The Impact of U.S.-China Trade Conflict on U.S. Corn Prices
Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension
May 17, 2019
Estimates of the impact of U.S.-China trade conflicts from outside University sources range from $0.13-21 per bushel on the high side to $0.08 per bushel. An analysis by Kansas State University Ag Economist Daniel O’Brien based on an analysis of seasonal price patterns estimates that average monthly impact from January through – mid May 2019 averaged $0.20 per bushel per month.
Underlying CFTC position of traders data confirms the record “bearish” short sale aggregate position of Managed Money (Spec) traders that began in January 2019 and trended to record bearish levels in April.
That market prospects for U.S. corn declined during the January – early May period is in evidence from the USDA World Agricultural Supply and Demand Estimates (WASDE) reports during this time. The USDA increased its projected U.S. corn ending stocks-to-use from 11.85% in January to 14.45% in May 2019 for the “current crop” 2018/19 marketing year for U.S. corn. During that time the only changes affecting U.S. corn supply-demand balances were adjustments on the usage side – with market expectations for U.S. corn use declining. The U.S. corn projected season average price declined $0.10 per bushel from $3.60 in February down to $3.50 per bushel in the May WASDE report.
Crop revenue insurance coverage levels are an additional important factor to consider in assessing the impact of low U.S. corn futures prices during the January through early May 2019 period. The planning price for corn crop revenue insurance in year 2019 in Kansas was determined by taking the average of DEC 2019 Corn futures during the month of February 2019. The calculated corn planning price for crop revenue insurance in Kansas for conventional (non-high amylose) corn was $4.00 per bushel.
To the degree that U.S.-China trade conflicts may have led to lower DEC 2019 corn futures prices during the February period, then Kansas and U.S. corn producers’ 2019 crop revenue insurance planning prices and revenue coverage are lower than would have occurred otherwise. In a year with significant 2019 crop production risk to date, negative effects on U.S. corn producers’ crop insurance revenue coverage levels are likely to be a critically important factor.
Since December 2018, U.S. corn prices have been moving in a pattern contrary to normal seasonal price pattern found in Kansas, with essentially no seasonal price increases. During the January 2019 through projected estimated May 2019 period, on a monthly basis U.S. corn prices were from $0.07 to as much as $0.34 / bushel under the levels they would have been if normal seasonal average price patterns prevailed that we have seen historically in Kansas corn markets.
The main idea of this article is that market perceptions about the progress of U.S.-China trade negotiations or lack thereof seem to have had a negative effect on U.S. corn markets from January through mid-May 2019 – at least until U.S. corn planting concerns began to predominate.
Following is a timeline since June 2018 of a U.S-China trade conflict actions and reactions, quoted from a Reuters article on May 8th, titled “Timeline: Key dates in the U.S.-China trade war”,
July 10, 2018 – S&P 500: +0.35% , United States unveils plans for 10% tariffs on $200 billion of Chinese imports.
Aug. 1, 2018 – S&P 500: -0.10% , Trump orders USTR to increase the tariffs on $200 billion of Chinese imports to 25% from the originally proposed 10%.
Aug. 7, 2018 – S&P 500: +0.28% , United States releases the list of $16 billion of Chinese goods to be subject to 25% tariffs. China retaliates with 25% duties on $16 billion of U.S. goods.
Aug. 23, 2018 – S&P 500: -0.17% , Tariffs on goods appearing on the Aug. 7 lists from both United States and China take effect.
Sept. 7, 2018 – S&P 500: -0.22% , Trump threatens tariffs on $267 billion more of Chinese imports.
Sept. 24, 2018 – S&P 500: -0.35% , U.S. implements 10% tariffs on $200 billion of Chinese imports. The administration says the rate will increase to 25% on Jan. 1, 2019. China answers with duties of its own on $60 billion of U.S. goods.
Dec. 1, 2018 – S&P 500: +1.09% (Monday, Dec. 3) , U.S. & China agree on a 90-day halt to new tariffs. Trump agrees to put off the Jan. 1 scheduled increase on tariffs on $200 billion of Chinese goods until early March while talks between the two countries take place. China agrees to buy a “very substantial” amount of U.S. products.
Feb. 24, 2019 – S&P 500: +0.12% (Monday, Feb 25) , Trump extends the March 1 deadline, leaving the tariffs on $200 billion of Chinese goods at 10% on an open-ended basis.
May 5, 2019 – S&P 500: -0.45% (Monday, May 6) , Trump tweets that he intends to raise the tariffs rate on $200 billion of Chinese goods to 25% on May 10.
May 8, 2019 – S&P 500: -0.16%
From this it seems that the DEC-JAN period started off quite positive for the U.S.-China trade negotiations, with a temporary 90 day halt of tariffs. Then by the time we get to late February, there is a negative announcement in the market – apparently being interpreted by corn market participants that limited positive progress had been made in the negotiations.
Flat vs Seasonal Prices in the “Current Crop” 2018/19 Marketing Year
If monthly differentials are averaged across the December 2018 through projected May 2019 period, the average monthly price difference between a regular seasonal pattern of U.S. corn prices and what occurred is estimated to be $0.20 per bushel per month based on cash and futures prices available through May 16, 2019. If the next step is taken to weight these prices by USDA estimates of monthly U.S. percent of cash corn sales, then the average monthly U.S. corn price difference is scaled down to $0.07 per bushel per month. Which approach to take – weighting by average monthly sales percentages or not, is a matter of debate.
Figures 1abc and Figures 2a-b illustrate this pattern in futures and cash corn prices. Figures 2a and 2b especially and Table 1a show specific details of how during January through mid-May 2019 U.S. cash corn prices have been less than would be occur should average seasonal price patterns occur based on historic seasonal corn price patterns in Kansas.
“Bearish” Corn Market Impact Shown in CFTC Commitment of Traders Data
The bearish tone of the U.S. corn market during the January to mid-May 2019 period is well documented, as shown by the Commodity Futures Trading Commission (CFTC) commitment of traders data in Figures 3a-d. Note especially the record bearish or “sell” position of Managed Money Traders as shown in Figures 3a and 3d. The implication is that grain market speculative traders held record bearish positions during parts of January to mid-May 2019.
The CFTC data for the aggregate trading positions of Managed Money Traders (Specs) or MMT-Specs shows something of the “effect” of a change in market sentiments about a positive resolution to the U.S.-China Trade conflict beginning to occur during January 2019 and continuing through mid-May 2019.
The CFTC Commitment of Traders data indicate that December 2018 was a time of relative optimism for MMT-Specs, as their long positions for the weeks ending 12/2-12/31 were net long by a range of 200-246 million bushels.
Progressing forward, January 2019 showed MMT-Specs week ending positions ranging from 246 mb long on 1/8/2019 to 49 mb short on 1/29/2019.
In February 2019, short positions of MMT-Specs grew from 33 mb short on 2/5/2019 to 590 mb short on 2/26/2019.
In March 2019 the trend to short positions for MMT-Specs accelerated, from 964 mb on 3/5/2019 to a range of 1.092 – 1.415 billion bushels the rest of the month.
Then in April 2019 new records were set for short positions for Corn futures, with a range of 1.319 bb to 1.721 bb for the month, with the record large net short position of 1.721 bb set for the week ending 4/23/2019.
For the week ending May 7, 2019 net short positions for corn futures traders were 1.480 bb. Since then, planting concerns have taken over and MMT-Specs have been moving away from their short positions and rebalancing toward the long side.
This CFTC commitment of traders information indicates that corn market Managed Money (Spec) traders’ sentiments turned or transitioned to being decidedly bearish as time moved from the beginning the December 2018 through January and February 2019. And that the bearish trend continued on to record short or “bearish” levels in April 2019 and early May 2019.
The implication here is that the lack of success in U.S.-China trade negotiations have been a primary causal factor in that occurring. The success of the 2019 Brazilian 2nd corn crop also contributed – likely in a sort of “piling on” negative, confirming manner.
“Direct” Impact on Soybeans Effect Expected Corn Market Supply-Demand & Prices
The primary news affecting grain markets during that period was the ongoing status of U.S.-China trade negotiations. While U.S. corn exports to China have not been a main driver in U.S. grain markets and trader sentiments, sharp reductions in U.S. soybean exports to China as a result of these trade tensions had increased the likelihood of reductions in U.S. soybean planted acreage in 2019, and compensatory increases in U.S. corn acreage.
This is consistent with the USDA’s analysis at the 2019 Agricultural Outlook Forum in Arlington, VA in February 2019. The direct effects on the U.S. soybean market from reduced U.S. soybean exports to China resulted in strong negative indirect secondary impacts on the U.S. corn market, as the USDA and the grain trade expected U.S. corn acreage and production to increase – with prices moving sharply lower for U.S. corn in fall 2019. And that sentiment has held sway among the corn trade until recently in mid-May 2019 when 2019 U.S. corn planting problems became serious enough to cause corn futures prices to begin trending higher.
Evidence from USDA WASDE Report Projections
Also, it is noteworthy that in its World Agricultural Supply and Demand Estimate (WASDE) reports, since November-January 2019 the USDA has lowered its forecast of U.S. Corn season average prices by $0.10 per bushel from $5.60 to $5.50. Note that this is calculated as a season average price “weighted by % monthly sales” basis by the percent of annual grain marketings projected for all 12 months of the “current crop” 2018/19 marketing year – starting September 2018 and lasting through August 2019. So, the USDA’s price projection for “current crop” MY 2018/19 of $5.50 per bushel relies in large part on the accuracy of the USDA’s estimates of past monthly weightings of sales.
If in this marketing year, U.S. farmers have delayed sales during the harvest period of September-November in greater proportion than normal until later (say during December – April). IF that occurred, THEN the estimated monthly percent of marketings used by the USDA’s calculation method would underestimate the impact on U.S. corn producers of the flat or non-seasonal price action that occurred during the January through mid-May 2019 period.
Impact on Crop Revenue Insurance Planning Prices from February 2019
An important factor to consider for the sake of U.S. corn producer’s risk management purposes is how the corn futures market’s bearish reaction U.S.-China trade issues potentially affected crop revenue insurance payments for the 2019 crop. Revenue insurance planning prices for 2019 crops are calculated by taking the average of daily closes for DEC 2019 corn futures during the month of February 2019. Therefore, to the degree that there was a negative effect on DEC 2019 Corn futures from U.S.-China trade negotiations, then planning prices for revenue-based crop insurance coverage for all U.S. corn producers will have been diminished – since DEC 2019 Corn futures prices were negatively affected by U.S.-China trade conflicts during February 2019.
Evidence from Other University Sources
KSU Agricultural Economist Nathen Hendricks cites other analyses that are for the most part consistent with these findings. Hendricks cites the following studies and results:
- Researchers at Iowa State University estimate that corn prices decreased by 4-6% or $0.13-$21/bushel as a result of the U.S.-China trade conflict. See p. 8 of their study: https://www.card.iastate.edu/products/publications/pdf/18pb25.pdf . They use a partial equilibrium model that essentially has supply and demand curves to simulate the impact of the tariffs.
- Researchers at the University of Illinois estimate that corn prices decreased by $0.08/bushel in 2018 due to the U.S.-China trade conflict. See table 1 in their study: https://farmdocdaily.illinois.edu/2019/04/the-trade-conflict-impact-on-illinois-agriculture-in-2018.html. They use regression analysis where they effectively compare how much prices dropped from spring to fall 2018 and how much larger the price decrease was than would have been predicted based on the relatively large yield in 2018.
Joe Janzen of Kansas State University has also addressed some of these and other related issues on KSU Agriculture Today radio on Wednesday, May 15th. Janzen discussed the probable impact of another round of trade aid for U.S. farmers. In particular Jaznen examined the probable impact of direct trade mitigation that occurred for farmers through the first round of Market Facilitation Payments (MFP) as a compensation to U.S. farmers for the negative affect of incomes from the U.S.-China trade conflicts.