Ameri-can and Mexi-can’t

It’s now nearly a week since Trump was sworn in,
and he has been busy signing executive orders. The
market is tentatively watching Trumps actions,
especially when it comes to corn.

One of the first acts which Trump performed was a
freeze on the activities of the Environmental
Protection Agency (EPA). This has caused a high
degree of consternation by climate change proponents
throughout the world. One of the key environmental
policies introduced by the EPA under the Obama
administration was the renewable fuel
standard/biofuel mandate. This required petroleum
producers to blend at least 10% bioethanol with fossil
oil, and there were plans to increase the blend.

This is great news for corn producers in the US, as it
created a relatively inelastic demand for corn to
maintain the blending ratio. It is speculated that
Trump may at the least curtail the biofuel mandate,
which would have a detrimental impact on demand
and therefore price.

In addition, Trump has continued his calls for a wall
between Mexico and the US which unsurprisingly is
increasing tensions between the two nations. The US
and Mexico are strong trade partners when it comes to
corn, with nearly all corn imports in Mexico originating
in the US.

Any issue with trade between the two countries would be
likely to impact corn (and linked feeds), as Mexico is the
2nd largest importer of corn in the world. In recent months,
Mexican buying power has already been eroded, with the
value of the US$ rising against the Peso, since the day of
the election (figure 1).

The biofuel mandate and the deteriorating Mexico-US
relations have impacted the corn market (figure 2) in recent
days, a deteriorating corn price will flow through to other feed
grains such as sorghum and barley.

Trump’s executive orders could be extremely negative to US
corn farmers. It is yet to be seen how far the policies enacted
by the president will marry up with his election speeches, but so
far, he has held up to his word. I would however expect that the
strong farm lobby in the US, where has a high degree of support
will in time make his moves more cautious.

The Week Ahead

Politics will continue to play a part as the market unwinds
Trump’s intentions, however eyes will start to move towards
the progress of the northern hemisphere crop.

It is still too early to form a strong view on the global crop,
but to raise prices substantially we do require a supply shock.