The Phase 1 Deal and the Deadline

The Phase 1 deal between China and the US is slowly starting to release more details about terms and conditions of the agreement.  The deal seems favorable when viewed as simply a number. The Chinese agree to 80 billion dollars over 2 years with an average of 40 billion a year.  The deal allows China some flexibility to buy goods as it sees fit as long as it hits that number by the end of 2021. Purchases that will count towards the 80 billion dollar deal will start February 15.  As of February 4th, the markets have been moving upwards as news that the Corona Virus is causing panic in China. China will have to respond to their people hoarding food supplies in the long term, but in the short term China has not committed to buying US soybeans, or many other US goods for that matter.  This makes sense because there is no use buying goods until it starts counting towards the trade agreement. After the February 15th deadline markets will expect China to start buying from the US in larger quantities. The question on everyone’s minds are “What will they buy?” and “How much will they buy?”. 

Near Term Demands and Politics

China’s action of stating that they will buy 80 billion dollars of agricultural goods suggests that the number was given to the US for purely political reasons.  No specific information was given to determine what they would buy. There are also disputes over what commodities count as agricultural products. Giving the US a dollar amount of how much they would buy means that China has the flexibility to buy only what they need and it gives the US an opportunity to claim that they will sell billions of dollars of goods. Corn is expected to be a more valuable commodity for China to purchase than soybeans would be.  US markets are showing corn to be competitive in pricing for a quality product at this time of year and the US has a reasonable supply on hand.

China’s record keeping has been in doubt regarding the number of pigs, chickens, and stores of soybeans that they have on hand.  Market research shows that when China buys soybeans or corn it goes directly to its people or animals and is consumed or processed almost immediately.  It’s estimated that if every Chinese person ate one more pork chop or drumstick of chicken a year, the US couldn’t keep up with demand. Soybean sales would increase because more feed would be sold.   The next 30 to 60 days will give us a better idea of what China will want to buy and how badly they need it.

“I can give you more reasons why it would fail than succeed”

Joe Vaclavik, of Standard Grain, reported on Agritalk radio, Feb 4th, that Brazil is expecting a record soybean harvest this year, with the markets expecting them to have their best February.  China claims that the corona virus is affecting purchase of US products. Signs point to economics being the reason they buy from Brazil because market prices are currently cheaper.   

Speaking about the trade deal  Vaclavik said, “I’m not saying that it can’t succeed, at this point I can give you more reasons why it would fail rather than succeed.”  The largest question is what can China buy that would get them to the target number as agreed to in the Trade Agreement. Because China can purchase soybeans for a lower price outside of the US and other products count as agricultural, such as lumber or farm equipment US soybeans will likely not be purchased in large quantities.  Ethanol could help the US reach the 40 billion dollar goal in the trade agreement. Currently there are disputes about whether ethanol is an energy or agricultural product.   

China could be stalling to see if they can renegotiate the terms of the trade agreement by buying what it needs and trying to renegotiate later.  The situation will be more clear by August when our market has more hard data.  

China is well equipped to play the long game when it comes to trade.   The US can try to hold out but it will come at the cost of more subsidies and strained relations with other industries being affected by the trade war who are not receiving subsidies.  Most importantly the average farmer will continue to struggle the longer we negotiate. 

Domestic Effects of the Trade War

The effects of the trade war are far more apparent in North Dakota than other areas of the country because our soybeans go directly to the Pacific Northwest (PNW) Market which is the direct line that sells to the Chinese market.  The prevailing thought is that large scale animal agriculture can soften the blow domestically, but that comes with environmental concerns regarding factory farming. Investing in local industries that could process soybeans or planting other crops like hemp would be another effective method to create jobs and build the economy.  

Preparing for 2020

There is no magic bullet, but most economists agree that the markets aren’t going to return to 2016 levels immediately even with Phase 1 in effect in the best case scenario.  Getting back to a market based economy rather than relying on a subsidy check from the government is something that every farmer can agree with. As the usual uncertainty with weather and domestic markets linger, the trade war continues adding extra layer of worry as farmers prepare their risk assessment for the coming year.

The question remains is how long can farmers weather the storm?