April 28 – Stocks are mixed to higher ahead of a week full of earnings reports, and key jobs data, while investors also monitor the ongoing tariff war. Nearly 73% of the 179 companies in the S&P 500 that have reported earnings thus far beat market expectations, providing support for the market. But that support is limited by the lingering recession fears tied to the tariff wars. Negotiations continue with many countries to lower those tariffs, but much of the focus has shifted directly to the ongoing trade war with China. The VIX is trading near 25, at levels last seen on April 2, while the dollar index is trading near 99.6. Yields on 10-year Treasuries are trading near 4.27%, while yields on 2-year Treasuries are trading near 3.75%. Crude oil prices traded either side of $63 per barrel overnight, while the grain and oilseed markets were mostly lower, led by new lows in Kansas City wheat on weekend rains in previously dry areas of the Plains.
Are relations with China thawing? Perhaps a bit, but they remain quite cold overall. President Trump and his team at the White House continue to suggest that talks are ongoing with China, while China insists that no trade negotiations are happening. I believe that the truth is somewhere down the middle. President Trump continues to make statements seeking to reassure the markets, and to reassure consumers, that momentum is moving forward on solving the current tariff standoff. Meanwhile, President Xi Jinping enjoys a sense of strong nationalism and public support within China, where he controls the message. That message is that the United States is the bully that has been practicing unfair trade practices for some time, and Xi is the world’s lone leader willing to stand up to the bully. He fears that reports of him negotiating with President Trump might erode some of that support away, making him look weak. Furthermore, Xi believes that support within the United States for Trump’s tariff war will quickly wane in the weeks and months ahead, putting Xi in a stronger position down the road. I do believe that conversations are happening at some level between China and the United States, but not at the formal negotiating level. The Chinese see formal negotiations as face-to-face negotiations, and those are not happening at this point.
A research report published by Goldman Sachs estimates that 16 million Chinese jobs are at risk if the trade war with the United States continues, with China’s east coast cities most at risk of seeing an economic downturn. Yet, Chinese authorities remain “patient” regarding new stimulus measures. Declining tax revenues would add to their mounting debt problem, as would more stimulus. As such, they’re hoping that the current sense of nationalism within China will support personal sacrifice sufficiently to avoid additional need for stimulus for the time being as Xi counts on Trump folding first. Both leaders are playing a high-stakes game of poker with a great deal at risk.
The highly anticipated biomass diesel production mandate announcement did not come last week. We thought it would come later next month, and the general thinking in the industry was that it would come by Memorial Day. Yet, rumors that it could come as early as last week had investors buying soyoil and soybeans last week, lifting the former to its highest levels since last 2023. The announcement could come at any time, although we still think that it will be later in May. In the meantime, the recent rally in soyoil prices in anticipation of the announcement rationed export demand, while keeping considerable biomass diesel production idle. Production of the latter has been cut roughly in half in the current calendar year as the industry waits for a new mandate from the U.S. Environmental Protection Agency, as well as clarity on what the incentive package for producing it will be going forward. The industry still anticipates a favorable package from the Trump Administration, but producers will remain cautious until the facts are actually known.
Will there be a tariff subsidy for farmers? I believe that President Trump fully plans on sending more checks to the American farmer if necessary to keep him / her supported through this tariff war, especially if the trade war with China lingers into late year. But the near-term focus will be on passing a Farm Bill, where funds will be limited. As such, another aid package for farmers probably would not be announced before the fourth quarter of this year, with payments likely coming early next year – the year of the mid-term elections. In the meantime, we may see financial support for farmers come via a strong biofuel program that provides domestic demand for commodities not being shipped to China. That could include a strong biomass diesel production mandate close to 5 billion gallons a year, plus support for ethanol blending in gasoline to move towards 15%, from its current 10% level. Until that happens, the focus will likely remain on currently known supply and demand fundamentals, with the markets currently focused on high production expectations for South America, and improved moisture supplies for previously dry areas of the U.S. Midwest and Plains. That doesn’t preclude drought risks for the Midwest for later this summer, but the bulls currently are struggling to find a story to build around.
