For my more avid readers, you may be coming into this week excited for the soybean supply and demand deep dive I was going to take, and while I hate to break it to the five or six of you, we’re going to go ahead and push that back to next week.
This week I want to touch on something that I’ve found has proven to be frustrating for a lot of farmers and traders out there, especially for those who have looked at some of the fundamental developments in corn and seen some reasonably supportive developments taking place in soybeans and wheat. The recent stretch of rangebound trade and the constant desire seen in these markets to test support almost weekly doesn’t seem to fit when you look at export sales pace, domestic demand growth around the world, and the strength in cash, but at the same time it feels difficult to really push the topside of the range with so many unknowns.
I always tell my growers when we are in a bear market, uncertainty is almost always bearish. You don’t buy what you don’t know, and that sentiment is obvious in the lack of follow through we have seen in these markets any time we are near the higher side of the range and both the farmer and speculator selling begins to ramp up.
When looking at the overall fundamentals in these markets, it is still very possible we could see a bullish surprise, with a reduction in production still on the table, as well as possible increases in demand for corn, soybeans and wheat. Of course, the near perfect weather outlook in South America makes it difficult to argue we need to press beans higher or well beyond their recent range. However, it is still difficult to say with confidence where price needs to head or what happens over the next several months, as global demand growth feels difficult to quantify.
It feels easier to argue the more bullish points that accompany feed grains this year, especially with corn and wheat exports up handsomely year over year, and solid demand seen for feed and industrial uses as well. However, corn and wheat are the prime example of the narrative this market is being plagued by, so this week I want to discuss the “Yeah, but” problem capping the moves higher in these markets and what it might take to break us out of the doldrums, if we can escape.
What Is A “Yeah, But” Problem?
A “Yeah, but” problem tends to be a more bearish phenomenon that influences the price direction in grains and is something that has become a more apparent issue since Trump’s reelection at the start of November, though it was seen influencing price throughout the election.
The “Yeah, but” issue is of course Trump’s trade and economic policies and what they mean for demand, with the overwhelming view driven by the media and many talking heads that Trump is going to destroy trade. How you know you’re dealing with a “Yeah, but” problem is relatively clear, and that is whenever something happens that could be considered even remotely bullish, like corn export sales that are running 30% ahead of a year ago with the USDA expecting minimal adjustments, or that soybeans see a marketing year export sales high at the end of November and after Trump’s win and the analyst response is “Yeah, but [insert generic statement about the destruction of demand driven by Trump’s trade practices that we will see after his inauguration].”
Don’t get me wrong, if Trump were to blindly unleash blanket tariffs on our top trade partners without warning or any type of negotiation on day one, all bets are off, and it would prove difficult to see how we wouldn’t lose market share. However, I feel like we aren’t taking into consideration the ways Trump has shown he prefers to negotiate —big threats, followed by talking and then much smaller threats while negotiators continue to (hopefully) work towards a resolution he or his team feel is worthy.
Yeah, But Exports
The “yeah, but” sentiment is most obvious when looking at exports. Many want to argue the extraordinary sales pace seen in corn is nothing more than traders working to get ownership ahead of Trump’s tariffs. Mexico is the prime example of this sentiment, as their early season purchase pace was extremely aggressive, and thoughts are that Trump and Mexican President Sheinbaum may find it difficult to compromise considering they come from nearly the opposite end of the spectrum when it comes to political leanings.
However, when looking at Mexico’s purchases of corn, while they are more aggressive than a year ago, they are not ridiculously out of line with what one would expect to see, with the overall purchase pace up 1.3 mmt or 51 million bushels from last year. This helps to cover a small portion of the 7 mmt or 276 million bushel jump in early season exports seen so far in corn, with the other increases relatively minor outside of purchases by Unknown.
It is the purchases by unknown that give me pause, as not having a clear destination named at the time of sale does make it feel more ripe for cancellation. Unknown’s corn buying is up 4.5 mmt year over year or accounting for well over half of the yearly increases. Traders remain adamant Unknown is not China in corn, though it is seen as nearly guaranteed China is Unknown when talking about soybeans for many of those same traders.
Speaking of beans, thoughts we would see China shut off purchases after Trump’s victory have been replaced by the idea that they are front running his inauguration after the recent buying pace by both China and Unknown has jumped. After what was an incredibly slow start to the export season, the selling pace has picked up in a big way, moving ahead of the pace needed to meet USDA projections, and above last year at this time. While Chinese purchases remain lower than that of a year ago, we are seeing decent interest from others, with the EU and other Asian destinations both up decently year over year. The threat of Trump’s tariffs looms large in soybeans, but so far China has not shut off purchases in a punitive manner, like many had thought we would see just ahead of and shortly after the election.
Wheat exports are decent as well, and like the others, the gains in demand are seen as relatively spread out. Overall wheat sales for the start of the year are up 2.5 mmt or just over 90 million bushels, with the USDA expecting full season exports to be 118 million bushels higher.
I will continue to argue that the nice start to exports is being driven more by economics and the availability of high quality supply out of the US more than anything, with the uncertainty of what happens next more likely to keep cash traders sidelined in foreign countries, not aggressively buying product if they don’t need it.
Biofuels Yeah, But
The negative market narrative is seen influencing the mindset around biofuel demand as well, with many in full-on prove it mode as opposed to preparing for possible shifts in demand and eventual supply availability.
The push by Indonesia’s government to implement B40 was rumored to have been abandoned more than once over the past few months, with officials again reiterating their pledge last week to up their blend rates starting January 1st. Biofuel expansion elsewhere is met with a similar response, with many scoffing at India’s push for increased ethanol blends. Demand expansion in places like Japan and Brazil is supportive to the long term price outlook in grains as well but with so many different moving pieces in so many different places, it feels difficult to quantify as it is a bit of a moving target.
I get the worry that comes with demand dictated by government policies but feel it is important to point out that the easiest way for some of these countries to cut emissions and work to meet their climate goals/pledges is through biofuels, even if that means the importation of supplies. In addition, the biofuel industry that has been built over the past few years is nothing like the biofuel industry we saw at the start of Trump’s first administration. Many of these plants have well connected investors with an energy background, who aren’t likely to just roll over if support to the industry is threatened.
What Does It Mean?
Like any other market narrative or trade mindset, there is nothing but the passing of time that will allow for a shift. Unfortunately, until a shift takes place, or we see something unexpected, we may find ourselves in an incredibly frustrating rangebound trade. To me the only thing that fixes the negative sentiment and the “Yeah, but” problem we are faced with is the shipping of the sales on the books, a continued decent purchase pace for corn, soybeans and wheat, and reality. Meaning that until we are in the thick of it with Trump and have a better understanding of how other leaders will react to his approach, those saying “yeah, but” aren’t wrong.
I will say, to see Canada’s Trudeau make the trip to Mar-A-Lago over the weekend to have what Trump described as a productive meeting was a positive sign. Canadian officials now say they will work to strengthen their border and to slow the flow of illegal immigration into their country. It appears as though Mexico’s leadership is open to talking as well, with a compromise more likely if Trump and Trudeau are able to work with one another to bring Mexico to the table.
Phase One, whether the administration tries to push for Chinese compliance and whether they do or they don’t cooperate will likely have the biggest influence on beans—however clarity there will likely remain lacking for quite some time as we await a new record crop out of Brazil.
In the end, the unknowns in this market will likely prove a heavy weight for quite some time while we work to determine who is right and who is wrong in this market both from a speculative standpoint and on the physical side as we have seen both buyers and sellers sitting on their hands for the most part recently.
As always, don’t hesitate to reach out with any questions. Have a great week!
