Posted on February, 5, 2025 at 04:30 pm
Price action on the Chicago Board of Trade was a little wild Feb. 3. In an action that was not totally unanticipated, the Trump administration announced over the weekend that we would have 25% tariffs on most goods coming out of Canada and Mexico and a 10% tariff on goods out of China.
The reaction was predictable. On the overnight, trading prices of corn, wheat and soybeans fell sharply. These are our biggest and closest trading partners. Canada does not allow us to sell them much for ag products, but Mexico is our biggest customer for corn.
In the overnight news Feb. 2, we saw Trump confirming the tariffs, and that he would be talking to the leaders of Mexico and Canada on scheduled Monday morning calls.
By midmorning, the news was out that the leaders had convinced Trump to delay the tariffs for 30 days while each country proved they were going to actively address the border issues that caused the threats of tariffs.
After all the excitement, March soybean futures closed up over 16 cents, March corn futures were up almost 7 cents, and March Chicago wheat futures gained over 7 cents. Interesting that prices went down on the rumor and then up when the rumor was delayed.
Futures are fickle and trading them is a gut-wrenching, trying to predict fundamental and technical reasons for price movement and then trying to not worry about some unforeseen news item that can make your decisions a disaster.
A lot of decisions have to do with understanding the personalities involved with trading. If you are a speculator, you just bet money by buying or selling a contract based upon what you think prices will do. If you are an elevator or an end user, you are selling futures as you buy cash to eliminate the risk of price change. You are a hedger and only care about price movement as it affects your ability to buy cash grain or your ability to come up with the money to continue to hedge your purchases.
Several times in my career, I had the problem of huge margin calls that were difficult to meet, even if I supposedly was hedging to avoid risk. When the man calls and wants another million for one day of price change, it is easy to wonder if there is an easier way to make a living.
Several times in my career, I also went through what are called “black swan” events. These are huge, market-changing events like the meltdown at the Chernobyl Nuclear Plant or the “Great Russian Grain Robbery,” in which the Russians started buying up millions of bushels of grain, and the market was surprised.
The 1988 drought was not a true black swan because it took place over a long period of time. The results for the hedger were similar, however, posting several dollars a soybean bushel to hedge a purchase that only had a few cents margin.
It has been my position since we started trading options that farmers should stay away from futures and just use options. The big reason is that once you buy, there is no more risk. No margin calls.
Besides getting comfortable with the mechanics of futures and option trading, there is the matter of being familiar with the roles of some of the players in the markets in order to anticipate market movement.
I remember when I was still farming and got a little too cute. I realized that with propane for drying and heat, and gasoline and diesel for tractor and truck fuel, I was using the equivalent of one contract of heating oil. If I remember right, it was 44,000 gallons. So, I bought one contract of heating oil as a hedge of my production costs. I started to think about what the players on the other side of a heating oil contract were thinking, and I realized I was just too ignorant to be in that market. I sold the contract for a small profit and never did that again.
What was significant Feb. 3 was that the reaction to delaying tariffs gave us a reason to come close to the magic price of $5 futures for corn. The March futures actually made a new high Jan. 29 before the tariff news, although we had warnings and speculation of tariffs. The high came at $4.97 1/2 and then broke back and gave us a $4.90 1/4 high Feb. 3.
At the same time, the fear of tariffs was jerking markets around, there were good reasons for price movement that had to do with production. Corn has been in a long rally as the reality of good demand for corn and a shrinking supply, partly from a change in U.S. Department of Agriculture assumptions of what supply was. In addition, we have Argentina with production problems for corn and soybeans because of a long drought. One current estimate has the corn and soybean crops each at 45 million tons of production. A caveat to that is that the estimate may be still too high by 5 million tons. For reference, last year, they produced 50.2 million tons of soybeans and 49.5 million tons of corn.
It should also be noted that the last Commitment of Traders report has the funds adding greatly to long corn positions. They now own 350,721 contracts of futures and options, the most since May of 2022. Meanwhile, they are net short wheat to the tune of 110,782 contracts. This is the largest disparity between corn and wheat for the specs since the beginning of record keeping in 2006. Corn and wheat has significant substitutability in some markets, so they tend to trade in the same direction.
Source: Farm and Dairy