This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
It looked like it was going to be a quiet week last week until China released new restrictions on rare earth minerals and related mining equipment on Thursday. Trump reached an agreement with President Xi in May to restart the flow of rare earth minerals and magnets to the U.S., but the agreement was only for six months, only for low- to mid-grade products, and required significant documentation. The current agreement expires on Nov. 10, and the new restrictions China announced Thursday are set to take effect Nov. 8.
China is now not only restricting export of 12 of the 17 essential rare earth minerals and magnets, but also requiring export licenses if the final product is made with Chinese equipment or material, even if no Chinese companies are involved in the transactions. The restrictions on the materials themselves have been increased, and they also have added tight restrictions on the mining and refining equipment itself.
These policies are similar to the U.S. approach to restricting microchips. They are designed to try to prevent other countries from being able to mine and refine the rare earths and to maintain China’s near monopoly and leverage. China controls 90% of the world’s processed rare earth minerals. Rare earth minerals are essential for production of anything that has electronics, which is pretty much everything now. This includes almost all modern weapons.
The move happened now because the U.S. is taking steps to ramp up its own production of the rare earths. China knows if it does not exert its leverage soon, it will lose it.
The market did not take much note of this announcement on Thursday, but when Trump responded in true Trump fashion on Friday with a lengthy social media post, almost all markets reacted. Trump said China’s trade hostility came out of nowhere and there was no way China should be allowed to hold the world “captive.” He said he had not spoken to President Xi because there was no reason to do so. Trump said he was supposed to meet with the Chinese president in two weeks, but now there seems to be no reason to meet. “If they do not rescind their latest action, he will have to counter their move.” For every element they have a monopoly on, we have two.
There are many countermeasures under consideration, including massive new tariffs. Soybeans, stocks, the U.S. dollar, crude oil and bonds all fell dramatically, and the VIX index shot higher. Corn and wheat were also pulled lower. The markets closed on Friday without any other confirmation from any government sources other than Trump’s social media posts.
On Sunday, Trump posted: “Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn’t want Depression for his country and neither do I. The USA wants to help China not hurt it!!!” He later went on to say that he had not canceled the meeting with Xi. Stocks and some other markets recovered some of their losses from Friday, but not soybeans. If the meeting does happen in two weeks, it is now more doubtful that soybeans will be the main topic of discussion. But at least there now seems to be an exit ramp, whereas on Friday it looked like we were heading back toward an all-out trade war.
China has near-record imports of soybeans this year and has bought zero from the U.S. If they buy none, the balance sheet is going to have too much cushion in the U.S. The market is struggling to navigate this, as are we. The seasonal rains appear to be starting in Brazil. They still have a long growing season before they make a crop, but there is no immediate weather threat. The U.S. harvest is still flying along, but with the government shut down, we do not know how far. There is some rain for the Midwest in the seven-day forecast. With no government reports, the market is going to lean on private estimates and watch headlines.