Stocks drop with fears of China trade retaliation

26.03.2018

Next week's U.S. Department of Agriculture reports on expected spring planted area and quarterly grain stocks are being overshadowed by fears of a trade war with China. Usually, the market is focused solely on weather and forecasting farmers' planting intentions, but President Donald Trump's metals tariffs and recent promises for more in the future are creating fears of retaliation from China. And these fears seem to be well-founded, as China responded this week by placing tariffs on what amounts to $3 billion of U.S. exports.

While many expected a greater response to the Trump announced $60 billion tariffs on Chinese products, this response shows that China is being measured and cautious in its response. The news, analysts and experts continue to debate the potential outcome of escalated trade restrictions, but the stock market response is happening as we speak. The Dow Jones was down big on March 22 (with the S&P 500 and NASDAQ following suit) as traders are worried about long term economic woes that may occur as a result of increasing trade roadblocks.

Additionally, China may choose to target some agriculture products in any future strike back at the U.S. (namely soybeans). Soybeans are the largest agricultural trade item for China, totaling more than $12 billion in 2017. This story will continue to develop, but traders remain uncertain about the future export business with China as well as broader economic issues for the U.S.

Wheat

Wheat markets in the U.S. broke hard this week. Weekend rains provided some relief for parts of the winter wheat crop that has been hit hard by drought the last few months. While parts of western Kansas and Oklahoma remain too dry, good precipitation (a mix of rain and snow totaling over an inch of liquid moisture) helped some areas in Nebraska and eastern Kansas. Additionally, some of the drier parts of the Central Plains should be getting rain in the coming week. Now is the critical time for the winter wheat crop, and though drought conditions remain in several areas, the eventual production of the winter crop is not set.

Spring wheat prices have been pulled lower with the drop for the Kansas City and Chicago contracts. Planting is just around the corner, and many are expecting a slight uptick in area from 2017. Next week's USDA Prospective Plantings Report will give direction heading into the spring.

Durum

Durum markets are unchanged from a week ago. Broader wheat market weakness is keeping a lid on any upside for durum. Many are looking to the USDA's Prospective Plantings Report for an idea of durum production potential in the U.S. Analyst group Informa Economics released their updated forecast for 2018 durum plantings: 2.21 million acres are expected to be planted to durum in the U.S. compared to 2.31 in 2017.

Canola

The canola market continues to track with U.S. soybean oil prices. Canola markets are well supplied, even with strong demand for the product. Planted area in Canada is expected to be a record in 2018, though reports on that will not be released until April.

Soybean oil markets have been flat to lower. U.S. lawmakers may be deciding the changes to the Renewable Fuels Standard as the Trump team is stepping back from the table with oil and corn representatives disputing the biofuels policy. This could delay any significant changes to vegetable oil demand in terms of biofuels production.

Argentina's soybean crop is a mess, with total harvest expectations from the Buenos Aires grains exchange cut to 39.5 million metric tons (from an initial estimate of 55 million metric tons and a more recent estimate of 42 million metric tons). This is the bullish factor that is keeping canola and U.S. soybean markets from falling further.

Peas and lentils

Pulse news has been light. The USDA purchased 8,030 metric tons from U.S. farmers as shipment for food aid. For once, India has stayed out of the news in terms of pea and lentil trade, with no new import restrictions put in place. Traders remain cautious, as additional tariffs could come at any time.

Mustard

There is little excitement for mustard seed markets. Trade remains light ahead of the spring planting season.

Barley

Some late-season freezes in the European Union could limit farmers' ability to complete fieldwork for the spring barley crop. Barley is one of the first crops to be sown each year at the end of winter in Europe, so the weather disruptions could delay eventual harvest.


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