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Paragon Commentary

Futures File: Soybeans, Oil, US $

Jun 15, 2018

Soybean Market Scorched by Trade Talk

The U.S. soybean crop continues to look exceptional, and there are few weather problems expected that could derail a near-record sized crop. However, dark clouds are forming over the market as trade disputes deepen between the U.S. and our two biggest soybean buyers, Mexico and China.

This week, President Trump announced escalated tariffs against $50 billion in Chinese products, which will likely result in retaliation from China against U.S. soybeans.

Meanwhile, Mexico raised the prospect of tariffs against U.S. farm products like corn and soybeans. This appears to be an intentional political maneuver by Mexico, as their officials have stated that they are directing tariffs against Midwestern farm states, which overwhelmingly supported President Trump in 2016.

While the ultimate outcome of these trade negotiations is unknown, this uncertainty about future demand is wreaking havoc in the grain markets, with July soybeans sinking to a one year low at $9.03 per bushel on Friday morning, while corn was dragged to a five-month low near $3.55 per bushel.

 

Energy Prices Drop

Oil, gasoline, and diesel fuel prices all tumbled ahead of next week’s OPEC meeting, where the oil cartel is expected to raise petroleum production levels. The 14-nation group collectively reduced oil production during the past two years, but appears to be ready to cash in on higher prices by drilling more.

This sent oil prices down by over $2 per barrel on Friday, dragging gasoline and diesel fuel prices to a two-month low.

 

U.S. Dollar in the Green

The greenback is gaining steam, approaching the highest value in over a year. Global investors are showing increasing desire for the dollar as our interest rates rise while other major economies remain stagnant.

U.S. interest rates were raised another 0.25% on Wednesday by the Federal Reserve, reaching 2.0%, up sharply from near-zero rates just two years ago. The Fed expects to raise rates another 0.5% yet this year. Meanwhile, Great Britain, Japan, and the European Union are all keeping rates flat, and the European Central Bank announced on Thursday that rates will likely stay near-zero for another year.

For investors, interest payments act as “rent” on currencies, and the widening gulf between climbing U.S. payments and cut-rate foreign countries is causing investors to flock toward dollars.

For U.S. consumers, this allows us to buy foreign goods at lower cost, while a strong U.S. dollar hurts American exporters who sell grains, livestock, and manufactured products abroad.

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