No Price Movement in Soybeans After Trump's Amazing Deal

Mish

Soybeans are like the dog that did not bark. There has been no price movement since Trump's trade truice with China.

Deal? What Deal?

There was a ceasefire in Trump's trade war escalation with China.

On January 13, I commented Trump and China to Sign Trade War Ceasefire.

Details were scant. Some items were even classified. But one of the key disclosed aspects was that China was supposed to renew buying massive amounts of soybeans.

But China’s promise to buy more U.S. farm products did nothing to pump up agricultural futures. This is a sign of doubt about the real economic impact of the deal.

The Dog That Didn’t Bark

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Please consider The Dog That Didn’t Bark: What Soybean Prices Say About Trade Deal

Chinese negotiators committed to increase purchases of U.S. farm products by $32 billion over the next two years. The deal is part of a broader agreement by China to increase purchases of a wide range of U.S. products, including energy and manufactured goods, by $200 billion over two years.

Brazil and the U.S. are both major exporters of soybeans. Of the 85 million tons of soybeans that China imported in 2019, 57 million tons were supplied by Brazil, estimates Ken Morrison, a former commodities trader for Cargill Inc., the agriculture giant, who now writes a newsletter on the industry.

If China shifts its purchases from Brazil to the U.S. to comply with the new deal, global demand wouldn’t change. Such a shift might push up the price of U.S. soybeans relative to Brazilian soybeans. But Brazil’s soybeans would then be cheaper in other markets, giving it a new advantage outside of China. The result: the gap between U.S. and Brazilian soybeans would likely close, leaving the price of U.S. soybeans little changed.

If the price doesn’t change, are American farmers better off? The answer is yes if they are able to sell more. Right now, at least, that’s not in the outlook. The U.S. Department of Agriculture estimates that American farmers will plant 84 million acres in the 2020-2021 planting year. While that is more than the 76 million acres in 2019-2020, it is less than as much as the 87 million planted the year before.

What if China bought more soybeans on global markets overall, rather than simply shifting purchases from one country to another? China could order its state-owned storage companies to buy more. But without an increase in national demand, the extra soybeans would end up in storage facilities, putting downward pressure on prices down the road. China could buy more next year to meet its goal, then buy less in 2022.

Truce Bottom Line

The bottom line of Trump's "amazing" trade war ceasefire is US farmers will be no better off than before.

The second to last paragraph in the WSJ article merits a spotlight.

The U.S. and China have ended up in an odd position. China, a one-party state with communist roots, insists that market forces determine the outcome of its purchase commitments. Meanwhile the U.S., a voice for capitalism, depends on massive state intervention to meet purchase commitments.

Mike "Mish" Shedlock

Comments (12)
No. 1-8
Runner Dan
Runner Dan

"China, a one-party state with communist roots, insists that market forces determine the outcome of its purchase commitments. Meanwhile the U.S., a voice for capitalism, depends on massive state intervention to meet purchase commitments."

Yes! Reminds me very much of this statement:

"The EU trades quite happily with China, or Vietnam, or Chile, regardless of how workers are treated, but it won’t be able to trade with Britain unless it has the right to control working hours, labour laws, tax and industrial policy."

The common denominator is that, regardless of political system, the "In Group" is protected with rigged markets while the "Out Group" has to play by the rules of the world wide fair market.

Greggg
Greggg

Great... farmers are left with an interfered market and it will take years to sort out the actual demand on their side of the equation... that is if they don't start their tariff wars again.

seanot
seanot

Before people get too worked up over trade deals and how they will affect local prices, it's useful to remember that we are talking about commodities. There are only two ways in which governments can affect commodity prices via trade policy. One would be to increase or decrease tariffs. In cases where tariffs are increased, the local price has to come down by the amount of the tariff in order for the commodity to be price competitive in the world market for those affected by that tariff.

The second action that can be taken is for governments to subsidize foreign buyers of commodities from that government's local markets. This was the essence of the Food for Peace program that attempted to win friends and allies during the Cold War.

If one takes a peek at the price action of Brazilian soybeans in recent weeks, one will note that the Brazilian bean chart looks virtually identical to that of the CBOT bean contract -- have a look at b3.com for those interested. The simple fact is that soybean prices, after a nice run higher (buy the rumor) are selling off (sell the news).

When China sees bean prices that interest them, they will enter the world market and any meaningful reduction in retaliatory tariffs against the US will make itself known in the form of purchases from the US.

Zardoz
Zardoz

Trump was lying, and this is surprising?

Y’all have battered wife syndrome.

lol
lol

It's fake,like everything else it's merely pretending to make a deal,That's what Trump does,sell as the greatest deal ever like that USMCA joke,then quietly walk away and hope no one's paying attention.

lol
lol

Trump is basically a 3rd Obama term,don't get squat done,but act like you did and hope no one's paying attention.

Brother
Brother

Most all contracts end at or near starting prices this is normal movement.

Casual_Observer
Casual_Observer

It is amazing because it is a Trump deal. It is just like a Trump hotel. The name makes everything amazing dontcha know.