Regardless of which side of the aisle you find yourself, the markets have had a great many new considerations to work through in recent months. Following the recent inauguration of our newest U.S. President, it quickly became clear that the new administration would create far more risk and uncertainty than the South American weather that stirred the pot in early January.
A number of President Trump’s early actions will have a direct impact on agricultural production, trade, and prices. They include:
Withdrawal from Trans-Pacific Partnership (TPP) Trade Agreement. This will help Brazil and Argentina compete with the U.S. for Asian business. It is important to remember though, that this agreement was not with China.
Labeling China as a currency manipulator or imposing import taxes. If we start a trade war with China, soybeans will be one of their primary targets for retaliation. However, we do not eliminate Chinese interest in US Soybeans, but may change the way they view access to the US vs our competitors (Brazil, Argentina, etc)
Building a wall and/or imposing a 20% tax on imports from Mexico. They will surpass Japan next year as the world’s largest importer of corn. If they reciprocate and tax our exports to them, South American corn will immediately become their cheapest source of supply.
A freeze on new regulations at the EPA has delayed the increased RFS mandate for 2017. Also at the EPA, any roll back in Waters of the U.S. (WOTUS) regulations would give farmers greater flexibility in land and chemical use.
What all of those items have in common is that they would all be bearish on U.S. grain prices. Often in market conversations, we refer to the added concern that arises from a particular issue as "risk premium". In most cases, that risk premium will elevate prices. In the case of these issues, we need to evaluate the risk "discount" that may develop in the months that lie ahead. Some would suggest that it already exists. However, we have observed domestically that as prices reach the high end of the range that we elaborated on recently, basis widens to reflect softer buyer interest.
To that end, the "discount" has not likely been applied lest we would see greater pressure on prices coupled with stronger basis levels. When identifying the risk from these issues, the big question becomes “How far below fair value should the market price itself in order to reflect the probability that one or more of these changes occur?” Given that we are headed into the planting season and the market also appreciates the need for acres, we cannot expect this gap to grow all too wide in the weeks ahead. However, as seed joins the soil, these risks become greater.
For this reason, we still encourage sales on rallies coupled with put option strategies to manage unsold bushels. Simple put options are easy to employ. See our table for current pricing. If you would like to explore other strategies, feel free to give us a call to walk through alternatives that may better fit your situation.608-960-4771