U.S.-China trade resumption may lift markets

Chinese sales of agricultural products from the United States have been slow but are expected to rise later in the year

A sharp rise in Chinese purchases of U.S. agricultural products could ignite the corn and wheat markets in the last half of the year, says an analyst.

China committed to buy US$36.5 billion of U.S. agricultural products in 2020 in the Phase 1 agreement it signed with the U.S. on Jan. 15, 2020.

Not much has happened since pen was put to paper. Sales amounted to $6.3 billion as of April 30, 2020.

“That’s a slow start,” said Arlan Suderman, chief commodities economist with INTL FCStone.

COVID-19, a strong U.S. dollar and tensions over how China is handling Hong Kong have hindered trade between the two countries.

Suderman no longer expects China to fully meet its commitments but he does think $30 billion in U.S. agricultural exports is feasible and that would be a record.

“I still expect substantial shipments in the last half of the year,” he said.

Robert Johansson, chief economist for the U.S. Department of Agriculture, said China’s imports of most U.S. agricultural commodities have been exceeding last year’s levels through May and in the case of pork, beef and corn have eclipsed the five-year average.

“We would expect to see a number of purchases occurring in the fourth quarter of 2020,” he said during the International Grains Council’s virtual annual conference.

Suderman said the foundation of the agreement is that the U.S. has to be price-competitive with other exporters and that hasn’t been the case in the first half of 2020 due to the strong U.S. dollar.

But the dollar has been dropping in recent weeks and that has sparked some buying out of China, as have meat shortages in the country.

There have been record pork shipments and strong sales of other commodities. Reuters reports that the U.S. sold 720,000 tonnes of soybeans to China in the week ended June 4, leading to the biggest weekly export program in 16 months.

Suderman thinks the trade has already factored in strong sales of U.S. pork and soybeans to China in the second half of the year.

But the market has been skeptical that trade will increase for many other commodities, so there could be some price upside for those commodities if it comes to pass.

The Phase 1 deal specifies China would have to abide by its World Trade Organization commitments and the U.S. contends that has not been the case for wheat.

That could result in millions of tonnes of additional wheat purchases and not just from the U.S., said Suderman.

The biggest potential market mover is if China starts buying more U.S. corn, distillers grains and ethanol in the second half of 2020.

“That would be a game-changer, not just for the corn market but also for wheat as well,” he said.

The country is in the process of removing its anti-dumping duties on distillers grains and recently surprised the market by purchasing a small cargo of U.S. ethanol.

Suderman thinks the recent surge in Chinese imports of U.S. products has more to do with concerns it has about COVID-19 shutting down ports in exporting countries than it does with them fulfilling their Phase 1 commitments.

They are likely also worried about the potential reignition of the trade war with the U.S.

The U.S. public has supported President Donald Trump’s tough trade stance on China and it is possible that he could flex his muscles again prior to the November presidential election.

That would quickly alter the forecast for strong exports in the second half of 2020.

“I don’t expect it to happen but it is a risk that must be respected,” said Suderman.

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