Stock markets tumbled sharply over the last few weeks as traders took profits from the run up earlier this year and positioned themselves for the possibility of weaker economic growth and corporate profits in coming months.
Some market theorists believe that when money comes out of equities it sometimes flows into commodities as investors look for market segments with better prospects for profitability.
If true, that could help the price of agricultural commodities, but there are no guarantees. There are many variables pushing and pulling in various directions and I believe the United States-China tariff war will be the dominant issue in all markets for months to come.
It certainly has played a role in the equity selloff.
By almost every measure, the American economy has been booming and other economies, including Canada and much of Europe, have been doing very well. The long-term recovery from the 2008 market collapse was sent into hyperdrive by U.S. President Donald Trump’s tax cut and regulatory relaxation.
Borrowing is still fairly cheap, oil prices are steady and corporate profits high.
U.S. consumer and business confidence is high and unemployment is exceptionally low.
With agreement on a new North American trade deal, a major uncertainty was eliminated.
Major stock market indexes were reflecting the good times.
In the spring they fell when Trump first started his tariff threats against China, but those fears were calmed through the summer by strong economic and corporate profit growth.
The Dow Jones Industrial Average hit a record high Oct. 3. The Toronto Stock Exchange set a record high in July.
But markets do not go up forever and the latest round of corporate financial reports contain warnings that the tariff war is starting to raise production costs and limit markets.
The tariffs are also slowing China’s economic growth.
Meanwhile, the U.S. Federal Reserve is raising interest rates to tap the brakes on the economy and manage the potential for runaway inflation.
Another factor that could be in traders’ minds is the forthcoming U.S. midterm election. Polls indicate the Democrats might take back the House of Representatives. If they do, it might make it difficult for the administration to move ahead with further tax cuts. As well, it could add further uncertainty to the U.S. political scene, if that is possible, and markets don’t like uncertainty.
Almost no one is forecasting a major near-term economic downturn but many are preparing for less rosy growth.
So as stock markets correct for lower profits ahead, does that mean commodity markets will benefit?
The answer is likely “no” because the tariff battle is slowing China’s economy and its demand for raw materials.
Prices for commodity metals such as copper and aluminum are depressed.
And the tariff fight also weighs heavily on several agricultural markets.
As of Oct. 18, U.S. 2018-19 soybean exports were 6.17 million tonnes, about 3.4 million tonnes behind last year at the same point. Increased sales to other buyers around the world have not made up for a 6.2 million tonne decline in exports to China.
U.S. exports of wheat are also running well behind last year’s pace. Corn exports were booming but failed to meet expectations the past two weeks.
We are just now hitting the usual peak export season for U.S. soybeans as the American harvest heads into the homestretch.
If China continues to resist American beans, that could put further pressure on the oilseed’s futures market, which in turn would weigh on canola.
According to the DimSum.blogspot.com, a blog on Chinese rural policy, China’s state-controlled media continue to run stories quoting crushers saying they intend to not import U.S. soybeans even though their price, even after paying the 25 percent tariff, is cheaper than Brazilian product.
The U.S. Department of Agriculture forecasts its domestic year-end soybean stocks will balloon to 24 million tonnes from about 12 million last year and 8.22 million the year before that.
Canadian farmers can’t escape the down pull. There might yet be bright spots for canola prices: the horrible harvest might have reduced production, China might import more to substitute for soybeans and Australia’s drought will likely push that competitor out of the market.
But that will likely impact basis more than the futures price.
Let’s hope that the U.S. and China can make enough compromises that each can claim victory and end the tariffs.