The CommStock Report— Guest Editorial

Thursday, July 19, 2018
Matthew Kruse

A paradigm shift

The question on people's minds is whether or not the bottom is officially in the grain markets. This would certainly seem plausible as we have seen soybeans give away $2 per bushel in the last six weeks. In that same amount of time corn has given away 60 cents. But don't underestimate the market. It goes where it wants. We have yet to make it through August. The last four years have all made the annual lows in August or September.

I was asked if prices could get back up to their highs as quickly as they fell. Anything is possible but not likely. It often takes a full year for the market to retrace a drop like this. Last year we hit the low on Aug. 28 and then it took eight months for it to retrace back to 2017 highs. If President Donald Trump and China President Xi Jinping held a press briefing tomorrow holding hands and saying they worked out a new trade agreement, you can bet the market would have a strong positive response to that. But until that happens, the markets are going to have to grind out a long, tedious uphill battle.

The soybeans look even worse as they are sitting on the edge of an abyss. Any time you have to use monthly continuation charts to find the next level of support down, things are looking rather dire.

By my calculations, corn and soybeans have lost a combined $18 billion in value that have been wiped out in the last six weeks. The market ebbs and flows all the time so you cannot attribute it solely to trade wars. We are typically trading weather this time of year and so far things look good in general. But there is little doubt that the trade wars have added another load of bricks to a market already weighed down by heavy supply. I like to quantify things and so if I know we have donated $18 billion to Trump's trade war crusade, what are we getting in return? I hope we didn't just trade the U.S. agriculture industry for the U.S. steel industry.

I never thought the trade wars were a good idea, but I also know I don't know everything. I actively seek out opposing views in order to better understand where they are coming from. Find an advocate for the trade wars while you still can. Surveys I have seen show as many as 37 percent of Americans still think the trade wars are a good idea. I was surprised it was that high. But my question is, how many of those people who voted that trade wars are a good idea are being directly affected by it? It is the same reason that everyone agrees we should drain the government swamp, unless it directly affects their own job. It is easy for people not involved in agriculture to put someone else’s head under the guillotine.

This reminds me of the recent truck strike in Brazil. The whole country got behind the truckers as they went on strike because of higher fuel prices. As Brazil is highly dependent upon vehicle transportation for goods, the entire country was pretty much brought to a halt. Gas stations went empty. Grocery stores ran out of food. Hospitals ran out of medicine. It took people about 5 days before it started to affect their daily lives. And then the mood shifted. They wanted it to be over with. Americans may last longer than five days but the end result will be the same. It is easy to support a cause when it doesn't affect you. But when you start losing money and the bank shuts farmers off, support will diminish.

Secretary of Agriculture Sonny Perdue has stated that he explained to Trump that the trade wars will have a negative effect on the rural community. I just find that unbelievable that he needed to have that explained to him. How can a president engage in any type of war before he knows what the ramifications will be? Trump was talking trade wars with NAFTA and China nearly two years before Perdue was even confirmed as secretary of agriculture. Two years ago if you asked people if trade with China and NAFTA was bothering them it would not even have been on their radar. So what has changed?

Logic would tell us that Trump knows what he is doing and he has a specific goal in mind. Therefore we should just give him a chance. But thinking logically has gotten me into trouble before because the world doesn't always work that way. My view is that Trump's domestic agenda was hitting obstacles. The repeal of Obamacare fell flat. Funding for the wall was not coming. The president needed a win. Presidents carry more power when it comes to directing our foreign policy. There is no Congress to get in their way. So by shifting focus on trade he could therefore have greater control, and we know Trump likes control. By creating a common enemy in China and Mexico, he could rally his base and earn political points. We have a laundry list of things that sorely need our attention back home. Trade with China was only like No. 32 on the list.

There is an amusement park near where I grew up. At the peak of the roller coaster is a sign that reads, "Point of No Return!" Once we go past that point, there is no going back. Make no mistake. We are past the "Point of No Return" in the trade wars. Even if Trump tweeted tomorrow that he was canceling all tariffs, it would help a lot, but things won't go completely back to the way they were. You can't put Humpty Dumpty back together again. Brazil has already begun eating into our market share and they won't just give it back. China will focus on developing their own agriculture sector. A paradigm shift has begun.


The CommStock Report is an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage.