Why the U.S.-China trade deal failed to support soybeans, wheat and corn

The U.S. grain market did not see much of a reaction after Washington and Beijing made phase one of their trade agreement official this week, and it will take time before commodities such as soybeans, wheat and corn benefit from China’s pledge to buy more agricultural products.

“We really didn’t expect the Chinese to immediately step in and buy with the signing of the trade deal,” said Sal Gilbertie, president and chief investment officer at Teucrium Trading. “They will only buy what they need, and only when they need it.”

That said, “there is no doubt the Chinese will buy U.S. grains, and they do need vast amounts going forward, which should put a floor on grain prices at some point,” he said.

In Thursday dealings, the most-active March soybeans contract SH20-0.08%  traded at $9.24 1/4 a bushel, up 4 1/2 cents, or 0.5%, for the session so far, with prices down more than 2% week to date. March corn CH20+0.73%  shed 11 cents, or 2.8%, to $3.76 1/2 a bushel, with prices looking at a weekly loss of 3%. March wheat WH20+0.18%  lost 9 cents, or 1.6%, to $5.64 1/4 bushel, but traded around 1% higher for the week.

Concerns over reduced production from Australia, Russia and the former Soviet Union countries due to weather concerns, as well as U.S. farmers intending to plant the lowest total number of wheat acres since record keeping began, has led to higher wheat prices, said Gilbertie. Wheat’s recent rally may be a bit overdone, but weather and supply uncertainties remain, “which might continue to provide support in that market.”

“Corn and soybeans seem to be treading water in their respective breakeven price ranges due to adequate current global inventories," he said. The U.S. Department of Agriculture, however, is predicting that global use of “both corn and soybeans will outpace production this year, which may further indicate that a floor on prices is near.”

Gilbertie said that with the trade dispute now partially resolved and demand outstripping supply, “a growing global economy will likely continue increasing the demand for all grains, which could result in increased investor interest in the sector.” That interest may be focused on corn and soybeans, in particular, because both are trading near their cost of production and haven’t followed wheat prices higher, he added.

Under the first stage of the trade agreement, China pledged to increase its purchases of U.S. goods and services by $200 billion over two years. Agriculture purchases represent $32 billion of the $200 billion total.

Caroline Bain, chief commodities economist at Capital Economics, believes that the muted response in commodities markets following the signing of the deal may be attributed to the fact that “the good news was already priced in,” as well as the possibility that “China’s promises to buy huge quantities of US energy and agricultural commodities not only look implausibly ambitious, but may also have a negative impact on global prices.”

In a report thursday, she said China’s aim to raise agricultural imports by $32 billion over the next two years, from a base of $24 billion in 2017—the last full year before tariffs, “looks even more of a stretch,” than the $52.4 billion China promised to spend on U.S. energy imports in 2020 and 2021, on top of the $9 billion it spent in 2017.

“The country is largely self-sufficient in the main grains and has large stockpiles,” Bain said. “It also has strict import quotas to protect domestic farmers.”

She believes the burden of the increased China agricultural imports will fall on soybeans.

China’s soybean imports from the U.S. were valued at $12.2 billion in 2017, out of total spending of $40 billion, according to Capital Economics.

A recent report from Teucrium Trading, written by Gilbertie and portfolio manager Jake Hanley, referred to China as the “granddaddy of global soybean importers,” as it buys “over six of every ten bushels of soybeans exported globally.” That makes soybeans the “current headline focus of the trade agreement.”

The “replenishing of Chinese soybean inventories will create a one-time temporary soybean demand surge for U.S. soybeans in 2020,” the report said.

Soybean production, however, is seasonal, and “it will be hard for the U.S. to fulfill all China’s import needs,” Bain said. There are other U.S. agricultural goods that can help it meet its import requirement, such as pork, lumber and cotton, but those have been on a smaller scale in the past, she said, pointing out that “China’s imports of US pork tripled to $0.65 [billion] in January-November 2019, out of total US pork exports of just $2.5 [billion].”

Bain does not expect China to meet its commodity import commitments in full. Still, it is likely to “make some big orders, which will inevitably mean a loss of market share for non-US producers.”

Under that scenario, “the prices of goods from alternative suppliers, and potentially global benchmark prices, may fall, particularly if the US raises supply in order to meet higher Chinese demand,” said Bain.

Source: Marketwatch