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Proposed Tariffs Could Support Prices In Short Term
DR. AARON SMITH
KNOXVILLE, TENN.
This past week was a volatile week in commodity futures markets. The biggest story in agricultural markets this week was the announcement, by China, of retaliatory tariffs on U.S. agricultural products such as soybeans, corn, wheat, sorghum, beef, and cotton. It is important to point out that these tariffs have not been implemented yet simply announced as potential retaliatory measures to be imposed in the future. If the tariffs were implemented it would not be good for U.S. agriculture, particularly for commodities that rely on exports to China, such as soybeans and cotton. Hopefully the two nations can work out their trade differences prior to the enactment of the tariffs.
When the tariffs were announced on Wednesday futures prices immediately dropped: soybeans 40-50 cents; corn 10-15 cents; wheat 10-15 cents; and cotton 1.5-2.5 cents. By the close of Thursday all four commodities had regained all or most of these loses. While I’m not yet convinced that the tariffs on soybeans will come in to effect (Chinese soybean consumers have as much to lose as US soybean producers), in the short-term we could potentially see accelerated export sales and shipments before the proposed tariffs are scheduled to be implemented as exporters attempt to secure and deliver product before tariff implementation. This could support prices in the short term.
China made an additional announcement this week that did not receive nearly as much press as the potential 25 percent tariff on soybeans. China indicated that it was repositioning incentives (subsidies) in favor of soybeans over corn in four provinces: Liaoning, Jilin, Heilongjiang, and Inner Mongolia (all four are large corn and soybean producing provinces). While this repositioning of incentives will not impact short term demand for imported soybeans the long term implications could be substantial, by replacing imports or limiting import growth of soybeans. The change makes some sense as China currently has 3.965 billion bushels of corn stocks carried over from the previous year and imports more than 3.5 billion bushels of soybeans annually. Shifting acreage from corn to soybeans could replace (over time) imports form the U.S. While it is unlikely that China would be self-sufficient in corn and soybean production in the next 5-10 years, a plausible scenario could be China plus South American production meeting Chinese corn and soybean demand in 5-10 years. This possibility should be a concern to U.S. crop producers and policy makers.
Numbers as of futures close on Thursday, April 5, 2018.
Corn
Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at Memphis, North-west Barge Points, Northwest, Upper-middle, and Lower-middle Tennessee. Overall, basis for the week ranged from 23 under to 36 over the May futures contract with an average of 1 over at the end of the week. May 2018 corn futures closed at $3.89, up 2 cents since last Friday. For the week, May 2018 corn futures traded between $3.72 and $3.92. Corn net sales reported by exporters from March 23-29 were below expectations with net sales of 35.4 million bushels for the 2017/18 marketing year and 0.4 million bushels for the 2018/19 marketing year. Exports for the same time period were down from last week at 49.8 million bushels. Corn export sales and commitments were 84 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31) compared to a 5-year average of 82 percent. Ethanol production for the week ending March 30 was 1.038 million barrels per day, down 1,000 from the previous week. Ethanol stocks were 22.425 million barrels, down 365,000 barrels. May/Jul and May/Dec future spreads were 9 and 24 cents, respectively.
July 2018 corn futures closed at $3.98, up 2 cents since last Friday. In Tennessee, the Crop Progress report estimated corn planted at 1 percent compared to 1 percent last year and a 5-year average of 1 percent. In Tennessee, September 2018 corn cash forward contracts averaged $3.91 with a range of $3.77 to $4.14. December 2018 corn futures closed at $4.13, up 2 cents since last Friday. Downside price protection could be obtained by purchasing a $4.20 December 2018 Put Option costing 34 cents establishing a $3.86 futures floor.
Soybeans
Average soybean basis strengthened or remained unchanged at Northwest Barge Points, Memphis, Northwest, Lower-middle, and Upper-middle Tennessee. Basis ranged from 50 under to 4 over the May futures contract at elevators and barge points. Average basis at the end of the week was 17 under the May futures contract. May 2018 soybean futures closed at $10.31, down 13 cents since last Friday. For the week, May 2018 soybean futures traded between $9.83 and $10.60. Net sales reported by exporters were above expectations with net sales of 41.6 million bushels for the 2017/18 marketing year and 13.2 million bushels for the 2018/19 marketing year. Exports for the same period were down from last week at 21.3 million bushels. Soybean export sales and commitments were 92 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31), compared to a 5-year average of 95 percent. May soybean-to-corn price ratio was 2.65 at the end of the week.
May/July and May/Nov future spreads were 11 and 3 cents, respectively. July 2018 soybean futures closed at $10.42, down 13 cents since last Friday. In Tennessee, Oct/Nov 2018 soybean cash contracts average $10.18 with a range of $9.79 to $10.44. November 2018 soybean futures closed at $10.34, down 13 cents since last Friday. Downside price protection could be achieved by purchasing a $10.40 November 2018 Put Option which would cost 62 cents and set a $9.78 futures floor. November/December 2018 soybean-to-corn price ratio was 2.50 at the end of the week.
Cotton
Delta upland cotton spot price quotes for April 5 were 81.57 cents/lb (41-4-34) and 83.32 cents/lb (31-3-35). Adjusted World Price (AWP) decreased 0.85 cents to 72.03 cents. May 2018 cotton futures closed at 82.57 cents, up 0.97 cents since last Friday. For the week, May 2018 cotton futures traded between 78.62 and 82.81 cents. Net sales reported by exporters were up from last week with net sales of 367,600 bales for the 2017/18 marketing year and 43,800 bales for the 2018/19 marketing year. Exports for the same period were up from last week at 452,400 bales. Upland cotton export sales were 108 percent of the USDA estimated total annual exports for the 2017/18 marketing year (August 1 to July 31), compared to a 5-year average of 92 percent. May/Jul and May/Dec cotton futures spreads were -0.42 cents and -4.7 cents, respectively.
July 2018 cotton futures closed at 82.15, up 0.35 cents since last Friday. The Crop Progress report estimated cotton planted at 7 percent compared to 3 percent last year and a 5-year average of 3 percent. December 2018 cotton futures closed at 77.87, up 0.14 cents since last Friday. Downside price protection could be obtained by purchasing a 78 cent December 2018 Put Option costing 4.5 cents establishing a 73.5 cent futures floor.
Wheat
May 2018 wheat futures closed at $4.64, up 13 cents since last Friday. May 2018 wheat futures traded between $4.45 and $4.66 this week. May wheat-to-corn price ratio was 1.19. Wheat net sales reported by exporters were within expectations with net sales of 4.0 million bushels for the 2017/18 marketing year and 7.4 million bushels for the 2018/19 marketing year. Exports for the week were up from last week at 15.7 million bushels. Wheat export sales were 92 percent of the USDA estimated total annual exports for the 2017/18 marketing year (June 1 to May 31), compared to a 5-year average of 100 percent. May/Jul and May/Sep future spreads were 17 cents and 34 cents, respectively.
In Tennessee, June/July 2018 cash forward contracts ranged from $4.48 to $5.06 for the week. The Crop Progress report estimated winter wheat condition at 32 percent good-to-excellent and 30 percent poor-to-very poor. In Tennessee, winter wheat condition was estimated at 57 percent good-to-excellent and 6 percent poor-to-very poor; and winter wheat jointing was estimated at 29 percent. July wheat-to-corn price ratio was 1.19. July 2018 wheat futures closed at $4.81, up 13 cents since last Friday. Downside price protection could be obtained by purchasing a $4.85 July 2018 Put Option costing 25 cents establishing a $4.60 futures floor. September 2018 wheat futures closed at $4.98, up 13 cents since last Friday. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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