Soybean Futures: G20 Could Catalyze Epic Volatility
When President Trump initiated the trade war with China in 2018, few would have guessed that agricultural commodities would become such an integral piece in this ongoing narrative.
At that time, solar panels, washing machines, and steel and aluminum represented some of “poster child” products in a dispute that sought to rectify the imbalanced trade relationship between the United States and China.
But that’s the thing about trade wars, they are multiplayer games and are therefore very unpredictable (and apparently not that easy to win).
The last thing President Trump likely expected when he first raised tariffs against the Chinese was that the response from the second-largest economy on Earth would be to surgically target a group of his key supporters—rural American farmers.
Nonetheless, that’s exactly what the Chinese did when they identified soybeans as a place they intended to hit back. And it didn’t take long for this trade tactic to be successfully implemented, and the ensuing pain to be felt.
From calendar year 2017 to calendar year 2018 purchases of American soybeans by Chinese buyers plummeted from 36 million metric tons to 8 million metric tons. And the exiting of Chinese buyers from the American market served as a harsh reminder of the sometimes brutal supply-demand equation.
The Japanese are no strangers to soybeans. Hundreds of Japanese dishes are made with soy ingredients. More than 50% of the soy consumed in Japan is by way of the three to four tofu dishes consumed each week. Along with miso, edaname, shoyu and yuba, soy is a national obsession.
But supplies still outweigh demand, causing front-month futures prices for American soybeans to hit a 10-year low during the first quarter of 2019 ($8.02/bushel on May 10). And the impacts of the soybean boycott have ranged much further than simply lower prices.
While many American farmers are used to tightening their belts when times get tough, the sharp decline in agricultural commodity prices forced many to close up shop altogether. Farm bankruptcies have now spiraled to a 10-year high, and the building mountain of unsold soybean supplies in the United States only serves to exacerbate that problem.
Unfortunately, headlines related to the trade war have arguably gotten worse in recent weeks, not better.
In early May of this year, President Trump escalated the trade war dispute by raising tariffs on another $200 billion of Chinese imports to the United States. The Chinese responded by raising imports against additional American-made products, and by ceasing purchases of soybeans altogether.
That suggests that the meager 8 million metric ton total purchased by the Chinese in calendar year 2018 could be significantly lower in 2019.
They say it’s always darkest right before the dawn and for American
A ray of hope appears to have broken through the storm clouds since the start of June. And storm clouds is a great metaphor because it’s those floating bags of water vapor that are at least partially responsible for the improvement in market prices.
Extremely wet conditions in the Midwestern United States have delayed soybean plantings significantly in 2019, and crop forecasting experts are starting to revise down their estimates for the 2019 harvest. With supply expectations dropping sharply, soybean prices have rallied off their lows, and are now trading at roughly $9.09 per bushel.
Aside from the stormy weather, soybeans got a boost from news that the presidents of the United States and China would meet on the sidelines of the G20 meeting at the end of June (June 28-29). Hopes now abound that a trade agreement can be reached in the not-too-distant future, and that Chinese buyers will soon return to the American soybean market.
Whether those hopes are well-founded is another question altogether—especially because the trade war has arguably transformed into a much broader “tech war.”
In sum, the above means that American farmers and commodities traders will be monitoring the upcoming meeting between President Trump and President Xi extremely closely at the end of this week.
Traders seeking to learn more about trading agricultural futures (and associated options) should find a recent episode of Market Measures on the tastytrade financial network extremely compelling.
For additional background on agricultural futures, traders can also review this post (Iconic Futures: Wheat vs. Corn), which provides a great overview of the sector.
Sage Anderson is a pseudonym. The contributor has an extensive background trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. If you have any questions about any of the topics covered in this blog post, or any other trading-related subject, email support@luckboxmagazine.com.
