In mid-February, the corn (ZCK25) and wheat (MWK25) futures markets were enjoying bullish price uptrends and scored multi-month highs. Soybeans (JSK25) future prices were trending up in early February and hit a four-month high. And then in late February, the proverbial bottoms fell out of the grain futures markets. Prices in all three markets are now trending down on the daily charts. What happened? And how long will the price pressure last?
U.S. Tariff Threats Are Finally Biting the Grain Markets
Since President Donald Trump took office in late January, he has made several proclamations that he would impose tariffs on major U.S. trading partners, including Mexico, Canada, China and the European Union. However, Trump at the same time has intimated he would rather negotiate and make trade deals with these countries.
Grain and livestock futures traders had begun to reckon that the Trump administration was merely threatening hardline trade sanctions and then backing off when the threatened nations offered conciliatory moves toward the U.S. Then last week, Trump said that in early March the U.S. would go ahead with imposing new tariffs on Mexico and Canada, and would also set new duties on China’s exports to the U.S.
Grain traders began to realize that threatened U.S. tariffs would soon become reality. China, a major importer of U.S. agricultural products, said it would retaliate. What that means to grain traders is that reduced China demand for U.S. grains was a real possibility. History also shows that tariffs tend to slow down not only global commerce but also can impede global economic growth. That’s a bearish scenario for U.S. grain futures prices.
Increased Risk Aversion in the General Marketplace
The Trump tariff threats and recent reports showing declining U.S. consumer confidence sent the U.S. stock market tumbling to multi-week lows last week. The “risk-off” attitudes in the general marketplace have spooked grain traders and sent many of the bulls to the sidelines. Continued weakness in the U.S. stock market would also be an ominous development for grain markets, which are considered risk assets.
Crude Oil is the Leader of the Raw Commodity Sector, and It’s Trending Down
Veteran commodity market traders know that as go crude oil prices, so likely go other commodity futures market prices. Crude oil is the leader of the raw commodity sector. Nymex futures prices are presently trending down and last week hit a nine-week low.
Lower oil prices are a bearish “outside market” force presently working against the grain market bulls. Crude oil prices will very likely have to stabilize and even start to trend up before the grain markets can begin to do the same.
South American Weather Leans Slightly Price-Bearish for Soybeans, Corn
Weather patterns in most South American corn and soybean production areas had been either too dry or too wet for much of the growing seasons. That had been a bullish element for corn and soybean futures markets.
However, in late February, weather patterns changed enough to improve overall soybean and corn crop production prospects in Brazil and Argentina. Argentina’s Rosario Grain Exchange (BCR) said in late February that good rains recently marked a positive “turning point” for the agricultural season. Brazilian crops’ production potential is also looking better late in the season.
The Seasonal February Break
An old grain-trading maxim called “the February break” has not been mentioned much in recent years. However, it appears to have resurfaced this year. The February break refers to down-trending grain futures prices during February, due in part to farmers selling more of their grain in the cash market to raise money to pay upcoming taxes that come due.
Where Do Grains Futures Prices Go from Here?
It’s my bias that grain futures prices will continue to trend sideways to lower during the month of March. The late-March USDA U.S. planted acreage updates and quarterly grain stocks data may provide the grain bulls with some positive news. Those reports are among the most important USDA data points of the year for grain futures.
The month of April will see U.S. corn planting begin later that month. That’s also when weather patterns in the U.S. Corn Belt will take center stage for the next four months. Remember that many more times than not, the grain futures markets experience at least one weather-market scare during the planting and growing seasons.
Grain market bulls right now are biding their time. With grain prices getting beat up at present, some traders are likely examining getting positioned for the summer weather markets by purchasing out-of-the-money call options on grain futures.
