Gulke: Media's Attempt to Influence Your Judgement

Before I discuss some basic items about China’s economy versus the U.S. and the rest of the world (ROTWO), we’ll look at today’s USDA report.

Often times it is not so much what a report says, but what it doesn’t say. The report today (April 10) was viewed as rather supportive in that the ending stocks were not reported as high as the average trade guess (as if those traders polled had a lock on intelligence).

The initial response was positive price wise but as often is the case, the close can be as important as the report itself. Below are the basics of the revised supply-and-demand picture for corn and soybeans. Of the extra corn stocks on hand reported on March 29, USDA reconciled the balance sheet by lowering feed usage by 50 million bu., FSI by 5 million bu. and then raised the carryover 55 million bu.

By not raising exports, USDA is saying it isn’t ready to agree with a significant enough cut in expected South American corn production, which would imply we are going to get more business yet this marketing year. Time is running out to do so, and we may very well be saddled with 2.182 billion bu. to carry-in to next year. We will find out how that extrapolates to the future 2018/19 marketing year in USDA’s May updated report. Most certainly they will have a lot more info out of North and South America to make a better assessment.

 

 

Soybeans were touted as the real shocker, with the surprise that the extra stocks found May 29 actually were translated into more crush by 10 million bu., and seed use lowered 3 million bu., while leaving exports unchanged from March. This resulted in an actual decrease of 5 million bu. to 550, while the trade had expected an increase in ending stocks. So, the guesses by traders were just that, guesses. 

Soybeans actually closed 14 cents off its post-report highs—a disappointment perhaps—but still higher for the day. The implications are that like its corn assessment, USDA really needs more time and info to suggest U.S. will sell with a vengeance to the non-Chinese world in spite of the lowering of the Argentine bean crop 7 mmt.  So while USDA is agreeing that the crop in Argentina is poor, it is not yet willing to admit that significant enough demand is going to come to the U.S. to get our carryover down to 400-450 as some bean bulls expect; at least not yet!

The takeaway for the report is that it could have been worse. But the disappointment has to be that USDA isn’t as anxious to say the U.S. will be a winner in the Argentina situation, just yet. That’s in spite of news this morning that Argentina bought 125,000 tonnes of soybeans for 2018/19 delivery. This also suggests in the next marketing year we might see fireworks.

The purchase also suggests that in order to fill their demand for meal, Argentina would rather buy the beans and crush them at home. That would add value (jobs) and not relinquish/lose meal demand to the U.S.  U.S. July soymeal prices were down nearly $6 reflecting that notion.    

What Else You Should Be Watching: Tariff Issues

The media is trying is trying its best to paint a bleak picture of the tariff issue and the negative ramifications they imply for the U.S. Notwithstanding the fact that the past two or three presidents have tried to rectify a problem that goes back to about 2001 when China was allowed into the WTO (World Trade Organization). They were allowed in under some of the same situations and obligations that other countries were under, like South Korea and Japan.  However South Korea and Japan were much smaller economies compared to the rest of the world. 

For example, South Korea had about 30 million people and a GDP of $41 billion. Japan has 90 million people and an $800 billion economy. China had 1.3 billion people and a $2.4 trillion economy.

The advantage China had was that it was viewed as a “developing nation,” however it has had a seismic effect on competing economies. It is said that more than ¼ of the manufacturing jobs lost in the U.S. from 1990 to 2017 were due to Chinese imports. China has not lived up to the WTO rules and has blocked foreign countries of ownership using protectionism as an excuse as well as its “developing nation status.”

Cyber events and the pseudo stealing directly or indirectly under pressure of intellectual property rights are hard to measure but likely put them well ahead of Russia as a culprit or taking unfair advantage. The U.S. has tried to get foreign partners to help put the pressure on China in the past, but with limited success. So, the unfair practices and widening trade deficit has boiled to a point where finally something seems to be taking place. One can argue the U.S. and other free nations benefitted from cheaper goods (ex: TVs, clothes, trinkets) but apparently the losses of jobs exceed the tangible benefits.

The two charts below may give you a better perspective to the size of China’s economy. CNBC and others will tout China as the “second largest economy.” While true, it is not as significant when measured against the U.S., EU, India and Canada combined. Putting into perspective the situation of making for a more level playing field, now that China’s economy has grown significantly, it appears there is justification for a war of tariff words or threats to bring all parties to the table. This morning’s announcement that China is willing to allow a higher percentage of foreign ownership of its companies, combined with a willingness to lower tariffs of imported U.S. autos are two measure coming to the forefront that 48 hours ago. These decisions were thought to be months away. All things considered, while my statement earlier may be a little out-of-the-box, I do thing that China has an inkling that they need the non-Chinese world more than we need China. Perhaps somewhere in the middles is that middle ground that we seek in “making a deal?”