You are here
China, China, China
The old joke is, the three most important items in the grain market are China, China,
and China! We’ve tired of hearing it, but really much of the outlook for the market depends upon our export relationship with China, which recently has been rocked as China and the U.S. jockey on trade issues. Saturday night, December 1, the U.S. and China came to a partial agreement on trade, with the U.S. suspending for 90 days planned increases in tariffs (from 10% on $200 billion to 25% on January 1) in exchange for China buying lots of ag and energy products.
The 90-day period starting December 1 is to allow both sides to negotiate a long-term agreement with the goal of eliminating all tariffs. Trump also tweeted Sunday night that China would also reduce and eliminate all auto import tariffs
from the U.S. (currently at 40% vs. only 15% for the rest of world) which was changed from 25% for all to punish the U.S. for imposing tariffs this year. But it’s unclear whether China will suspend the 25% tariffs on ag and energy products
immediately, or even at all. Economic advisor Kudlow (who attended the Saturday meeting) says the ag tariffs will be removed by China, but also adds that the situation must be monitored closely for compliance by China.
It’s almost as if the Chinese aren’t sure they want to do that, but the U.S. is tying their delay of tariffs on the Chinese doing exactly that. One thing seems painfully clear: The Chinese are willing to move on the trade issues to prevent
additional tariffs from arising. Other than that, talk doesn’t seem to have any impact, as the U.S. should know, as talk has been going on for about 35 years on trade issues with China. It seems the only thing the Chinese understand is
There is still great uncertainty in the media over what exactly was agreed upon in the Saturday night meeting between Presidents XI and Trump. Clearly the U.S. agreed not to hike tariffs January 1 on the $200 billion/10% plan to the 25% threatened, and U.S. tariffs on the last $260 billion or so are suspended as well. In return, the Chinese agreed to "buy more" from the U.S. and reduce their tariffs, but no specific details emerged. Trump and Kudlow both said auto tariffs (Trump) and ag tariffs (Kudlow) would be reduced by the Chinese. Neither gave a date but they indicated they expected China to do so. Likely that means if the Chinese do not, U.S. tariffs might immediately go into place. The media wants to make this into a circus, touting their favored political views on both sides. But the reality is usually something in between, and it’s clear that both China and the U.S. have much to gain and lose from either getting along, or
not getting along, on trade.
One thing that is unusual is the Chinese soy crushing plants have only bought 2% of the total of the previous marketing year at this time. Is it likely that a 25% tariff alone would reduce Chinese purchases by 98%? It seems odd, and
makes one think something else was at play. And since China is a communist government, and controls not only media and government, but also business, jobs, positions, and even prosecution and executions –that when the Chinese
government makes a decision, the grain buyers obey! This was true even though they would run out of beans to crush without U.S. beans (which was a good share of their supply). That didn’t sound like an economic decision when
they obviously have a dire need for soybean meal (and oil) from the crushing plants. If so, that is a morbid reminder of what power/control government has in a communist system. I suppose a Chinese crushing plant manager would
have some fear as well from the government if he defied their wishes and bought anyway.
Also, how much will China buy from the U.S. in 90 days? The U.S. says they agreed to buy more ag products, but more than the paltry amount they bought since tariffs came on (only 2% of the previous year’s purchases). Or more than they bought without tariffs, which was about 1.2 billion bushels per year. China obviously needs U.S. soybeans, though, for its livestock production/feed industry. Being free to buy for 90 days from the U.S. without retribution from the government would perhaps allow Chinese soy crushing plants/feed users the opportunity to buy massive amounts to cover its needs for 2019 with the rest coming from Brazil. Free to https://login.microsoftonline.com/25a91ddd-3fd8-486d-b937-a8bcd0717c76/o... even with tariffs, how much would they buy to tide them over for another year (and find alternative sources later)?
Having said all that, the market reaction was paltry in ag, with only small gains so far. If the trade expected China would unleash its buying power to buy more than 1.2 billion bushels, and a long-term agreement would be made, soybeans would be limit up, and follow that with $1.50 gains in a very short period. Maybe they are waiting for actual Chinese buying, not an announcement on paper.
On the other hand, reaction in the stock market was more dynamic, with basically 400 point gains in the DOW, $2+ gains in crude oil, and even 1.77 gains in cotton. Many believe both countries face immense pressure from investors and big companies to make a deal and provide the concessions necessary to avoid global stock declines and an economic recession (or worse) doe to a prolonged trade fight. We’l see in the next 90 days if that’s enough to move these stubborn positions from both sides.
SAM weather is turning drier and warmer for Argentina and southern Brazil in the next seven-day forecast. Northern and central Brazil are still forecast cooler and wetter for the seven-day. The eight- to 14-day forecast goes back to more normal precip for Argentina, so we’ll see if that forecast is constant as time goes on. Argentina seems to be the one
country that could suffer some from drought, as the eastern portion has been a bit on the dry side recently.
Ray Grabanski can be reached at firstname.lastname@example.org.
Ray Grabanski is President of Progressive Ag Marketing, Inc., the top
Ranked marketing firm in the country the past 8 years. See
http://www.progressiveag.com for rankings and link to data from Top
Producer Magazine and Agweb.com.
This material has been prepared by a sales or trading employee or
agent of Progressive Ag Marketing, Inc. and is, or is in the nature
of, a solicitation. This material is not a research report prepared by
Progressive Ag Marketing's Research Department. By accepting
this communication, you agree that you are an experienced user of the
futures markets, capable of making independent trading decisions, and
agree that you are not, and will not, rely solely on this
communication in making trading decisions.
DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY
LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD
INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR
RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS
COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR
JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS
COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION.
The risk of loss in trading futures and/or options is substantial and
each investor and/or trader must consider whether this is a suitable
investment. Past performance, whether actual or indicated by
simulated historical tests of strategies, is not indicative of future
results. Trading advice is based on information taken from trades and
statistical services and other sources that Progressive Ag Marketing
believes are reliable. We do not guarantee that such information is
accurate or complete and it should not be relied upon as such. Trading
advice reflects our good faith judgment at a specific time and is
subject to change without notice. There is no guarantee that advice we
give will result in profitable trades.