March 4 – A “risk-off” sentiment prevailed overnight across many markets as traders digest the latest tariff actions implemented by the Trump Administration. Both stock futures and much of the commodity world came under selling pressure, although selling seemed to be limited somewhat by the losses already seen, plus hopes that we will see some hope emerge from plans to be announced at tonight’s State of the Union address to be given by President Trump. The VIX is trading at a 10-week high near 24 at this hour, reflecting the anxiety on Wall Street, while the dollar index is trading near 106.1. Yields on 10-year Treasuries are trading 4.15%, while yields on 2-year Treasuries are trading at their lowest level since October near 3.90%. Crude oil prices are down another 1% to trade near longer-term support levels near $67 per barrel, while the grain and oilseed markets continued their free-fall overnight as well.
The feared 25% tariffs on goods flowing from Canada and Mexico went into effect at midnight last night, while Trump’s 10% tariffs on Chinese goods were doubled to 20%. Retaliatory steps are beginning to emerge from these trading partners, raising fears of an ever-escalating trade war that will send our economy, and the global economy, into a recession, reducing demand for commodities in the process. Today’s tariffs come on top of a national security investigation into Canadian wood products entering the United States that could see additional tariffs, a probe into countries that charge a digital services tax on our exports to them, proposed fees on Chinese built ships that enter our ports, and reciprocal tariffs to be implemented starting in early April.
China’s retaliation includes an additional 15% tariff on chicken, wheat, corn, and cotton imported from the United States. It will also add another 10% tariff on imports of U.S. grain sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy products starting on March 10. These tariffs are lower than the 25% tariffs that China placed on U.S. commodities in the trade war during Trump 1.0, but it includes more products. Furthermore, China Customs suspended three international grain trading houses’ soybean export qualifications, accusing them of including foreign materials in their shipments that violated Chinese law and regulation. The latter is not uncommon by China, which can sometimes be a short-term service interrupter, or it can sometimes linger as long as deemed politically expedient. It should be noted that China hasn’t imported much U.S. corn over the past year as it leaned mostly on cheap supplies from Ukraine and South America, and this is the time of year when it normally switches to cheaper new crop South American soybean supplies as well. It’s grain sorghum imports have also been few and far between over the past six months. However, this will have an impact on many of the other products listed.
We should get more details this morning on the specifics of retaliatory steps from Canada and Mexico, where the impact on U.S. trade could be very substantial. Ethanol was not originally on Canada’s list of retaliatory tariffs, but that doesn’t mean that it won’t be added. The key with Mexico will be whether it places retaliatory tariffs on U.S. pork and corn flowing into that country. Doing so would put upward pressure on food inflation for Mexico. Thus far, Canada, China, and Mexico have responded with lower tariffs than what we placed on them. They’re generally spinning that as a moderated response seeking to generate a de-escalation that could lead to an agreement, and that’s likely true. But the economies of each of these nations also cannot bear the price of an escalated trade war. Yes, it will hurt the United States as well, but each of these nations face greater challenges than those of the United States. The question is, what is President Trump’s end objective, when he keeps moving the goalposts? He uses that as a negotiating tactic, but it also creates a tremendous amount of uncertainty that negatively impacts the markets, business sentiment, and consumer confidence, increasing the recession risks.
President Trump will address the nation this evening when he delivers the annual State of the Union address. We saw him respond to lower agricultural prices in the trade war of Trump 1.0 with assistance to farmers. Yesterday he seemed to hint at increased opportunities for U.S. farmers to sell products at home. So, does that mean that his Administration might give more favorable treatment of agricultural commodities as feedstocks in biomass biofuel production? Might he say something about that in tonight’s speech? It’s difficult to predict Trump, but that’s a possibility. Today’s actions should actually be positive for some commodities, although it might take a minute for the markets to understand that amid the negatives. For example, it should be net positive for beef, as we import more than we export. It should also be positive for spring wheat, reducing the flow of Canadian wheat across the border. We still face widespread dryness across much of the central and southern Plains wheat belt as the crop breaks dormancy, with similar concerns in the Black Sea. Drought is also building across eastern portions of Brazil’s winter corn crop, impacting a third of the area planted thus far. But headline risk continues to drive price action for now.
