Newsom on the Market

Well THAT was Fun

Wednesday's market action was like watching a clown: Fun or scary, depending on how you feel about clowns. (Photo by graceofapplevalley, CC BY 2.0)

That's two weeks in a row now where a week's worth of market goings has occured over the span of a single day. Last week it was Thursday, the last day of the holiday-shortened trading week that started with USDA's weekly export sales and update, included USDA's Quarterly Stocks and Prospective Plantings reports. Later in the day I moved on to participate on a panel discussion of the day in general on IPTV's Market to Market program, and I concluded with a late-night writing of my weekly column to summarize it all.

Somehow, though, that pales in comparison to this Wednesday. Somewhere around 2:30 to 3:00 in the morning, I had a feeling that I needed to go check the markets. I didn't; therefore, when I got around to my computer around 4:30 and saw soybeans down almost 50 cents, I knew instantly that it had to be due to China and tariffs. In a short period of time, DTN Ag Policy Editor Chris Clayton (along with the early morning DTN editorial crew) had a piece up from DTN China Correspondent Lin Tan.

A quick online scan proved my thought to be correct. Early Wednesday morning, somewhere in that 2:30-to-3:00 timeframe, China announced proposed retaliatory tariffs on another round of U.S. commodity imports, this one including soybeans. I say retaliatory because, late Tuesday, the Trump administration had announced its own proposal of additional tariffs on Chinese imports. A flurry of tweets from the president saying the U.S. wasn't in a trade war with China only stirred the pot and seemed to be contradicted by U.S. Commerce Chief Wilbur Ross' comments that "even shooting wars end with negotiations."

Ah, negotiations. The thin thread that holds U.S. agriculture in the balance. China's proposed new round of tariffs hinge on the U.S. implementing its latest threats, all while trade negotiations between the two countries continue. A lot of Twitter chatter (more about Twitter in a bit) revolved around the theme of standing up to bullies. In this fight, I couldn't help but picture two of the bullies from The Simpsons -- Nelson Muntz and Jimbo Jones -- duking it out to show who is toughest.

Yes, China thinks it's above the law when it comes to world trade. That has long been the case and will continue to be the case when the president's chair in the Oval Office is filled by whoever holds the job next -- and the person after that, and the one after that, and so on. The most interesting aspect of this is the question of whether or not the U.S. administration was actually pulling off another of its tiresome sleight-of-hand tricks, this time at the expense of U.S. farmers.

Love him or hate him, one has to admit this particular president likes to get everyone arguing something on one side, while quietly doing something else on the other side. In this case, U.S. agriculture was coming unglued over the trade war while something more nefarious was going on. A friend of mine on Twitter, Ryan Wagner of Wager Farms, said it best: "The tariffs are the shiny object to distract you from the dismantling of the RFS in broad daylight."

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Wagner could be right. As award-winning DTN Reporter Todd Neeley discussed in his Wednesday article on the EPA, the agency, under the direction of Administrator Scott Pruitt, was granting Renewable Fuel Standard waivers to a large refiner. This exemption to the energy program was designed for small refiners demonstrating economic hardship, not large refiners showing billions of dollars in annual profits. Talk on Twitter was that there were a number of refiners receiving waivers, in essence pulling the teeth out of the mouth of the RFS program one by one.

Why is this so alarming? As Todd's piece points out, with quotes from Iowa Republican Sen. Chuck Grassley, "It appeared EPA granted a 'secret' waiver." The bottom line is that the government now seems to be providing "massive" handouts to a big corporation, activity that "isn't just unfair, it may be illegal."

From a market point of view, what happens to U.S. corn prices if the 5.575 billion bushels (bb) of estimated ethanol demand is waivered away?

Following the recent Quarterly Stocks report, my 2017-18 domestic ending stocks estimate for U.S. corn came in at 2.66 bb to 2.88 bb, as opposed to USDA's latest projection of 2.127 bb. If ethanol demand goes back to pre-2006 levels, where do you think price will go given the continued record production seen in the United States?

That's why I'm more concerned, long-term, about what's going on in secret rather than where all the noise is.

However, let's take a look at soybeans. I'm on record saying China will still need to buy U.S. soybeans, tariff or not. In DTN Analyst Todd Hultman's "Todd's Take" column from March 27, he wrote: "It is likely that Brazil will be able to quench China's appetite for soybeans through September without much need for the U.S. After September, however, the tables turn as South American supplies dwindle."

As Wednesday wore on, more opinions were falling in line with Todd's calculations. The reason China waited until April to propose a tariff on U.S. soybeans was because it's now comfortable with expectations for Brazil's production.

By the end of Wednesday's session, soybeans and corn had taken a big cut out of earlier losses. Soybean meal had turned higher because Argentina's soybean crop is still a disaster and Kansas City wheat was in the green. In addition, wheat and oilseeds could easily trade higher overnight into Thursday morning.

The question remains corn. What happens if traders start paying more attention to this administration's actions against the RFS rather than its ongoing war of words with China?

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Editor's Note: We're sharing this week's Newsom on the Market commentary from DTN Senior Analyst Darin Newsom in our Top Stories segment across all DTN/The Progressive Farmer platforms. Newsom on the Market regularly appears Friday mornings on our DTN subscription products such as MyDTN. To find out more, visit http://www.dtn.com/…

Darin Newsom can be reached at darin.newsom@dtn.com

Follow him on Twitter @DarinNewsom

(BE/GH/AG)

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