The World on April 4

By Todd Davis, Extension Grain Marketing Specialist

“May you live in interesting times” is attributed to a Chinese curse. The times are indeed interesting in the grain markets, as China has announced proposed tariffs on corn and corn products; soybeans and soy products; and wheat. China has not announced when these tariffs will be imposed; however, the news rocked the commodity markets lower. By the time you read this article, the markets may have shaken off the initial bearish response. Regardless, this is an excellent opportunity to reflect on profit potential and what price risk opportunities look like for corn, soybeans, and wheat.

A Western Kentucky grain farmer’s expectation on 2018 crop profitability is substantially different on April 4 as compared to that on April 3. The soybean market had the strongest negative reaction to the tariff announcement. The futures market believed that China would exclude soybeans from retaliatory tariffs because that country needs U.S. soybeans to meet demand. About 30% of China’s total soybean use in 2017 was from soybeans produced in the United States. The announcement of possible tariffs had the greatest impact on soybeans by reducing Western Kentucky cash forward contract bids by $0.24 per bushel in one day. Corn forward contract bids were trimmed by $0.05 per bushel due to the tariff news. Wheat was not affected because the U.S. does not have a significant wheat trade with China.

The projected profitability on April 3 had the wheat / double-crop soybeans (WDCB) crop enterprise with the largest budgeted return over total budgeted costs of +$14 per acre. Notice that the cost of land, even owned land, is charged $175 per acre in rent. The budgets include overhead expense and family living expense of $40 per acre. The combination of good yields and better than expected prices made the WDCB enterprise the most profitable enterprise. Full season soybeans were budgeted to have -$57/acre return over total costs with corn budgeted at a -$127 per acre return over total costs.

The announcement of proposed tariffs reduced the WDCB enterprise profitability by $11 per acre. Full season soybean’s profitability was reduced by $13/acre, and corn’s profitability was reduced by $9/acre. Again, this is due to the market’s reaction to possible tariffs. Expectations are for even lower corn and soybean prices if China implements tariffs on corn and soybean products.

I hope that managers had taken advantage of corn and soybean futures prices as both markets had a February rally and provided an opportunity to remove some price risk. Managers should continue to monitor the futures market to continue to remove price risk when opportunities occur. Corn, soybeans, and wheat suffer from ample stocks that will cap price potential. Anything that limits production will contribute to higher prices. Anything that reduces demand (like a tariff) will push prices lower.