Don't expect detail in Trump's trade deal: analysts

13 Jan 2020 | Thomas Hughes

On Wednesday the US and China are expected to ink a phase-one trade deal that the US claims will lead to $40-50 billion worth purchases of US agricultural goods, but recent statements by China have once again triggered questions about which goods will be bought.

With a deal just 48 hours away, analysts are split as to exactly what it will entail, particularly in the light that China is allegedly rowing back from its ethanol mandate and has stated it will not breach its import quota system for wheat and corn that supports domestic farmers.

Last week, Reuters News quoted unnamed sources saying that China would officially delay a target to boost ethanol consumption to 10% in gasoline sales.

Meanwhile, other news outlets have reported the world’s fourth-largest oil producing nation will start to buy US ethanol as part of the deal.

Neither the US nor China have publicly stated a breakdown of the goods.

For those hoping that Wednesday’s signing ceremony will change that, there may be disappointment, as most analysts think any detail will be omitted.

“In my view, China will likely be unwilling to explicitly commit to a $40 or $50 billion figure, but will likely add some more generic language that would imply something close to that figure, but with some wiggle room for market prices,” said Heather Jones, an independent analyst.

Dan Hueber from the Hueber Report told Agricensus: “I have heard stories that details may not be released after the signing on the 15th. It is not impossible for China to import over $40 billion of US ag commodities but it could be the agreement would allow all commodities, i.e. energy and other non-ag commodities to be included in the total.” 

Last week’s report about whether ethanol will be included has got analysts rethinking the sums.

Many had previously estimated a shopping spree that included the renewable gasoline component, but now are rejigging the figures.

Grains gains

“The latest abandonment of the ethanol mandate could result in only 200 to 500 million gallons (600,000 mt to 1.5 million mt) of ethanol imports, if the 40% import duty is waived or lifted, instead of a billion gallons (3 million mt) industry groups were looking for previously,” Terry Reilly from Futures International told Agricensus.

“(That) could have a snowball effect on corn imports, followed by minor feed-grains such as sorghum and barley. The less corn needed for industrial use results in higher supplies available for the feed sector,” Reilly added.

But any increase in corn and wheat imports will likely be capped by China’s quota system, which will limit any additional purchases.

Currently, China’s quota for corn imports is 7.2 million mt and 9.64 million mt for wheat, although it used less than 50% of its corn quota and about a third of its wheat quota in 2018.

That means in order for grains imports to increase, the US will likely need to gain market share from other origins as opposed to fill constrained demand.

And that brings it back to meat, soybeans and soymeal.

Taxing meat

Starting this month, China cut its pork import tariffs by 4 percentage points, meaning imports from the US are now taxed at 58% and from the rest of the world at 8%, leaving plenty of room to cut pork import tariffs from US meat producers.

Tyson Foods and WH Group, two of the US’s biggest meat producers in the world, have seen their share price rise 6-7% in the past six weeks, outperforming the S&P500’s 4% rise over the same period.

“I believe (the $40 billion target) is achievable over the next two years. China’s feed needs will increase from current levels, given growth in poultry production and aquaculture (both intensive from a SBM perspective) and its hog production should begin to expand, albeit off low levels,” said Jones.

She added that meat tariffs will likely be slashed as part of any deal and “that imports of both pork and chicken are very likely to meaningfully exceed prior records”.

Yet scepticism lingers about what direct impact a trade deal will have in the foreseeable future on soybeans.

Bumper Brazil

While higher meat imports undoubtedly mean higher soybean demand in the US, a huge Brazilian harvest of soybeans from February onwards means additional import demand of beans is unlikely until at least September when the new US harvest comes in.

“Just last week China bought beans from Brazil, normal for this time of year, and this shows China wants to buy beans that are cost-competitive,” Joe Vaclavik from Standard Grain told Agricensus.

“China has already committed to much of its domestic needs through May, so US exports of soybeans to China during the second half of 2020 and all of 2021 would have to be extraordinary,” Reilly added.

That being said, there were rumours last week that China’s state-owned Cofco was gearing up to buy US beans from February onwards after jettisoning some Brazilian cargoes in the spot market – a dynamic that would run against government statements to buy according to market fundamentals.

Cofco was unavailable for comment and there have been no reports of any purchases so far.

Yet based on total agricultural imports in 2019, coming in well over $100 billion, others think that China should easily be able to allocate a greater share of imports to the US.

“China took $131 billion in ag imports in 2019, so that means they would only need to commit to 31% of their total ag imports from the US,” Charlie Sernatinger of ED&F Man told Agricensus.

Sernatinger added that soybeans could account for almost 40% of that total and once additional meat, corn, ethanol, sorghum, cotton, DDGS, fruit nuts and seafood is added in it could reach the $40 billion goal.

Others are more sceptical.

“I have a hard time believing they can, or will, pull off $40 billion in 2020. We are talking about them buying almost triple what they bought in 2019 and the USDA certainly didn’t address that type of demand in January's Wasde report, ” Dennis DeLaughter from Vantage RM told Agricensus”.