End of 2018 was disastrous for big trading houses, what about 2019 with the U.S. / China trade war ?
Trade news
Trade-war between the USA and China deeply impacted agribusinesses as all of the ABCD recorded a loss during the fourth quarter of 2018. For instance, AMD net income dropped by $315 millions, Bunge has suffered a $125 millions mark-to-market loss, Cargill reported a 20% fiscal profit drop and Louis Dreyfus sustained a $65 millions mark-to-market loss on oilseeds hedging.
These impressive loss are mostly due to tariffs imposed on each other by the rival nations. China, in response, turned to Brazil for its soybean and grain traders, ABCD’s, jumped at the chance to ship them from South America, resulting in a price increase. However, as tensions eased, price for Brazilian soy returned to its normal state and most trading companies lost money on their hedging operations.
For the current year, the US Department of Agriculture forecast an increase in unsold crop from 13.5 millions tons, stocked, by the end of 2018, to 25 millions tons. This huge setback in sale will mostly impact farmers as Financial Times estimates the 2018 loss to almost 8 billions dollars.
Price movement
(Prices expressed in USD$ per bushel)
Soybean prices keep falling as traders wait for improvements in US / China trade war. March futures fell 11.5 cents to move back, closing at 8.89 dollars. Preliminary estimates of volume were 87,770 contracts, down 25% from the final figure of 117,490 set earlier this week.
Bids for soybeans remained virtually unchanged on Wednesday, but rose 2 cents in an Illinois river terminal and 3 cents less at an Iowa processor today.
Poor road conditions resulted in the closure of Brazil’s main agricultural transportation route, BR-163, until Friday, which allowed repairs to be made. The country is transporting millions of bushels of corn and soybeans on the BR-163, where it is finally loaded onto ships in its northern ports. It only resulted in minor shipping delays as the market was already shifting back to US soy.
Despite all the tensions on the soybeans market, some smaller actors like Egypt took advantage of the situation, placing several 42,000 metric tons orders of Soyoil in an international tender March 6, for arrival in late April.
Recommendation for the future
China and USA are close to sign a trade deal this month however that does not mean the trade war ends. Trump warned that he can still walk out on China like he did with North Korea.
However, based on the forward curve and other information presented, we suggest to go long on the futures as we deem the chinese demand on the verge of increasing. Plus, we are confident that large trading companies will not make the same mistakes as they once did in the last quarter of 2018, if the trade war starts over.
Sources
‘ADM Fourth-Quarter Profit Misses as U.S.-China Trade War Stings,…’ Reuters, 5 February 2019. https://www.reuters.com/article/us-archer-daniels-results-idUSKCN1PU19R.
‘China Will Buy More U.S. Soy in “Good News” for Trade Talks’, 22 February 2019. https://www.bloomberg.com/news/articles/2019-02-22/china-will-buy-more-u-s-soybeans-in-good-news-for-trade-talks.
GmbH, finanzen net. ‘25 Million Tonnes of US Soybeans Will Go Unsold This Year as a Direct Consequence of the Trade War with China | Markets Insider’. markets.businessinsider.com. Accessed 7 March 2019. https://www.businessinsider.com/trump-china-trade-war-25-million-tonnes-of-us-soybeans-to-go-unsold-2019-2.
———. ‘Soybeans PRICE Today | Soybeans Spot Price Chart | Live Price of Soybeans per Ounce | Markets Insider’. markets.businessinsider.com. Accessed 7 March 2019. https://markets.businessinsider.com/commodities/soybeans-price.
‘Soybean Outlook – Soybean Market Defies Logic’. Farm Progress, 15 August 2016. https://www.farmprogress.com/story-weekly-soybean-review-0-30767.
‘U.S.-China Trade War Rattles Agribusinesses, Especially Bunge’. Reuters, 20 February 2019. https://www.reuters.com/article/us-usa-trade-china-agribusiness-idUSKCN1Q92UQ.