DB Returns to Ranting About Soy Beans, with a pro tip for economic advisers

Yes, the results of the midterm elections were mostly satisfying — large and copious  thanks to all those who phone banked, precinct walked, and otherwise worked to make those results possible — No, there weren’t any major networks (or even minor ones) discussing trade policy as a factor in those election results, and rightly so because trade policy wasn’t a big deal.  Why should it be?  It’s not like anyone pays much attention, and that includes the so-called “business channels.”  About as close as we’re likely to get to any explication is yet another interview conducted by some major urban news outlet with yet another white rural voter who inexplicably votes for “Buzz Windrip” in the White House while ignoring the trade policy that’s wiping out rural agricultural profits.

Type in “stock market” and Google will return 384,000,000 results in less than .30 seconds. Type in “commodity futures trading” and get 27,900,000 results in the same time period.  Which one has more impact on our daily lives?  Right! The one with the smaller numbers, likely because the advertisers who pay the freight for what passes for business news are interested in the stock market, their stock prices, their competitor’s stock prices, their 90 day stock performance… we get it… the advertisers want stock market information and want us to pay attention to their stock market information, so that’s what we’ll all get — and we’d get it 24/7/365 were it not for commercials about skillets which can be beaten with sledge hammers, devices to remove facial hair, and pills and potions to restore attributes few people had in the first place.  But, we digress.

Those commodities futures trading markets are important.  There are four major functions of these markets: pricing; hedging; speculating; and organizing.  Let’s look at the hedging function first:

Merchants, farmers and international firms use the futures exchanges to hedge future transactions. When a farmer plants his crop of wheat, for example, he does not know what the price will be at harvest time. To remove the risk of price changes, he sells wheat futures contracts at planting time. When he sells his crop a few months later, he buys back the futures contacts. If wheat prices have fallen, he is protected because the futures contracts he buys at harvest cost less than the ones he sold at planting. An importing firm can use financial futures contracts in the same manner to lock in a price for the goods it will be importing later in the year.

This concept doesn’t require a degree in finance to comprehend. Sell futures contracts to protect himself from a price drop at harvest and our soy bean farmer can stay in business.  Actually, the farmer usually isn’t dealing with the futures but we can bet our last soy bean the grain elevator operators are. They’re paying very close attention.  NPR explains, “They’ll use futures contracts to manage sales and get good deals throughout the year, allowing them to pay farmers a more consistent price and protect them from big drops.”  Farmers benefit from a “more consistent price” and “protection from big drops.”  Anyone doubt those of us who buy the stuff related to soy beans (everything from soy sauce to animal feed to consumer products)  benefit from consistent prices?

“Manufacturers of both industrial and consumer products use soybean oil and meal to replace petroleum and other volatile or hazardous ingredients, as well as increase product performance. The versatility of U.S. soybean components makes product applications remarkably wide-ranging, including rubber, fiber, coatings, solvents, plastics, lubricants and adhesives.” [UnitedSB.org]

Again, no finance degree is necessary to understand that a consistent price is beneficial for manufacturers in a wide range of consumer products.  Consistent prices in a more stable market mean more predictable manufacturing costs, and more predictable business decisions.  IF there’s a market.  If there’s a market for the soy beans. If someone would decide (preferably before December 10, 2018) to fix the mess created by the administration’s silly tariff flap with the Chinese.

December 10 is the day the CFTC is scheduled to make a decision on the storage rate for soy beans — thus far it’s climbing because we’re about out of storage space — because major purchasers like China aren’t buying soy beans — and storage space is scarce and becoming more expensive —  remember Economics 101 or high school  “General Business?”  The result of current policy is a nose dive in soy bean prices.

The USDA is forecasting that soybean-planted acreage will drop by 6.6 million acres to 82.5 million in 2019. The American Farm Bureau Federation notes that “if realized, this would be the third-largest acreage decline of all time and the largest year-over-year decline in soybean plantings since … 2007.

“The decline in soybean acreage is anticipated given the slow pace of soybean exports, the dramatic decline in Chinese purchases, expectations for a nearly billion-bushel-l?carryout and projections for decade-low soybean marketing year average prices.”

Negotiations are still underway between the Trump administration and the Chinese government over trade issues. However, the U.S. government has emphasized that it is committed to getting things back to normal for soybean farmers. According to Bloomberg, “Any trade pact would also address the resumption of soybean sales specifically, since that was targeted in the trade war.”

“Committed to getting things back to normal?”  How about if Buzz and Company hadn’t launched the stupid trade war in the first place? There were other ways to press the intellectual property issues and trade questions with the Chinese without using a policy version of a meat ax.  However, the ham handed, ham fisted, and ham headed administration acted as “normal” i.e. acting first, without a full and measured consideration of the ramifications, and being surprised at the unintended consequences of its actions.  So, we’ve lost 98% of our soy bean sales to China.  Our storage facilities are filling up, and costing more; while the Chinese are signing contracts with the Brazilians for more beans.

Pro Tip for the economic advisers to the President — draw him a picture of a soy bean on a white dry-marker board, put his face on it, and then erase 98% of the picture until he gets the idea we’ve lost sales, and revenue, and a major component of our national agricultural statistics.  We could try this, but I don’t really hold out much hope he’ll do much more than blame the problem on a slow walking group of immigrant mothers and children from Honduras who have Hillary Clinton’s emails in their back packs, and whose 300 pound sons are at home in their bedrooms in San Pedro Sula hacking into DNC servers.   But, hey, it’s worth a try to amuse Buzz on a rainy day when he can’t play golf, with some colorful charts and pictures of himself as a soy bean if we could manage to get his attention long enough to do something about the trade/tariff stupidity?

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