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Who holds the Trump card in the ongoing trade war?

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World agricultural commodity markets look set for continued volatility as the trade truce between the United States (US), and China appears to be dead in the water. Late last week both Washington and Beijing released statements suggesting that a deal to end the bitter trade dispute was unlikely in the short term.

Negotiations have been at an impasse since May with both sides claiming the other reneged on provisions of a tentative deal. Tensions escalated last Thursday when The Don (Trump) announced, via Twitter, a new tariff of 10 per cent on US$300 billion worth of Chinese imports that aren’t already subject to US duties.
This is on top of the US$250 billion worth of Chinese imports that are already subject to a 25 per cent tariff imposed mid-way through last year. The new tariff is set to come into effect on September 1.

It was no surprise to see China respond to the latest announcement by saying that they would take all counter-measures necessary as a result of the escalation in the trade conflict. However, the trade imbalance is a huge challenge for China. Washington has the potential to tax around US$540 billion worth of Chinese imports, but Beijing only has around US$120 billion worth of US goods it could target.

That said, President Xi Jinping does hold one significant trump card. China controls more than 90 per cent of the world’s production of rare earths, a group of 17 metals with magnetic and conductive properties that power most of the globe’s electronic devices. More importantly, it also accounted for 80 per cent of all US rare earth mineral imports between 2014 and 2017.

Chinese imports of US agricultural commodities have fallen dramatically as a result of Don’s Party (the trade war). Beijing retaliated to the initial round of US duties by slapping a 25 per cent tariff on a long list of US goods, including soybeans, in July 2018.

China is by far and away the world’s biggest importer of soybeans. The burgeoning demand for soybeans in China over the last ten years has been driven by an explosion in demand for meat as consumers shift from a diet dominated by rice to one where pork, poultry and beef play an increasingly important part.

In 2017, Brazil and the US were the two biggest soybean exporters, totalling US$25.7 billion and US$21.4 billion respectively. China accounted for two-thirds of global trade, importing US$39.6 billion worth of beans. In the same year, US exports were around a third of Chinese soybean purchases. At just under US$14 billion, soybeans were the second most valuable US export to China, behind aeroplanes.

However, the US share of that import demand has changed dramatically as a result of Don’s Party. Up to the end of May this year, US soybean exports to China were less than 6 million metric tonne (MMT), with a value of around US$2.7 billion. In volume terms that is almost an 80 per cent decrease compared to the three-year average of 29MMT for the same period.

It is no accident that the Chinese chose to impose tariffs on soybeans. The biggest producing soybean states are across the US Midwest, and this is The Don’s heartland. The farmers voted him into office. Beijing hopes that the farmer will either lobby Washington to solve the impasse or desert Trump at the ballot box in next year’s election.

So, what does The Don do to appease the US farmer? He announces another support package worth a monstrous US$16 billion, that’s what! According to a United States Department of Agriculture (USDA) announcement late last month, the latest Market Facilitation Program (MFP) payment “is aimed at supporting American agricultural producers while the Administration continues to work on free, fair, and reciprocal trade deals” with China.

This is the second round of trade assistance announced by the US in response to what Washington termed as “unjustified retaliatory tariffs” on agricultural commodities. The first program, totalling US$12 billion, was announced in August 2018, with payments made in the third quarter of 2018 and the first quarter of 2019.

Primary producers can qualify for payments ranging from $15 to $150 per acre for row crops under this year’s version of the MFP, with rates varying widely by county and region. The rates are based on the historical mix of crops produced by each county as well as USDA’s calculation of the impact on each commodity of unfair trade practices over the past ten years.

The first tranche of payments is expected to begin this month with a potential second wave in November and a third, and final, distribution in January 2020. The USDA said that the second and third payments could be cancelled if the trade war with China is resolved beforehand.

The irony is that recent research has found that 10 per cent of the recipients, predominantly large corporate farms, are receiving a whopping 54 per cent of the payments. The vast majority of US farmers, the smaller operators, those with the least ability to cope, but are copping the brunt of Don’s Party, have been abandoned as the payments are proportionate to farm size and success.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Chinese economy faltering as Don’s Party rolls on…

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News that a Chinese trade delegation had cancelled this week’s planned visit to farms in the states of Montana and Nebraska has put a dampener on the upcoming US-China trade negotiations. The delegation reportedly headed back to Beijing earlier than scheduled after mid-level talks wound up in Washington late last week.
The delegation was involved in preliminary trade talks with US officials to find a resolution to the ongoing trade war (Don’s Party) ahead of cabinet-level negotiations which are scheduled to take place in Washington in October. Their early departure has raised doubts about a possible breakthrough and sent US soybean futures more than 1 per cent lower in Friday’s trade.

High hopes were set for last week’s trade talks in Washington, which came after both sides softened trade tensions earlier this month with gestures such as tariff exemptions and delays. China purchased 600,000 metric tonne of US soybeans the previous week and said it would exempt American pork and soybeans from additional tariffs, taking effect this month, as a sign of goodwill heading into the talks.

The plan for the farm visit was only announced a few days earlier and the sudden change of plans appears to have come on the back of comments from US President Donald Trump (The Don) saying that he wanted a complete trade deal with the Asian nation, not just an agreement from China to buy more agricultural goods from the United States.
But both sides moved quickly over the weekend to indicate that the negotiations will continue, and that high level talks pencilled in for October would still proceed. The two countries agreed to keep communicating on related issues and discuss the details of the next round of trade talks.

Negotiators on both sides have continued to look for an avenue to resolve their differences as tensions ratcheted up a notch or two over the northern summer. Both the US and China want to see a resolution to the long running dispute, particularly with the United States heading into elections in 2020.

However, plentiful global grain supplies and declining Chinese demand has dulled their appetite for imports. Overall feed grain demand in China is expected to decline amid substantially lower domestic swine inventories due to the continuing African Swine Flu epidemic.

It seems that the biggest hurdle facing negotiators on both sides may be agreeing on the scale and ambition of any deal they try to formalise. China wants to agree on a partial deal that would head off Washington’s planned tariff increases on Chinese imports in October. ‘The Don’ clearly wants a far more comprehensive deal.

US soybean exports have been the hardest hit by Trump’s brinkmanship and the Brazilian farmer has been the biggest beneficiary. One of the best barometers of the degree of tension surrounding US-China trade negotiations this year has been port price premiums paid for Brazilian soybeans over US soybeans. When the tensions escalate, premiums develop at the Brazilian port of Paranagua over US Gulf ports. Similarly, when tensions diminish the premiums slowly fade.

These price premiums have risen and fallen within the context of global price movements that have centred on the progress of the 2019 US crop. Prices rose in both Brazil and the US as the early season wet conditions hindered corn and soybean planting in the US and high water levels in the Mississippi River raised the cost of moving old crop soybeans to US Gulf ports. As conditions have improved over the past couple of months, prices of both Brazilian and US soybeans have trended lower.

The rise and fall of the Brazilian export premium correlates directly with the rise and fall of trade tensions. In May this year, the US announced plans to raise tariffs on $200 billion of Chinese products from 10 to 25 per cent. Brazilian soybeans moved to a 7 per cent premium over US soybeans as a result. The premium gradually fell back to around 1 per cent by late July. However, a new round of tariff hikes that took effect on September 1 pushed Brazilian premiums up again to almost 10 per cent.

The concern for Australia is that any deepening of the trade impasse will potentially weaken an already vulnerable Australian economy. The trade crisis comes amid a weakened domestic housing market and stifled economic growth. The health of the Australian and Chinese economies is intricately linked. Our agricultural exports, mining exports, tourism exports and education exports all depend heavily on China.

As Don’s Party rolls on endlessly, China is beginning to admit its traditionally high rates of growth are in jeopardy. And the latest numbers tell the story. Industrial production growth fell to 4.4 per cent in August, its lowest in 17 years. Growth in retail sales also fell last month to 7.5 per cent. A lofty number by Australian standards but much lower than the 10 per cent growth consistently seen over the last ten years.

Beijing is now saying that it will be very difficult to grow at 6 per cent this year, well below the numbers seen in the years since the global financial crisis. If Chinese growth continues to decline it will undoubtedly be reflected in demand for Australian goods and will have countless flow on effects across the domestic economy.
The best result for all concerned, including Australia, would be a swift resolution to the standoff. No doubt this is front of mind for Prime Minister Scott Morrison as he tours the United States and meets with The Don.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

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