Talk of a potential trade deal between the US and China is buzzing among the agricultural investment community. And for good reason – the lifting of the trade tariffs imposed on one another's goods last year would be a boon for traders and commodity prices.
But while this alone is cause for excitement, the bigger story is the USD 30 billion of US agricultural products that China reportedly plans to buy annually. The proposed amount would be on top of pre-trade levy levels, and would include purchases of major bulk commodities (soybeans, coarse grains, wheat, cotton and ethanol).
Details are sparse at the moment, and specifics on enforcement and logistics are absent. But if this proposal turns into reality, it would fundamentally alter global trade flows of agriculture for the foreseeable future. To understand why, some context is needed.
In 2017, before the tit-for-tat tariff exchange, China imported USD 21bn worth of agricultural products from the US. So this would mean it plans to purchase roughly USD 51bn worth of goods per year. The extra USD 30bn would go toward gobbling up the US's leftover supply of wheat, corn and soybeans, which at current prices would be USD 20.6bn in total for 2018–19 reserves. This would leave another USD 9.4bn to binge on other US products like meat, cotton, dried distiller grains, ethanol, seafood and sorghum.
Unfortunately for China's agricultural trading partners, they would effectively be shut out of certain markets if such a deal materializes. By wiping US reserves clean, Beijing would be buying more supply than it needs for goods like soybeans given that demand has likely peaked (at USD 40bn) and the government has been pushing for feed-use efficiency. This is especially bad news for producers like Brazil, which has benefited the most from the trade war and ranks China as its largest export destination.
There would also be considerable collateral damage on other producers, like Argentina and Brazil, and other big trading partners, like Australia and Canada. Trade flows to China and out of the US would ultimately need to adjust – and this would mark a major shift in the global status quo, as these two countries dominate the world's agriculture industry.
For example, if the US increases its market share of soybeans shipped to China from 34% in 2017–18 to 50% in 2019–20, or an extra 45m tons, this would displace imports from Brazil, Argentina and Canada. Meanwhile, the US's trading partners of Mexico, Japan and Indonesia would need to source oilseeds from other suppliers. Likewise, greater US exports of wheat, rice and corn to China would affect Australia and Southeast Asia, while an increase of Chinese meat protein imports from the US would hurt the overall export volumes of Australia, Brazil and New Zealand.
According to press reports, a summit between Presidents Donald Trump and Xi Jinping will likely be in April (or perhaps even in March). Still, it may take time before details emerge on enforcement and the actual shopping list. It also remains to be seen whether some of the more thorny issues, like forced technology transfers, non-tariff barriers and China's management of the USDCNY exchange rate, will be tackled to any significant extent at the next meeting.
So we're keeping a close eye on developments at the moment, rather than updating our positioning. Besides the features of a trade deal, we're also tracking US spring plantings, weather in Asia and the spread of African swine fever in China as factors that could affect agricultural prices.
Author: Wayne Gordon, Analyst