The US grain market remains hesitant. Even after the signing of the 'Phase One Deal' between the United States and China. While Trump is urging farmers to buy more and bigger tractors, the industry is awaiting more details.
Trump's popularity among farmers is at its peak. No less than 83% of the agricultural sector is positive about the president, according to a recent poll. That has been different in the near past. After China stopped buying agricultural products, prices for corn and soy, among other things, fell sharply.
Larger tractors
Those times are over and glory days are here, Trump assured his agricultural audience. During the annual meeting of the American Farm Bureau Federation, among other things, he reiterated that farmers in the country need to buy more and larger tractors to cultivate more land. After all, China will buy a huge amount of products, he assures.
The Phase One Deal in the trade agreement is good for up to $80 billion in exports to China over a 2-year period, according to the White House. “That's what $40 to $50 billion is earmarked for the agricultural sector,” Trump said during the meeting. “Exports to China triple.” In 2017, China imported $24 billion worth of agricultural products from the US.
Market trades on rumors
After the deal was announced, corn and soy prices ended slightly lower in Chicago. Wheat did increase. However, the week ended on a positive note based on rumors that the first shipments have been purchased by China. The CBoT will be closed on Monday January 20 due to Martin Luther King Day. Traders are waiting. The presented agreement does not yet offer any new insights for the sector. The market wants to see details before it can decide whether there is justified reason for euphoria.
In response, China itself already made some reservations. For example, it announced that market conditions play a role in the purchase of raw materials. Certain American products will continue to be subject to import duties. The Phase One Deal mainly shows the good will of both parties and no hard deals. These will follow in Phase Two.
Promises unrealistic
Analysts are skeptical about the promises Trump makes. Professor and agricultural economist Ian Sheldon is positive about the agreement, because it shows that the trade war will not escalate further. Yet the promised exports of $40 billion according to Sheldon impossible for both countries. “An increase of $16 billion in 1 year is not realistic. I see no way how this can be achieved.”
Sheldon sees the only option in the Chinese government. It must instruct state-owned companies to purchase exclusively American raw materials. However, ties with Brazil have been good since the trade war. This country can even file a dispute with the World Trade Organization (WHO) due to unfair competition. In addition, Ukraine is targeting part of China's corn imports.
Long-term support
Support for corn, soy and wheat prices is expected in the long term, when it becomes clear that China has changed its purchasing policy. Then the market can expect support. The question remains whether American farmers will buy all those extra-large tractors.