Corn Export Demand – Developments

November 14, 2019 in Commodites and Hedging

A notable headwind for U.S. corn prices over the last several weeks has been export demand. We’ve discussed the implications of a weaker Brazilian Real here on our blog, and on social media before – but, with some unexpected political developments in Brazil lately, we thought it would be worth revisiting today.

First, a yearly comparison of Brazilian corn exports per month since 2008. Not only is the seasonal nature of Brazilian corn export activity shown very clearly by this chart, we can also see that this year has been a barn-burner for the Brazilians.

Since export figures for the month of November aren’t complete, we left it a lighter shade of yellow. However, you can already see it right up there with the monthly pace for years like 2009.

What’s been the main reason for such a strong export pace as of late? The weakened Real has continued to make export attractive. The currency, after a period of sub – R$4 trade, rocketed up again last week. This time, it was off of news that the jailed former President, leftist Luiz Inácio Lula da Silva (“Lula”), was to be released from custody. A threat to President Jair Bolsonaro’s pro-market right-wing government, Lula’s release was a cause for a break above R$4, where the currency has remained since (as of this writing).

So, a weaker Real has been a damper on export demand. We’ll see if any major increases in corn export sales occurred this week tomorrow morning, but the numbers continue to show relative weakness in American corn prices to other major exporters:

 

Whirlwind Week in Trade: Timeline of Negotiations Between U.S. and China

May 1, 2019 in Commodites and Hedging

Those following trade negotiations between Beijing and Washington this week would be excused for losing track of what was going on somewhere along the way. While concerns over the U.S.-Chinese trade deficit had been a focal point in President Trump’s campaigning and policy making since he entered politics, the events of the last few weeks came as a shock to many; it seemed for a while like a major new headline on the talks was coming out every minute. Commodity markets, consequently, were on edge this week as the talks were underway.

While this whirlwind week for commodities is finally coming to an end as we come into Memorial Day weekend, talks are ongoing, and it doesn’t appear much of substance has been officially hammered out by either side. What we do know: there is no trade war (yet), nothing appears to have slowed down the young commodity bull (yet), and we will have to wait and see about the risk of further tariffs spoiling the markets’ mood.

The recent discussions between Beijing and Washington over tariffs had been preceded by months of poor trade relations on both sides of the Pacific.  The Trump administration had previously imposed a wide assortment of tariffs on a variety of Chinese products; this led to Beijing, among other things, stopping purchases of U.S. soybeans in early May.

As news over the cancelled United States/North Korea summit in Singapore have snapped back to the top of the headlines, let’s take a moment to give a quick rundown of the headlines regarding the last month of negotiations between Washington and Beijing, particularly as they relate to commodity markets:

May 10, 2018: “China’s ZTE may be first major casualty of trade war with US” (The Guardian)
After the Trump administration forbade U.S. firms from dealing with Chinese smartphone giant ZTE, the company was forced to suspend major business activities due to an inability to source materials from the United States.

May 18, 2018: “China Said to Offer President Trump a $200 Billion Cut in U.S. Trade Deficit” (Fortune)
One of President Trump’s main campaign promises was to reduce the trade deficit with countries like China. Media reports on the 18th widely reported that both parties had come to agree to a reduction of the U.S./Chinese trade deficit – and, at $200B, it was an eye-popping number. However…

May 18, 2018: “China disputes reports it offered U.S. $200 Billion trade cut” (MarketWatch)
… the reports were flatly denied by China hours later.

May 20, 2018: “U.S. Suspends Tariffs on China, Stoking Fears of a Loss of Leverage” (New York Times)
On May 20th, agricultural futures markets were up on news that there was a breakthrough: the Trump administration suspended tariffs on China.

May 21, 2018: “‘We’re putting the trade war on hold’: Steve Mnuchin says US has paused China tariffs following Washington meeting” (South China Morning Post)
The next day – another up day for agricultural commodities: the trade war was temporarily called off, according to U.S. Treasury Secretary Steven Mnuchin.

May 21, 2018: President Trump tweets this: trump tweet farmers.PNG

In typical Trump Twitter bravado, the president announced that China would be buying more ag products from the United States. Markets jump once more on the news.

May 23, 2018: “Opinion: My farm crops gained $45K in value since Trump delayed China trade war — but it’s not a done deal” (The Hill)
In an opinion piece for The Hill, Iowa corn farmer Tim Burrack documents the impact the talks had on corn prices, and his perspective on the headlines coming out of Washington.

May 24th, 2018: “The Commodities Benefiting From China Trade Truce” (Video) (Bloomberg)

May 25th, 2018: “The weird zigzags of a ship trying to navigate the U.S.-China trade war” (CBC)
One of the most interesting looks at the impact trade talks have had on global markets: how the headlines impacted the course of the RB Eden, a ship transporting sorghum from Corpus Christi, Texas, to Shanghai. The Eden made it by the Cape of Good Hope around South Africa, before charting a course for Spain on fears of new sorghum tariffs from China, followed by another about-face just south of Cartagena to Singapore on news of thawing relations between Beijing and Washington.

 

It’s a lot to follow, and it isn’t over yet: CNBC is reporting this morning that Trump could be taking a “harder line on trade” with Beijing now that the summit with Kim Jong Un is cancelled. Stay on top of trade news by following @packcreekcap on Twitter, and stay tuned for more updates on this ongoing situation.

Should You Be Worried About the Strong U.S. Dollar?

April 1, 2019 in Commodites and Hedging

While talks of a trade war with China, the U.S.’s NAFTA partners, and the European Union have dominated headlines related to commodities markets over the last several weeks, less attention has been paid to the strength of the U.S. dollar and the impact that has on the attractiveness of American products in global markets.

Compared to other major currencies worldwide, the U.S. dollar has been getting stronger in recent months. This is a result of, among other things, tightening monetary policy from the Federal Reserve in response to concerns about inflation and the strength of the U.S. economy.

While the DXY measures the dollar’s strength compared to major currencies like the Yen and the Euro (which has been flagging in recent weeks due to political concerns out of Italy), economist Erik Norland of the Chicago Mercantile Exchange raises key concerns about the strong U.S. dollar compared to currencies in emerging markets in an article published yesterday on the CME’s website.

Major wheat, corn, and soybean producing-nations like Brazil, Argentina, and Russia have seen their currencies, relative to the dollar, decline in value in recent months. Products for export markets do better when the currency they are traded in is weaker, and the article does a great job showing the impact on commodity prices that result from a weak Argentinian Peso, Brazilian Real, and Russian Ruble.

 

Argentinian Peso: The Argentinian Peso has been performing poorly in recent months, amid high inflation and concerns over public debt in the country. The country is moving to secure a new loan from the IMF to ensure that the country doesn’t spiral into recession.
Why it matters: Although soybean production has been hampered by drought in the country, a strong harvest in the country could make beans more attractive to buyers internationally due to the weakness of the Argentine Peso.

Brazilian Real: Latin America’s largest economy and agricultural powerhouse has been roiled by weeks of strikes in the trucking and oil industries. Compounding economic concerns in the country has been a weak real, which has declined 15% compared to the USD since January 23rd.
Why it matters: Brazil is a major producer of sugarcane, coffee, corn, and cattle, and as these strikes let up, prices in commodities like sugar and beans could decline once more as exports resume. Combined with a weak currency, this could mean lower prices for these commodities.

corn soy brlusd

(from CME article, Bloomberg)

Russian Ruble: Like the Real and the Peso, another emerging market currency that has performed poorly against the USD is the Russian Ruble. The currency is down 10% relative to the dollar since January.
Why it matters: Russia is a major wheat exporter, and a weaker ruble makes Russian grains more attractive on the international market. Traditionally, a weaker ruble has been correlated with cheaper wheat:

wheat rubusd

(from CME article, Bloomberg)

In addition to the impact of currency risk on commodity prices, Erik Norland’s article for CME does an excellent job explaining how these trends may be a bellwether for underlying issues in emerging market economies, and the impact that can have on U.S. farmers. Stay on top of commodity news by following @packcreekcap on Twitter, and stay tuned for more updates from Pack Creek Capital on currencies, commodities, and risk management. #hedgebetter

The full article from the CME can be read here:
http://www.cmegroup.com/education/featured-reports/should-us-farmers-fret-over-falling-ag-currencies-.html