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Veteran Contributor
Posts: 485
Registered: ‎09-20-2018

A Good Day For Grains

The meeting of the Chinese and Americans at the G-20 meeting over the weekend gave a good lift to the grain markets on Monday, as the two countries agreed to postpone any further tariff increases until the beginning of the year. There also was a pledge to try to reach an agreement during the next 90 days on the trade disputes between the countries.

 

Financial and commodity markets took the news with typical euphoria, but there are many well-respected investment houses - led by Goldman Sachs - that see the news from the weekend as a temporary measure that was intended to slow the drop in stock markets during the all-important-to-retail Christmas shopping season, and to slow the rapid decline in the Chinese economy that has occurred since the original tariffs were put in place by the US.

 

My read on this is not any different than it was before the weekend. In the long run, tariffs have little if any effect on the sale and purchase of basic foods like grains. The Chinese still need to feed a billion people and won't be able to do so without American grain. So they will buy their grains from non-US middlemen who will in turn get the grain they sell by buying it from American producers. Prices should level off once the mechanisms are in place for this inter-country arbitrage, the only winners will be the middle men and the big losers will be the Chinese consumers who will see their cost of food go higher by the amount of the middle man mark-up.

 

However, fools and their money are soon parted, so I am happy to see prices move higher on emotion rather than supply and demand. I have been waiting for a while now to see corn move into the $3.85 to $3.95 area, and we touched that band today, registering a high price for March corn of $3.8525 before settling back down to $3.8175 at the close of trading. The technical indicators on the charts say we still will go higher, so if you have corn in the bin, hold on to it, because you should see another 10 to 15 cents higher in price before sanity returns. The big picture is that there remains a lot of corn from this year's harvest that needs to be sold, and the supply /demand curve has not shifted due to this weekend's news. 

 

Going forward, the market is also setting itself up for disappointment, and that disappointment will probably come when the 90 day period is over and there still is not an agreement on trade issues between the US and China. The differences are still very wide between the country, and many of the important areas the US seeks to change - like intellectual property rights and protections and access for American firms to sell competitively into China - have not even been discussed seriously yet. The Chinese are being incredibly stubborn over many of the trade issues, and they will need more pain before they give in to a fair trade agreement that ends the raping of American businesses by cheap Chinese imports. Remember, it took not one but two atomic bombs to get the Japanese to give up in World War II, and the Chinese do not seem to be any more open minded about protecting their exports as the Japanese were open minded about realizing their empire was over.

 

So now that almost as much hope has been factored into agricultural prices as could be imagined, any news that tends to bring the match closer to the balloon will have the same type of over-reaction as we saw today, except the over-reactions are likely to be in the opposite direction. I expect that corn will reach the $3.90 to $3.98 level during the next month, and it should be sold with impunity there. 

 

As a side-note, I am happy to see that since September, soybeans have risen more than corn. I don't trade soybeans, but I did opine in October that I thought the spread between the beans and corn would widen, and it has. I hope that at least some of you who read my posts have made some money on that trade. I expect that when the corn market peaks, the spread between beans and corn will be at its widest, and at that point that spread trade of long beans and short corn should be partially closed with a sale of the bean holdings. 

Veteran Advisor
Posts: 4,126
Registered: ‎05-13-2010
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Re: A Good Day For Grains

ray   -  paragraph  - 3,   Chinese  Consumer  - hit  with  the  increased  costs  -  ?  How  do  ya  figure that one  ? 

Veteran Contributor
Posts: 485
Registered: ‎09-20-2018
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Re: A Good Day For Grains

[ Edited ]

You sell your corn at market price to a middle man because the Chinese buyer won't buy your corn due to the Chinese tariff on American corn. 

 

The middle man puts your corn in a new bag that does not say USA, and he sells it tariff-free to the Chinese. His price is what he paid you plus a mark up for his efforts.

 

The Chinese consumer winds up paying what s/he would have paid you without the tariff plus the cost of the middle man mark-up. 

 

So the Chinese tariff did not hurt you because you still sold your corn at market price., It helped the middle man since he made money on the deal. 

 

And the Chinese buyer wound up paying the increased cost of the middle man's mark up, so s/he is the loser as opposed to when s/he could buy your corn without a tariff and without the markup of a middle man.

 

Tariffs on imports almost always boost the prices of imports, because the retailer passes along those tariff costs to the consumer. That is a main purpose of tariffs, to put up the price of imports beyond the price of a domestically produced alternative so that domestic producers can compete with foreign producers on equal terms and a lel=vl playing field.

Honored Advisor
Posts: 17,365
Registered: ‎05-13-2010
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Re: A Good Day For Grains

That corn/bean spread could become like the gold/silver spread as in not making any sense. There is 10 times more silver than gold, yet gold is 85 times higher and it always has been out of whack.  Plus silver is needed for industrial purposes like cell phones, computers and solar panels in in small amounts not worth recycling so it ends up in the landfill. Meanwhile gold just sits there gathering dust selling at 85 times what it`s step brother does.

 

I think the market is well aware that "no deals" came out of the meeting, but at least at the meeting they didn`t flip each other the bird and storm out.  If a deal is to happen in 90 days, this is how it starts

 

Right now corn -1 and beans -4 perfectly understandable, until the paperwork and pens come out.

Senior Contributor
Posts: 941
Registered: ‎11-30-2014
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Re: The pent up Rebound Effect

Is 50 cents to $1 higher corn and say $4 higher on beans.

soooo it's going to happen just bout like that over the winter.

or should we call this the recoiled noodle effect, LoL.

Veteran Contributor
Posts: 485
Registered: ‎09-20-2018
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Re: The pent up Rebound Effect

Well I don't know about time frame, but you certainly could see corn up at $4.50 if the market gets above the last major high at $4.1225. 

 

I just don't know what fundamental change in the supply/demand function could cause such a move. There's a huge amount of corn in the world right now, and the typical big buyers seem to be well-stocked. On top of that, the major economies are all about to go into tailspin recessions. The US is nearly there with the breakdown in housing, the auto layoffs (btw, MorgStan predicted today that Ford will be laying off 25,000 workers world wide soon), the rising Jobless Claims, etc... France is burning, which will preface a recession there, Germany has a major banking crisis at its largest bank which will curtail credit there, Italy is on the ropes about meeting the EU budget requirements, and Britain is about to have a political crisis over Brexit. The Chinese economy is falling off a cliff, and the rest of the world burns when these major countries light the match.

 

All in all, the economics of the world right now are not the sort to cause commodity prices to break into bullish trends. So I would be very careful about betting the farm on those predictions for corn and beans. 

 

But hey, I will do my part to help the rally. If the market breaks above that old major high, I will gladly cover my shorts and get on the ride up to $4.50. I am just not booking my vacation in the Riviera on that idea yet.

 

Senior Contributor
Posts: 941
Registered: ‎11-30-2014
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Re: The pent up Rebound Effect

The chinese economy is in a Lot better shape than you spout rayfcom.

 

Thee big payers of trumps tariff damages is in Fact the USA.

usa farmers in particular are paying way more than anyone else in tariff damages.

that mainly because...thru dishonesty and Stupidity there's in Fact an Export Sales Tax being called a darn 25% outgoing tariff.

trump and some Stupid farmers actually need the immigrants to Teach them the meanings of the words of our English Language.

Veteran Contributor
Posts: 485
Registered: ‎09-20-2018
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Re: The pent up Rebound Effect

Take a look at the chart of the Shanghai stock market, the main stock market for Chinese companies, and you will see the damage already caused by the tariffs the US has set up against the Chinese. Why do you think that the price of oil fell $25 in less than two months, the largest fall in the price of oil in so short a time ever ? Because demand for oil from Chinese factories has fallen off a cliff. This is why the Chinese were finally ready to talk and make concessions when they met in Argentina with the American leaders at this past weekend's G-20 meeting, because their economy is struggling for air as they did not believe that Trump was serious about turning the trade tables against them.

 

I have been approached to provide seed money for several nascent companies in Australia and in South America looking to buy American grains and sell them to the Chinese so as to avoid the tariffs. American grains are at their highest prices now since May, even with the bite of the Export tax you mention. If any farmers are hurting over these tariffs, its only temporary because soon your phone is going to be ringing off the hook with middle men who will be buying your crops and selling them to the Chinese with a mark-up. Tariffs at  most have a short term effect on food prices, people still have to eat. 

 

I agree with you about the immigrants, they should teach Americans how to say the words "go home" so that wages in this country can start rising again and a true middle class can be resurrected before its too late.

 

I have said it before and I will say it again and its as true now as ever...farmers are victims of their own success. You figure out ways to be more productive all the time, and you wind up producing more than is needed. Until the farm community starts basing their production off of what your commodity markets are telling you, you will have the same problems of barely ringing out a profit for your work. You have had a bear market in corn and other agricultural commodities for  years now, yet no one is willing to band together and cut production to force prices higher. I know its difficult, you have to have an association of farmers that only suggests rather then enforces production limits or you will have price fixing charges leveled against you. I know there are farms that are barely making ends meet so they produce as much as they can seeking to maximize income, but wind up slashing their own wrists when prices fall due to the over production. I know that you spend so much time on your work that its hard to spend the time necessary to find a good marketing adviser with a proven track record in the futures markets to help maximize your income. But all of these measures are what;s needed to make farming profitable, and somehow the farm community has to decide to find the means to implement these and other strategies if you want to see your work become more profitable. 

 

By necessity, America has to change or its economy will fail miserably. You cannot continue to give away a trillion dollars a year of your wealth, and then borrow a trillion dollars a year to pay the costs of reducing the standards of living of millions of people because you want to save a few dollars when you shop at Walmart. America needs to make its own products for itself, and that is not going to happen when shareholders are valued more than workers. Tariffs are the traditional way this turnaround is accomplished, if there was a better way it would have been tried already. The alternative is that you will turn America into the kind of third world country that all these immigrants are running from, and all these cheap labor sweatshops prey upon. This issue is a lot bigger than your income, its the fate of your country's future. Its never easy to change, but if America doesn't start down that road now, it will not have another chance. 

Senior Contributor
Posts: 425
Registered: ‎08-02-2012
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Re: A Good Day For Grains

Oil was almost 150$ A barrel when Bush was in office. All of a sudden Obama straightened that out down to under 30$ no tariffs involved. So, 25$ drop is literally nothing. According to the consumer the pump price dropped maybe a dime here Chicago. Hardly even noticeable. However, back to the people getting hurt from these tariffs, the American worker and mainly Farmers are the victims. Do you honestly believe anyone would have seen sub 4$ corn or sub 10.50$ soybeans if the election in 2016 would have gone to the person who actually won with the most votes?
Senior Contributor
Posts: 425
Registered: ‎08-02-2012
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Re: A Good Day For Grains

You talk of the U.S. and our debt, look at that chart. First of all cut all black projects next slash the military budget then stop. Just by doing that we’re out of debt in roughly 3 years done.