75 million bushels, “reflecting U.S. price competitiveness and reduced exports for Russia.”
In trying to answer the question of how badly producers will be affected by the Trump Trade War, I found these points from a recent FarmDoc Daily post to be a helpful summary:
For current production, impact of the tariff conflict awaits the crop being planted in South America. Very different scenarios emerge if the South American crop is at or above vs. below trendline.
Intermediate impact depends on whether the tariff conflict pushes China’s economy into recession, how impact on soybeans radiates out to other crops, plus unforeseen positive and negative events.
Long run impact is troubling because the tariff conflict again raises the issue of how reliable is the US as a provider of the daily staff of life, a topic broached in a historical perspective of the USSR grain embargo in a July 13, 2018 farmdoc daily article (Zulauf, Coppess, Paulson, and Schnitkey).~ Zulauf, C., G. Schnitkey, N. Paulson, J. Coppess “Value of US Production of Farm Commodities amid Tariff Conflict.” farmdoc daily (8):189, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 12, 2018.
It’s probably a good time to remember the wisdom of trade analyst Scott Lincicome, who sagely observed that, “Tariffs not only impose immense economic costs, but also fail to achieve their primary policy aims and foster political dysfunction along the way.”
Earlier this month, Purdue University’s Center for Commercial Agriculture published its latest Ag Economy Barometer, finding that producer sentiment has reached its lowest level in two years.
In their study of producer attitudes and intentions, Purdue economists James Mintert and Michael Langemeier also found that 72% of producers expect their farm income will fall at least 10% due to trade conflicts – and half of those expect farm income to fall at least 20% for the same reason. Even more to the point, 46% of producers surveyed said they intended to store most of their soybeans “until the trade conflict is settled.”
One wonders, just how long can they wait?