U.S.-China trade war resolution would change markets

Arlan Suderman believes there is a narrow window of opportunity for the United States and China to sign a trade deal that would transform the prevailing bearish sentiment in commodity markets.

Funds have been sour on commodities since March 23, 2018, when U.S. President Donald Trump imposed tariffs on steel and aluminum imports.

The trade war that ensued between the U.S. and China stifled economic growth, chasing investment money away from commodities.

There have been occasional rallies caused by events such as escalating tensions between the U.S. and Iran and adverse planting conditions in the U.S. Midwest but as soon as those concerns subsided commodities markets fell back into their bearish bias.

Suderman, who is the chief commodities economist with INTL FCStone, said momentum appears to be building for a resolution to the trade war and that would “change the lens” through which the funds view agricultural commodities.

“Changing the psychology makes a big difference on the funds and whether they want to be short or long,” he said.

“They would have a more upbeat attitude towards the commodities.”

One of the reasons for his optimism about a potential resolution to the trade impasse is the Trump impeachment inquiry launched by the U.S. House of Representatives.

The president is eager to declare any political victory to help offset the negative publicity of the impeachment hearings.

Suderman believes that is why Trump took the unusual step of announcing a trade pact with Japan before it was finalized.

“When do you announce a partial trade deal? You don’t. You don’t announce them until they’re all done,” he said.

That might have Chinese President Xi Jinping thinking Trump is vulnerable and may be willing to make some concessions on previous demands.

On the other hand, Xi has problems of his own with anti-government protests in Hong Kong and Taiwan and the spread of African swine fever, so he too could be looking for diversions.

Suderman thinks the political pressures at home may help the two world leaders come to an agreement on trade within the next 30 to 45 days.

If that doesn’t happen there will not likely be a resolution until after the U.S. federal election on Nov. 3, 2020.

“This is going to be an interesting drama to see how it plays out with significant implications for the grain and oilseed markets,” he said.

A deal would open the door for more U.S. soybean exports to China, but they won’t return to pre-trade war levels because of the devastation African swine fever has caused to China’s hog herd.

Suderman believes the bigger impact will be on corn prices. There will be a slight uptick in U.S. corn exports to China but a profound increase in ethanol exports.

China is going to fall woefully short of its goal of having a 10 percent ethanol blend in its fuel supplies by 2020. It will need to import huge volumes of foreign ethanol to come anywhere close to meeting that goal.

A deal would also result in a resumption in U.S. wheat sales to China. Canada has greatly benefited from China’s reluctance to buy U.S. wheat, with Canadian exports to China up 78 percent in 2018-19.

China is already showing signs it is willing to buy U.S. wheat. It recently purchased 130,000 tonnes of white wheat, the first significant sale since the trade war erupted.

Suderman said it shows China is concerned about the state of North America’s spring wheat harvest.

“We’re looking at the possibility of a real squeeze developing in the Minneapolis market,” he said.

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