January 22 – The “Trump rally” continues on Wall Street as traders price in expectations for a pro-business environment in the years ahead, with the S&P 500 stock index poised for the possibility of closing at new record highs today, despite new tariff risks in the news today. The VIX set a four-week low below 15 overnight, while the dollar index trades near 108.1. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are trading near 4.27%. Crude oil prices consolidated either side of yesterday’s close after the recent selloff, while the grain and oilseed markets are modestly higher again this morning.
President Donald Trump voiced plans to place punitive tariffs on goods flowing from the European Union late Tuesday, while also saying that his administration is discussing placing 10% punitive tariffs on Chinese imports due to the fentanyl that continues to flow into the States from China via Canada and Mexico. His recent comments appear to be coalescing around expectations for tariffs to be implemented on February 1st, including 25% tariffs on Canada and Mexico, on top of the above. However, Trump also signed a trade memorandum Monday ordering federal agencies to complete a comprehensive review of trade issues by April 1st, raising some speculation that we may see some tariff action on February 1st, with more comprehensive tariff policy implemented at some point after April 1st. Both Canada and Mexico have struck a conciliatory tone with Trump, wishing to work through the issues step by step. Neither can afford a trade war with the United States, even though such would inflict pain on the United States as well, including within the commodity world. But China and Europe also have fragile economies now and can also ill-afford a trade war.
China’s Vice President Han Zheng attended the Trump inauguration on Monday. His presence seemed to be strategic in nature – signaling that President Xi Jinping is willing to improve relations with the United States, while not leaving Xi personally as exposed to criticism if relations deteriorate further. Han reportedly met with Vice President Vance on Sunday, prior to the inauguration, while also meeting with key business leaders, including Elon Musk. It’s interesting to note that Xi had a call with Russian President Vladimir Putin immediately after the inauguration. Trump has been stating that he would bring a quick end to the Ukraine war. This has raised speculation in China that Trump would use his leverage to end the war in a way that could allow the United States to move closer to the Kremlin to target Beijing jointly. Moscow is well-aware of the long-term risks of cozying up to Beijing, and it may want to have a partner to help protect it from Beijing once it no longer needs China’s support in the Ukraine war – at least that’s the fear currently within China.
China suspended receiving soybean shipments from five entities this month, stating that they failed to meet phytosanitary requirements, according to Reuters. I first mentioned this in my Midday commentary on Tuesday. The move raised speculation that it might be a step towards China reaching a trade deal with the United States, and that is possible. But I doubt that is the case now. The timing of the move is curious, as it comes right as the flush of new-crop supplies start reaching the ports in Brazil, needing to move in a hurry to keep from backing up the flow of cheap soybeans moving towards China. It’s possible that there were genuine phytosanitary issues, but I doubt it. More than likely China was looking for some leverage – either against these companies or against Brazil – or possibly simply wanting to manipulate the basis market. Whatever the reason, the expectation is that this will be short lived, with soybeans flowing freely in the days and weeks ahead as the new crop is harvested and shipped. I do expect to see a trade deal between China and the United States at some point, but I doubt that this is part of moving in that direction. China would be showing too many of its cards to be taking such actions for that reason so soon.
China bought an estimated 35 cargoes of soybeans last week, according to our cash sources, with nearly 80% of those cargoes originating in Brazil. It imported 74.56 million metric tons or 2.74 billion bushels of soybeans from Brazil in calendar year 2024, accounting for 71% of its soybean imports. That compares to 22.13 mmt or 813 million bushels of soybeans imported from the United States. China imported roughly 35 mmt from the United States just a few years ago, but Brazil has increasingly grabbed market share over the past 15 years, even as overall Chinese demand has rapidly expanded as well. It’s largely done so with a cheap currency. Brazil farmers sell their soybeans based on Chicago futures. A price of $13.50 per bushel in July 2011 translated into 20.6 reais per bushel back then. Spot futures are trading near $10.70 this morning, but that translates into 64 reais per bushel today. Granted, import costs for fertilizer and chemical have gone up dramatically for the Brazilian farmer, but still the rate of expansion within Brazil has correlated well with the decline of the real. The strong dollar makes U.S. soybeans that much more expensive for Chinese crushers, relative to Brazilian supplies.
