When tariff threats were being tossed out by President Trump against China we reached back for Jimmy Carter’s Russian Grain Embargo for a comparison of what the damage would be that might be done by them. The framework trade agreement being negotiated between China and the US since taking the tariff threat off the table for now could prove to be the opposite of the Russian Grain Embargo. The result could be more similar to the Russian Grain Robbery of 1972.
That was a year before I started farming. The story was related to me by a floor trader who went by the title “Silver Fox” who claimed to have become a millionaire trading the event. He taught marketing/charting classes here locally in the late 1970’s. For those not familiar with the Russian Grain Robbery – that was back when we were feeding Russia, who was then dependent on US grain. They had a poor crop and therefore were going to need a significant amount of grain. They went about the purchase very craftily. They needed 10 mmts which was a huge amount that they knew would rock the market if awareness of the need became public. So, they contacted many commercial grain merchants and contracted portions of the total purchase without them knowing that there were many purchases. Each commercial grain merchant thought that they were the only one with the deal.
The Silver Fox said he was standing in the wheat pit one day when unusually, floor traders used by the commercials who had been absent, all congregated suddenly there. . . Cargill, Continental and others, and then he noted that one stuck out his hand and bought several lots of wheat. He said that the commercials were “sneaky buying” as he called it. He said that he got long wheat and that was the beginning of a huge long ride as markets exploded. Commercials eventually became aware that each had only a portion of the total Russian purchase and the immense size of it. Commercials did not own that much physical wheat and elevators started shrinking the basis to entice farmers to part with it. The Russians caught everyone asleep and made out like bandits. That was back when being a wheat farmer in KS was fun. . . until a few years later when Jimmy Carter destroyed their market with the Russian Grain Embargo of 1980.
The Russians were dependent on grain exports and after the embargo by the US they decided that they could not endure such a grave food security risk. That gave them the incentive to turn their agriculture totally around. They had the resources. They had not put them to full potential, something they have certainly changed under Putin. There is great irony that today the Russia/Black Seas region is a far larger global wheat granary than KS is. US wheat has become the global residual supply. Our wheat prices do little when there is drought in KS and jump when it is dry in Russia.
What this shows is that our politicians can have a huge impact on our markets. Donald was looking like the cat that ate the canary when tweeting that they were making a deal with China where they would increase their Ag commodity purchases boosting what they buy by 35-40 percent. To get to a meaningful number, to have an impact on the trade deficit, they are going to have to buy a lot more than just soybeans. Trump let ZTE off the hook and Beijing did the same for US sorghum producers. That would just be the start of things.
Commerce Secretary Wilbur Ross is reportedly going back to China to flesh out the framework of a trade deal. China should be in the market for soybeans, cotton, beef, dairy, DDGs, ethanol, LNG and even pig intestines in what could be a massive purchase program. That is what the Trump administration was suggesting. That would make Trump look like a hero in farm country blowing Democrats out of the water in rural areas. For several years, we would start out with a heavy balance sheet for soybeans and China would come in and buy down the burdensome supply to pipeline supply. Trump said that China would buy everything that US farmers could grow. I think Trump knows things and Trump was being literal.
USDA is projecting a 415 mln bushel soybean carryover at the end of the marketing season. Some were suggesting that China would buy 10 mmts more soybeans. That would be 367 mln bushel. We don’t have that many (9 mmts maybe) unless we would run down the pipeline beyond what has been possible. You get the point. If they buy a billion gallons of ethanol along with reopening their market to DDGs it would press the ethanol industry to boost the corn crush to meet that demand. That would add 357 mln bushels to our corn demand plus, of course, whatever it took to expand our meat production to meet the repeal of tariffs on US beef and pork.
So how is this all going to happen? I have no idea. The markets really do not know for sure how to respond to this yet. The Chinese are smart traders and may try to hide their hand to create uncertainty before they play it. The Russians pulled off a fast one in 1972 and that would be difficult/impossible for China to repeat. Commercials have to report export sales of size daily and weekly so sneaky buying is harder to engineer today than it was back then. At the same time, it would not be in China’s interest to telegraph everything specifically about what they are going to buy and when, ahead of time. If we take what Trump said China would do for Ag demand at face value the market impact would just be beginning.
I feel like we are potentially making history. I hope that we can someday read in Wikipedia about how Trump negotiated with the Chinese, a game-changing trade deal for the US Ag economy in 2018.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page