The Emergence Of Tariffs On Mexico Could Bring Renewed Risk Or Volatility To The Grain Market

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Includes: CORN, SOYB, WEAT
by: Andrei Evbuoma
Summary

President Donald Trump announces plan to impose a 5% tariff on Mexico imports, effective June 10, incrementally increasing it to as high as 25% by Oct. 1 on immigration.

With Mexico being the leading buyer of U.S. corn and wheat, the tariff threat could rattle the grain market.

Agriculture community is on edge after the announcement of tariffs being applied on Mexico imports.

Investment Thesis

After a nice rally, the emergence of tariffs on Mexico brings additional downside risk/volatility to the grain markets. Investors should expect for the rally to be slowed and prices rangebound with the potential increase in volatility.

U.S. will impose a 5% tariff on all goods coming from Mexico starting June 10 until illegal immigration comes to an end

Tariffs are in the news once again, and this time it doesn't involve China, but rather Mexico, the largest buyer of U.S. corn and wheat. On Friday, President Donald Trump announced that he will slap a 5% tariff on Mexican imports effective June 10. In a White House statement, the tariffs would rise to 10% on July 1, 15% on August 1, 20% on September 1, and reach a permanent level of 25% on October 1 if illegal immigration across the southern border doesn't stop. Figure 1 below is an image of a tweet from Thursday (May 30) of President Trump's plans to impose a 5% tariff on Mexican imports.

Source: Twitter

The move comes on the heels on news that the U.S. recently removed tariffs on Mexican steel and aluminum while the administration pushes for Congress to approve the new trade deal with Canada and Mexico that replaces NAFTA.

In 2017/18, Mexico was the top exporter of U.S. corn with exports valued at $3.3 billion. Additionally, that year, U.S. corn exports to Mexico reached a record high of 15.7 million tons.

With Mexico being a leading export market and a top international buyer of U.S. grains and related products, this news development puts the ag community on edge as this could bring headwinds to the agriculture market.

Many in the agriculture community has appealed to President Donald Trump to reconsider plans on opening a new trade dispute with Mexico. Below are quotes from members in the agriculture community.

“The potential fallout from new tariffs is like struggling to survive a flood then getting hit by a tornado,” said Chris Kolstad, Chairman of the U.S. Wheat Associates (USW) and a wheat farmer from Ledger, Montana.

“We call on the President to rescind this threat immediately,” said Ben Scholz, President of the National Association of Wheat Growers (NAWG) and a wheat farmer from Lavon, Texas. “We’ve been hit by low prices; we’ve been hit by rain and flooding that is hurting what was an excellent wheat crop; and now we’ve been hit again by the actions of our own government. We need to end indiscriminate use of tariffs now, one way or another.”

“NCGA strongly urges the President to rethink applying new tariffs to Mexican goods and to reconsider using tariffs to address non-trade issues,” said National Corn Growers Association President Lynn Chrisp. “Mexico is the top customer for U.S. corn. Corn farmers want to continue working with the administration and Congress to ratify the new U.S.-Mexico-Canada Agreement (USMCA) and pursue new trade agreements. The recent deal to lift steel and aluminum tariffs on Mexico and Canada was an important breakthrough for USCMA but new tariffs threaten to reverse that progress. Amid a perfect storm of challenges in farm country, we cannot afford the uncertainty this action would bring.”

"We appeal to President Trump to reconsider plans to open a new trade dispute with Mexico,” said David Herring, National Pork Producers Council president. “American pork producers cannot afford retaliatory tariffs from its largest export market, tariffs which Mexico will surely implement. Over the last year, trade disputes with Mexico and China have cost hard-working U.S. pork producers and their families approximately $2.5 billion.”

Senator Joni Ernst, R-Iowa, chairwoman of the Senate Agriculture Subcommittee on Rural Development and Energy, warned that if Trump goes along with the tariff, the chance of getting the USMCA through Congress “will be stifled.”

“But we are concerned about the prospect of the imposition of new U.S. tariffs against Mexico,” the two said in a joint media statement. “The imposition of such tariffs unquestionably will jeopardize ratification of this crucial trade accord that would bring about more normalized and predictable two-way trade with the United States’ top trading partners, which is vitally important to U.S. agriculture, the American economy and job creation, particularly given the current trade disruptions with China.”

Hints of a drier weather pattern over the next week across the northern corn and soybean belts

This all comes after news that the weather pattern is expected to be drier particularly across the northern corn/soybean belts over the next week. A wet pattern will continue across the central U.S. but will be more concentrated over the southern half of the corn and soybean belts. Figure 2 is a map showing the 7-day accumulated precipitation forecast across the Lower 48.

Source: NOAA

The U.S. July corn futures finished Friday's trading session down 1.98% to $4.2738, with the U.S. July soybean futures down 1.10% to $8.7825 and the U.S. wheat futures lower 1.58% to $5.0488. For the less-volatile, unleveraged Teucrium ETF grain products, the Teucrium Corn ETF (CORN) finished down 1.82% ($0.31) to $16.71, the Teucrium Soybean Fund (SOYB) finished down 1.02% ($0.16) to $15.47 and the Teucrium Wheat Fund (WEAT) also finished down 1.83% ($0.10) to $5.63. Figure 3 below is a price trend chart of the front-month July futures contract for corn over the past 24 hours.

Source: Investing.com

Figure 4 below is a price trend chart of the front-month July futures contract for wheat over the past 24 hours.

Source: Investing.com

Figure 5 below is a price trend chart of the front-month July futures contract for soybeans over the past 24 hours.

Source: Investing.com

July Chicago Soft Red Winter Wheat (SRW) futures were seen down 9.6 cents to $5.046, with July Kansas City Hard Red Winter Wheat (HRW) futures down 5.6 cents to $4.732, resulting in a 31-cent premium of CBOT wheat to KCBT wheat. MGEX's Hard Red Spring Wheat (HRSW) July contract was down $0.114 to $5.520. Figure 6 below is a price trend chart of the front-month July futures contract for spring wheat.

Source: Barchart

Decent export sales report for both corn and wheat

The United States Department of Agriculture (USDA) released its weekly net export sales report for the week ending May 23 Thursday morning.

The 2018/19 wheat export sales for the week ending May 23, 2019, was 153,000 metric tons. That was noticeably higher from the prior week and up 63% from the prior 4-week average. Main buyers of the old wheat crop last week were Indonesia and Yemen. For the 2019/20 new wheat crop, net export sales for the week ending May 23, 2019, was 411,800 metric tons. Main buyers of the new wheat crop last week were from unknown destinations and Japan.

The 2018/19 corn export sales for the week ending May 23, 2019, was 906,800 metric tons. The 906,800 is up noticeably from the prior week and up 94% from the prior 4-week average. The main buyer of the old corn crop last week was Japan. For the 2019/20 new corn crop, net export sales for the week ending May 23, 2019, was 76,500 metric tons. The main buyer of the new corn crop last week was Mexico.

The 2018/19 soybeans export sales for the week ending May 23, 2019, was 455,800 metric tons. The 455,800 was down 15% from the prior week, but up 92% from the prior 4-week average. The main buyer of the old corn crop last week was China. For the 2019/20 new soybean crop, net export sales for the week ending May 23, 2019 was 22,000 metric tons. The main buyer of the new soybean crop last week were from unknown destinations.

Final Trading Thoughts

Weather (slow planting season) and trade are the two variables that are driving the grain market the most with the former responsible for the market's recent rally. The news about tariffs being targeted at Mexico could disrupt the recent weather/slow planting rally. Close watch will be new on tariffs not only on China, but now potentially on Mexico. This inserts additional uncertainty/risk into the markets. Look for the rally to be slowed and for prices to be rangebound moving forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.