It’s all about Macro this week. The Federal Reserve cut interest rates and there was little movement in Chinese trade negotiations, until Thursday when there was a big movement. We discuss this and more in the August 2nd edition of HPAW.
As the price update graphic above shows, only one of the contracts we follow regularly on this blog ended the week in green. The U.S. Dollar Index rose following the announcement of a quarter percent cut in the interest rate, but lost ground following the announcement of new tariffs on Chinese imports, out Thursday. We explain what that means for agriculture later in this post.
The other contracts we follow were in steep enough decline that you might’ve needed a ‘must be this tall to ride’ clearance. DEC Corn opened Friday pushing 5.0% below its Monday open with SEP KHR Wheat, DEC Cotton, and NOV Soybeans not far behind. There isn’t a cause for panic, a lot of this movement is testing support to end the week and will likely remain range bound until the August 12 Crop Production report which will include a resurvey of acres that should (in theory) provide a better picture of planted acreage in Midwestern states, and therefore, a better overall picture of the corn and soybean outlook.
China
The week in the U.S. – Chinese trade relationship was also a wild ride. Monday Robert Lighthizer and a U.S. trade delegation traveled to China to reopen negotiations with Beijing. When the talks ended prematurely, reports out of China said that the discussions had been ‘pragmatic’ and ‘constructive’. By midday Thursday, President Trump announced a new 10% tariff on a new $300 billion of U.S. goods imported from China.
This new announcement sent stocks running lower, oil on a decline, and in combination with movement trending lower early in the day, KC SEP Wheat, CBOT DEC Corn, ICE DEC Cotton, and CBOT NOV Soybeans closed down on Thursday.
Why does this matter to the agricultural sector?
One of the major talking points for the negotiations this week was supposed to be encouraging the Chinese to make a large good-faith purchase of agricultural goods. A large purchase could help numerous sectors, as China is one of the most important agricultural markets for the U.S. (See our post in ‘It Depends’ on ‘How Do All These Tariffs Actually Work?‘)
In 2018 the U.S. exported $9.2 billion of agricultural goods to China. In 2017 that number was $19.4 billion. At $9.2 billion, the Chinese market is still the 5th largest U.S. destination for agricultural products. Further, in from January to May of 2019, agricultural exports from the U.S. to China totaled only about 70% of the exports during the same period in 2018, which ended the year over $10 billion (over 50.0%) behind 2017. Additional tariffs may help in the long run, but in the short term they could lead to additional retaliatory measures from the Chinese.
Which products have seen the greatest decline in their export share to China since 2017? Exports of livestock and meats were just 26.0% of their 2017 amount in 2018. As for this year oilseeds (soybeans) and their products along with horticultural products, and seeds for production have been hit the hardest compared to 2018.
Macro News
Following their Tuesday-Wednesday meeting this week the Board of Governor’s of the Federal Reserve (the Fed) announced they would cut interest rates by a quarter of 1.0% (25 basis points). The last time the Fed cut rates in this manner was during the middle of the financial collapse in 2008. Why does this matter to a regular person like you and me, or to someone in agriculture? The interest rate set by the Fed is actually the interest rate that banks charge when lending money to other banks, which is then spread across a bank’s customers. So, when the Fed lowers the interest rate that a bank charges another bank for borrowing, the cost of borrowing money goes down to the banks, and in turn the cost of borrowing goes down for all of us borrowing from banks.
Why did the Fed cut the interest rate? Unemployment is at a 50-year historic low and the stock market is moving up, which are both signs that the economy as a whole is relatively healthy. Typically interest rate cuts are associated with poor economic health so why is the Fed using this monetary tool right now? Jerome Powell, the Chairman of the Fed stated that uncertain international economic conditions, lower manufacturing numbers, and the multiple trade disputes led the Fed to this decision. However, the decision was not unanimous as two of the ten Fed officials voted against rate decreases. In his comments, Jerome Powell stated that the move to cut interest rates did not signal an upcoming period of continued cuts, but that this one a one-time mid-cycle move. That comment was met with mixed to negative sentiment that sent the stock market down as much as 300 points before the close.
Why does this matter to the agricultural sector?
First, as I discussed above, a lower interest rate charged to banks means that they in turn are able to charge a lower interest rate to customers, i.e. you and me. For producers and agribusinesses this means that it will be cheaper to borrow money to finance a large purchase like new equipment, investment in a new facility, or a new land purchase.
On the less positive side, the announcement of decreased interest rates sent the dollar sharply up before the market close on Wednesday (red circled bar on U.S. Dollar Index below). The value of the dollar has been climbing steadily through the month of July, and as the dollar is valued higher U.S. exports become more expensive relative to other countries. With grains and soybeans already on unstable footing, the prospect of more lost exports sent their prices tumbling. Midday Thursday, SEP KC Wheat, NOV CBOT Soybeans, and DEC CBOT Corn were all down in the neighborhood of $0.15 to $0.20 cents (some of that movement could also be attributed to the situation with China).
Long term, these interest rate moves will not be felt overnight. It will take time to see if the Fed’s intended goal of avoiding an economic downturn will be met.
In other macro news this week, the U.S. Senate passed a bi-partisan budget deal that the President has previously endorsed and is expected to sign. Long-term this will provide some stability and pushes the possibility of another shutdown beyond the 2020 election.
Important Dates
August 5 – Crop Progress, NASS
August 5-7 – Texas A&M Beef Cattle Short Course, TAMU
August 12 – Crop Production, NASS
August 12 – WASDE, OCE
In the News
BEEF – Better access to the European beef market within sight
Feedstuffs – USMCA hearing features call for action now