Trade War Archives | Grain Brokers Australia

US-China trade deal ‘totally done’…

Posted by | Grain Brokers Australia News, Weekly Commentary | No Comments

Farmers in the United States have received an early Christmas present after Beijing and Washington finally arrived at a preliminary agreement to lift some tariffs of Chinese imports in exchange for purchases of a range of US goods and services, including agricultural commodities.

China was first to announce the deal, which follows almost two years of protracted negotiations, punctuated by Trump’s tariff hikes and Beijing’s immediate retaliation.

The US trade representative Robert Lighthizer was quite upbeat about the phase one deal saying it was ‘totally done’ and would be signed in January. However, the Chinese were far more guarded in their comments, stating that they would act reciprocally and that they had not decided when they would ink the deal.

The US is ostensibly retaining 25 per cent tariffs on US$250 billion of Chinese imports while halving the tariff rate it imposed in September on US$120 billion of Chinese goods from 15 per cent to 7.5 per cent. The US has agreed not to proceed with 15 per cent tariffs scheduled to take effect on December 15 on almost US$160 billion of Chinese imports, and Beijing has cancelled its retaliatory tariffs which were due to commence at the same time.

China has committed to increase purchases of US agriculture products by US$32 billion over two years, but this appears to fall well short of Trump’s boast in October that China would increase purchases of US farm goods to as high as $50 billion annually in two years.

The increase will be measured against the 2017 level of US agricultural and related product exports to China, the last full year before the trade war commenced. In that year, China’s purchases totalled $24 billion, bringing the annual commitment to just US$40 billion, or US$10 billion short of Trump’s objective.

Lighthizer said Beijing would aim for an additional US$5 billion in farm purchases annually, but there were no guarantees. He said broad targets for Chinese acquisitions would be released publicly. There would also be more specific targets for purchases on a range of products, but those would not be made public to avoid distorting markets.

US exports of soybeans have been hit hard by the trade dispute, and China said they would immediately increase their purchases of US beans. However, they did place a significant caveat on that action saying imports would be based on domestic demand, and the US had to be competitive compared to alternative origins.

Lighthizer confirmed that notion by declaring Beijing would be free to buy “when it’s the perfect time to buy”. Given that from February onwards, South American soybeans are generally cheaper than US imports, even without tariffs, it begs the questions as to eventual subsidies by the Chinese government on purchases of US soybeans.

The China trade representative stated that they would increase their buying of US wheat and corn, not hard since they bought nothing over the last year, but the quantities would be subject to quotas. In any case, the deal is supposedly bullish on corn, with potential for an additional 3-4MMT of imports from the US, and as one market pundit said, ‘corn is the locomotive that pulls the wheat train”. 

But many in the trade question whether it is actually feasible to achieve the additional purchases of US$16 billion per annum in 2020 and 2021. Under China’s Tariff Rate Quota (TRQ) system for certain agricultural products, the total quotas of 9.2 million metric tonne (MMT) for wheat and 7.6MMT for corn equate to just US$3.5 billion.

On the futures market, it was a case of buy the rumour, sell the fact. The news of an impending deal surfaced on Thursday last week and corn, wheat and soybean futures were all up. Come Friday, the markets started the day in positive territory but gave away those gains when the deal was announced. A very subdued response from the funds which are sitting on short positions in both corn and soybeans.

Given the conflicting rhetoric throughout the negotiation process, it would be understandable if the funds and traders want to see more details and some supporting action from China before they get too excited.

Early celebrations could also be embarrassing knowing that China still holds hefty tariffs on US soybeans and pork, only waived at their discretion. And there is the prospect of a record Brazilian soybean harvest in early 2020, much of it driven and financed by China’s tariff on US soybeans.

The trade deal with China comes at a critical time for Trump, just a couple of days before a new round of tariff increases were set to take effect. The impeachment process has also been stealing the headlines in recent weeks, and Trump is desperate for some good news to deflect attention away from the impending trial.

Next year is an election year in the US and Super Tuesday, the first big test of voter sentiment, is only eleven weeks away. More delegates to the presidential nominating conventions can be won on Super Tuesday than on any other single day on the primary calendar, and it is a critical test for presidential candidates from both sides of US politics.

In an attempt to keep the good news rolling, Trump said negotiations on a “phase two agreement” with China would begin immediately, instead of waiting until after the 2020 election.

Hopefully, news of the trade deal is not another empty political promise to farmers, but the beginning of a commitment to right the vast amount of damage done to the global agricultural economy over the last two years.

Who holds the Trump card in the ongoing trade war?

Posted by | Weekly Commentary | No Comments

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.

US-China trade war is now a love fest…

Posted by | Weekly Commentary | No Comments

World grain markets trod water early last week ahead of Thursday’s release of the October World Agricultural Supply and Demand Estimates (WASDE). Ramifications of same were quickly forgotten after the announcement on Friday (Saturday morning Aussie time) of an interim trade pact between China and the United States (US).

US futures were a sea of red on Thursday following the release of the WASDE report, with CBOT wheat, corn and soybeans closing down 9 cents per bushel (c/bu), 14¼ c/bu and 1¼ c/bu respectively. That all turned around on Friday after news of the trade deal broke with wheat up 16 ½ c/bu, corn gaining 18 c/bu and soybeans up 10¾ c/bu.

The Friday action was predominantly fund buying as they scrambled to cover their shorts. They are reported to have purchased 40,000 contracts of corn, 15,000 contracts soybeans and 10,000 contracts of wheat. This equates to 5MMT, 2MMT and 1.4MMT of corn, soybeans and wheat respectively. Not bad for a day’s work!

Political pressure had been mounting for both leaders to reach a compromise after economic headwinds had struck both economies in recent months. It also came at a time when both leaders were trying to deflect attention away from domestic issues; impeachment for Trump and unrest in Hong Kong for Xi Jinping.

Trump had been holding out for a comprehensive deal that addressed a range of concerns around Beijing’s management of its economy. The Chinese negotiators were equally resilient, responding to US threats of increased tariffs with new measures of their own and refusing to include many of the US concerns in negotiations.

In the end, it seems that they have settled on an interim agreement that involves China buying more US agricultural products and undertaking several minor measures to open up its economy in exchange for the United States waiving the planned tariff increase set to take effect this week.

According to President Trump, the agreement was going to be great for both countries and was “a great deal for world peace. You know there was a lot of friction between the United States and China, and now it’s a love fest.”

He said that Beijing had agreed to buy $40-50 billion worth of US agricultural products which was a massive win for the US farmer. With the summer crop harvest ramping up in the US at the moment it will certainly be welcome news across the US corn belt, a key area for Trump in his run for re-election in 2020.

With the details of the pact yet to be inked, the biggest concern, for now, is how long the renewed affections will last and whether the deal will ever be consummated.

Meanwhile, there were a few surprises in the United States Department of Agriculture (USDA) October WASDE numbers compared to the previous month. The corn yield was raised slightly from 168.2 bushels per acre (bu/ac) to 168.4 bu/ac. It may have been quite a minor increase, but the trade was expecting a decrease of as much as 3 bu/ac. The USDA did cut the expected harvested area by 200,000 acres leading to a fall in US production of 0.5MMT.

Global production was decreased by 1 million metric tonne to 1.104MMT with non-China production decreasing by the same amount to 850MMT. Ending stocks were up in Brazil and Mexico and down in the US and Ukraine. The net effect was a fall of almost 4MMT in global and non-China ending stocks to 303MMT and 107MMT, respectively.

On the soybean front, the USDA reduced the expected harvested area by 300,000 acres to 76.5 million acres and cut the forecast yield from 47.9 bu/ac to 46.9 bu/ac. This led to a decrease in US production of 2.25MMT compared to the September estimate. Production in all other major production jurisdictions remained the same month-on-month resulting in a global number of 339MMT.

Soybean ending stocks were reduced in the US by almost 5MMT. This was partially offset by increases in both Argentina and Brazil culminating in a net fall of 4MMT to just over 95MMT globally.

World wheat production was virtually unchanged at 765MMT, but the numbers for several of the major producers are questionable. The USDA reduced the Australian crop by 1MMT but still have us pencilled in for 18MMT. The crop in Australia is suffering big time at the moment, and anything above 16MMT would be a miracle.

Argentinian wheat production was left unchanged at 20.5MMT. However, the season has taken a turn for the worst in many areas with drought conditions expected to have a significant impact on final yields. The provinces of Cordoba, La Pampa and the west and south of Buenos Aires province are in serious need of rain to arrest the decline.

The Buenos Aires Grain Exchange have reduced their production estimate from 21MMT to 19.8MMT and called the wheat crop 23 per cent good /excellent, against 30 per cent last week and 37 per cent last year. The Rosario Grain Exchange have also cut their estimate by 1.5MMT to 20MMT. However, private forecasters are saying wheat production could already be less than 19MMT.

The biggest swinger in the world wheat space could be Russia. The USDA left production unchanged at 72.5MMT, but Russia’s Agriculture Ministry put production at 75.6MMT with 1-1.5 million hectares still to harvest. That means that the early season forecasts of a 78MMT Russian wheat crop is highly possible.

This all means that the world wheat balance sheet is burdensome. Production is 30MMt higher than last year, projected global demand has fallen by 8MMT since the June WASDE report, forecast exports have dropped 6MMT over the same period, and world ending stocks are now expected to be 4MMT higher year-on-year. Competition from the major exporters is increasing, but world stocks continue to grow.

Wheat is lacking a significant demand driver at the moment, and the overall landscape is only likely to change if there is a significant weather event to disrupt supply or a political event that interrupts traditional trade flows.

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

Get Your Free Grain Health Check Now or call us on 1300 946 544 for more information. Sign up today