The News & What it Means – US-China trade deal attracts news coverage. But really, China buys what China wants

By John DePutter & Dave Milne – August 17, 2020
The News:

“China continues to lag behind the pace of imports from the US needed to meet the terms of the two nations’ trade deal, amid a rapidly worsening diplomatic standoff that’s sparking global fears of a new Cold War.”

Bloomberg, July 27, 2020
What it means:

Was anybody really surprised that China was behind with its imports?

Not really. The volumes required in that deal were pie-in-the-sky ideas to start with.

But lately, China has been a huge buyer of several commodities, including soybeans. Some say that China is actually trying to make good on the deal.

Or is China just buying because China needs ag products and the prices are right? Most likely the latter.

Let’s look back

As most everyone knew – and still knows – China is generally a major buyer of global agricultural products. In 2017 – prior to its trade war with the US – China was one of the largest buyers of American farm goods, accounting for shipments worth about $24 billion and purchasing around 60% of US soybeans. Of course, those numbers slumped badly amid the trade battle before US President Donald Trump and Chinese leader Xi Jinping finally signed a much-ballyhooed phase one trade deal in January of this year.

The trade deal numbers appeared gaudy at the time, with China apparently committing to increase its purchases of US agricultural products by $32 billion over two years, including $12.5 billion above the 2017 baseline in 2020 and $19.5 billion above the baseline in 2021. All told, Chinese purchases of all US goods – including agricultural, manufacturing and energy – were supposed to total more than $170 billion for this year.

At the time of the deal, US ag industry leaders were thrilled, with many expressing bullish hopes. The markets were buoyed up with optimism at that time. We saw a front page splash in several non-ag papers and the ag media. One example of the bullish coverage back then is seen below – a front page clipping from the Western Producer.

Front page story in The Western Producer shortly after the trade deal between China and the US was announced by President Trump on Jan. 15, 2020.

However, a few market analysts (including those at DePutter Publishing), expressed caution. We warned that actual Chinese purchases would be heavily dependent on prices and need.

It wasn’t because we had any special insight on China’s internal supplies. It was just that this is how the markets work. They function according to supply and demand more than hyped-up trade agreements.

Countries that need products tend to buy them if and when they need them, China included.

China purchases still running behind

As it turns out, that caution was well founded.

According to Bloomberg calculations in late July, China was less than one-quarter of the way toward achieving its $170 billion total purchase target through the first half of this year. For agricultural products specifically, the Washington, D.C.-based Peterson Institute for International Economics said China imported $7.5 billion in the first five months of 2020, meaning it remains well behind on that front, as well.

Admittedly, China has made some notable purchases of American farm products the past several weeks. Last week alone, the USDA reported that almost 600,000 tonnes of soybeans were sold to the Asian giant. The USDA’s export reporting system announced new sales to China for seven days in a row. That’s rare.

Again, though, it is an open question whether that increased buying is the result of the trade deal or the simple filling of a need for additional supplies.

If China does come through with lots more big buys, it will probably have more to do with the weather, other internal supply issues and prices. Severe flooding in southern areas has already taken a big bite out of China’s rice production and there are worries the heavy rains will creep further north, threatening the country’s corn and wheat fields. Chinese soybean prices were up as much as 30% in the first half of this year, so it seems only natural that the country would increase its imports.

Meanwhile, China claims to be on the way to building its swine herd after it was decimated by African Swine Fever. It that’s to be accomplished, more soybean meal will be needed.

Too good to be true?

It is often said that, when a deal sounds too good to be true, it probably is. The phase one agreement was a good example of that.

Consider that September corn and soybean futures are currently trading at $3.25 and $8.97/bu, well below the levels of late January 2019 ($3.78 and $9.17) when the pre-agreement trade war was in full swing.

Consider, too, the soybean chart below, showing how the market peaked just a few days before the seemingly wonderful Phase 1 trade agreement was signed on Jan. 15. (Shown by red line.)

(Note: graph above updated to August 10th. Market is higher at press time.)

The time to make a sale of soybeans was precisely when the bullish trade deal news was peaking.

Again, the points to be made are these:

  1. Sure, China is buying. But wouldn’t the country’s buyers be doing that anyway? Probably. The much hyped US-China trade deal didn’t fundamentally change China’s demand.
  2. The time to sell is when markets are strong based on big expectations about great, promising trade deals.

If there’s a need, there’s demand. If the price is right, there’s going to be purchases – trade deal or no trade deal.

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