This U.S., China Trade Agreement Has a Lot of Teeth, Analyst Says
Grains have had a nice run higher, with corn gaining 17¢ in three days, soybeans up four straight days and 10 of the last 11 days, and wheat up 30¢ in three days.
Markets Trend Higher
So, we may be due for a short-term correction before resuming the uptrend. But make no mistake, the fundamentals have certainly changed in the past week with the USMCA deal, Phase 1 China trade deal, Argentina's 5% hike in export taxes to 12%, and the UK’s Brexit vote (allowing a U.S./UK trade agreement to be negotiated). This indeed has been a positive week for agriculture, and therefore it’s unlikely to end the uptrend soon.
Another positive is the world economic news that seems to be indicating the world is coming out of the recession, with the U.S. Dow/S&P running to new all-time highs yesterday, and even the EU seeing the highest stock levels in four years. The drag of a sagging world economy appears over and will be further supported by easing trade tensions among major players.
Weather is relatively stable, with continued above-normal rainfall in most of the Brazil (exception is the central/east, which is dry), and Argentina remains with a somewhat dry forecast the next seven days. But the eight- to 14-day forecast shows increasing chances of rain with above-normal precip in all of Brazil, and normal precip in Argentina. Temps remain below normal/normal in Brazil and above normal in Argentina the next 14 days.
Over the weekend, we had more clarification on the U.S.-China trade agreement, with the U.S. scaling back less of the tariffs than originally thought and the dollar amount China committed to buy from the U.S. broader than just the agriculture numbers.
Trump tweeted that the 25% tariffs on $250B of China goods ($50B) is still in place, and only half (7.5%) of the $120B punitive tariffs will come off ($9B). Also the U.S. cancelled implementation of the 15% tariff on the $156B scheduled for December ($23.4B), so the total tariff reduction on China was $32.4B.
The U.S. still has $59B in tariffs on China (essentially $5B/month), and $32.4B to be used as “snapback” tariffs in case the Chinese do not honor the agreement.
This agreement specifies China to buy $16B more than 2017 ($26B) of U.S. farm goods for a total of $40B in 2020. It also has pledged to move it up to $50B in time, but that will depend on factors such as availability and price competitiveness as well as Chinese needs.
Essentially, China has to make the U.S. “happy” with its import progress.
More broad than ag, they committed to importing $200B more of U.S. goods across all sectors, with Trade Representative Lighthizer indicating Sunday specific amounts were attached to the sectors manufacturing, agriculture, services, and energy. I repeat because of its importance – $32.4B tariffs hang over China’s head if they do not honor this agreement. And $59B more hang over them to continue to negotiate. This tariff hammer is likely to strongly encourage China to comply – something they are not used to doing. So, naysayers to this agreement who say it has no teeth will probably be wrong – by $32.4B or $59B or both.
This agreement has a lot of teeth!
The Chinese have incentive to continue to negotiate on the other terms in “Phase 2” and “Phase 3” with the U.S. to try to get the other $59B U.S. tariffs reduced – exactly the situation the U.S. wanted. It seems to me that the only thing that has brought China to the negotiating table is the hammer of tariffs – something past U.S. negotiators did not see.
In many ways, you have to admire the Chinese pragmatism and business acumen toward negotiations. For years, China has duped U.S. policy with all our high-handed free trade multinationals rhetoric, essentially ripping business right out of U.S. manufacturing hands (like Apple, the third-largest world company making all iPhones in China even though they were invented in the U.S.).
But, if you watched the Chinese news conference Friday and read between the lines, it looked more like an ESPN interview of the losing locker room after a sporting event. China obviously wasn’t happy, and expressed that sentiment in its complaints over the deal. But it agreed anyway to a trade deal because it was better than not doing one (by $32.4B/year). Ironically, that proves all the coalition world trade people wrong as the U.S. certainly can unilaterally force China to make agreements: You just have to have a large tariff bomb hanging over their heads.
Good Week For Agriculture
Last week was a monumental week for U.S. agriculture – with trade agreements with our three largest trade partners (Canada, Mexico, and China) in the USMCA (Tuesday announced) and China "Phase 1" completed Friday.
These are huge benefits to agriculture; we may look back at the past week as perhaps the biggest moment in agriculture the past five years. The U.S. is also finalizing a trade agreement with Japan that is huge for U.S. agriculture, and further agreements are expected with the U.K., which just rubber-stamped Brexit by a huge voting margin, which now allows a trade agreement with the U.S.
Trump has vowed to complete an agreement with Johnson soon that should also be good for agriculture. And then the EU will be next on the negotiation block (with huge ag trade also possible there as the U.S. prices are about half the protected EU prices for ag products).
We said in early December that the odds of $4.75 corn and $11.50 to $12 soybeans by August 1, were improving considerably (perhaps now greater than 50%). The odds
just jumped exponentially more by last week’s trade progress.
It’s likely grains have bottomed for at least a few years, and the upside looks very good. It will be a long, slow struggle though this time (as opposed to 2006-12) as things will incrementally improve. We could even get to the top half of the previous range in the next few years, which would look like heaven to U.S. agriculture compared with where we are now (the bottom).
Ray can be reached at firstname.lastname@example.org.
Ray is President of Progressive Ag Marketing, Inc., a top Ranked marketing firm in the country. See http://www.progressiveag.com for rankings.
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