After a couple of months of decent rallies in commodity prices, South Dakota's farmers had reason to be optimistic about this year's crops. Then came President Trump's tariff announcements last week and suddenly everybody sobered up.
More on that later, but first off, the improvement in crop prices hasn't been about supply/demand fundamentals, which haven't changed much in recent months. Instead, producers can thank the stunning volatility in the stock market for their good fortune.
Analysts are generally saying that institutional investors are pulling substantial cash out of stocks and moving it into commodities. This is a "lock in your profits" trade, as the big gains since the election of President Donald Trump have given investors plenty of reason to take profits out of historically over-valued stocks and put them into real-world products, particularly wheat, corn and soybeans.
Running to safe havens during volatile times is a long-standing trading strategy, so given the quirky nature of policies that are coming out of a White House defined by volatility and chaos, it's no surprise to see the gambit coming into play of late.
But much as they love the nice upside bounce in prices, farmers saw their markets react with serious concern at the end of last week when Trump's sudden announcement on steel and aluminum tariffs made the news. Wheat prices in particular got clobbered. The reason? Nobody knows how the rest of the world will react.
If Trump's tariffs do indeed get set into motion next week, it's likely that our trading partners will respond with retaliatory tariffs of their own. Trump seems to welcome that scenario by saying "trade wars are good and easy to win." Meantime, our farmers, who depend heavily on foreign markets, are out in their fields wondering if retaliatory tariffs will aimed at them. This whole thing is a cloud hanging over the American farm industry.
With good reason, the Belle Fourche-based Tri-State Livestock News writes that farm leaders reacted to the tariff news with "fear and horror." TSLN reports that the American Soybean Association and U.S. Wheat Associates jointly stated that "we have repeatedly warned that the risks of retaliation ... set by such a policy have serious potential consequences for agriculture."
Wheat prices are particularly sensitive to intense foreign competition and stand to take a shellacking if there's a retaliation from our foreign customers. That explains the huge drop in wheat prices the day after Trump's tariff announcement.
Most surprising to me is that ag producers are themselves surprised by this turn of events, considering that Donald Trump campaigned consistently on his pledge to put the United States into protectionist mode when it came to foreign trade. Trump's well known support in the farm belt (he carried South Dakota with 62 percent of the vote) suggests that voters either weren't listening or simply didn't believe he'd actually pull a stunt like this.
As farmers go out into their fields engaged in their spring planting activities the next few weeks, they'll be wondering if a world that up to now has been eager to buy their production will soon be saying "no, thanks."