Rest of the Story: Demand Destruction vs Production Reduction

Jerry Gulke
( Lori Hays )

For months I discussed in the media, including this column, the evolution of the negative connotation that the “irrational exuberance” in soybeans would bring about. This process evolved since in earnest beginning with the daily key reversal down on May 29th after repeated attempts to break out of the sideways trading from April through May.  The sideways trading, buying time and price, came about after the 8-week weather market in Argentina that began with the Jan 12 final USDA S/D Report. Weather markets last typically 6-8 weeks until worst case estimates are worked into the price discovery process. 

By June 1, it became obvious that Brazil was gaining production nearly as fast as Argentina was losing it--then came tariff talk. Discussions are emitting in the media that the tariffs may not have been the cause of the demise of soybean prices.  Last week, Commerce Secretary Wilbur Ross stated that in his meeting with some farm commodity leaders a week prior that they (the leaders) stated that farmers thought speculators had more to do with the price collapse in soybeans than perhaps trade tariffs. To suggest that we are ok blaming someone else and that agriculture has the capability to support such a financial debacle in these times was ill-conceived at best, and sent the wrong signal at worst.  It could have been better stated that the psychology of the tariffs has sucked the net income from the average producer meaning college funding, health care, retirement and the general standard of living has suffered not to mention the ability to make after tax capital equipment payments for land and machinery.  Cash flow has suffered and looks to be more than a short term situation if the tit-for-tat turns in to a longer term cold war of tariffs. 

Furthermore, when Ag Sect Perdue was asked about what the administration was going to do to support agriculture the pat answer was that it was far too soon to discuss details as negotiations were still in process and it would be folly to divulge any details to the media of any such plan.  Furthermore, he stated it was difficult to ascertain just how much to blame on the tariff situation when tariffs hadn’t actually been implemented yet--that starts July 6th. In addition he stated that price is determined by supply and demand and weather and that farmers understood that--prices go up and they go down.  Such rhetoric leads me to no other conclusion other than there isn’t a plan as hope springs eternal that “things” will get resolved soon.   If we believe that the intellectual property rights problem will or can be solved in a matter of 6-8 weeks before we start harvesting another bumper crop, we may be as naïve as those with irrational exuberance thinking that we had China’s back against the wall.

The November soybean chart below tells the “rest of the story” all by itself.  Talk is cheap but it takes real money to support the average farm family.  To be used as a pawn in the trade war is ridiculous.  The drop in the value of the 4 bil-bu soybean crop has dropped about $5 billion.  Price looks relatively cheap now compared to one month ago but the question is, “relative to what”?  Relative to what we knew in January through April or what we know now under a different set of acreage, weather and demand uncertainty.  The question to ask yourself is “What would it take to re-set soybean prices back anywhere near $10 or a more realistic value of $9.67 posted originally on Jan 12th“? The thought that China could use less next year than this year would be a surprise to the market as the market hasn’t yet come to grips with what caused the downdraft in the first place. 

Nov Soybeans - Gulke Group

Corn has been a puzzler to the trade. Since we don’t sell corn to China in any magnitude, a tariff would be rather meaningless for China to implement.  Thus one can only surmise that the market was building in larger acres and another record yield closer to 180 than 170.  The combination of acres/yield threatens to take carryover back to $2.0 bil-bu for 2018/19 and to prices representative of such stocks.  Prices usually go lower and higher than needed to match stocks with value so the current downdraft may exceed expectations before reality is realized.  The December price chart shows how quickly markets pick up on good weather or at least non-threatening weather. Add in threats of retaliation of our traditional corn buyers, and this is what we get. 

Dec Corn - Gulke Group

WHEAT:  SRW Chicago wheat posted the traditional 1-2-3 wave top in seeking new highs and then failed to sustain a close above point (3) fully discounting mounting US yield problems for HRW as well as uncertainty of the actual spring wheat acres and production potential.  Technically wheat looks better than both corn and soybeans but even with a surprising 4 mmt reduction in French wheat, prices reversed today after the knee-jerk up move on Friday looked promising.  The French implication has positive connotations down the road as Europe and the Black Sea Region including Russia may not be able to fulfill export demand and some of that demand may have to come to the US.   However, this is a futuristic view much like the focus that corn has a demand story perhaps in early 2019.  For now the short term is more important than the demand carrots on a stick.

July Wheat - Gulke Group

July 6th  the self-imposed line in the sand owned by this administration that will either accelerate or forestall actions as there is an escape clause that can be used to implement a 30-60 day delay if ‘there is evidence of progress in negotiations  With China now showing resolve in their actions, such progress may be in the eyes of the beholder. It is obvious what the lack of buying can do for a market. 

Bottom line, the focus is to be not in harm’s way should that black swan event occur.  For the most part we have warned of the potential demise of soybeans and warned of drinking the Kool-Aid that I have China up against the wall that they have to buy soybeans from us. That was a half-truth as China may have to buy from the US, but how much and what will be our carryover for 2017/18, then 2018/19 and 2019/20. There seem to be a lot of media advisories in deep trouble—even the buy-a-put-option advice and roll them up cost a lot of money and as I have suggested in years, about the time a put option  would be needed at the top (a month ago) there wasn’t money left in their capital account to buy them.   I’ve been here before and unfortunately nothing seems to have changed in market psychology except for the times,  names and faces.  One doesn’t have to be a marketing expert to capture a profit in bull markets.

Market collapses are more difficult and more important as efficient action prevents operating losses.  Being flexible and performing due-diligence on market outlook can make the difference of being or not being around when the good times roll again.  It is yet to be determined whether the inherent demand destruction of US products is in the making or not.  Production reduction (supply) can even the playing field of course, but we don’t want to go back to that era after spending decades otherwise.  Regardless of how the  “I’ve got your back” strategy plays out it won’t be good if government gets involved again.  In the July 2nd Wall Street Journal there is an interesting chart that shows last quarter’s winners and losers in global stocks, indices and commodities). Live hogs were the biggest winners while soybeans were the biggest losers; go figure!

If markets have you up against a wall or your marketing plan was affected by irrational exuberance, it isn’t too late to learn--perhaps I can help.  Also our Beaver Creek Conference in July where Informa will present their 2018/19 outlook,  Elwyn Taylor updating yield prospects, and experts in the financial sector reviewing our global macro economy under the new tariff trade war that is the cold war of the futures, should have significant importance to our decision making process.  As we can see from the last 30 days, good information is priceless in difficult times.  Anything less isn’t worth the paper it is written on. 

Jerry Gulke  

[email protected] or phone 480-285-4745;   707-365-0601.  

Read more commentary from Jerry by visiting

Columns from last week:

USDA Report Delivers Mixed Results: The Exception is Soybeans

Rest of the Story: A New Cold Tariff-War