Markets Could Have More Questions Than Answers After Phase One Signing

12:32PM Jan 14, 2020
U.S., China
Leaders from U.S. and China are scheduled to sign a Phase One trade deal at the White House on Wednesday, however, the market may not have all its questions answered after the deal is official.
( MGN )

Traders, analysts and farmers are anxiously awaiting the signing of the Phase One trade deal with China. The signing ceremony is set for Wednesday at the White House. While the market is cautiously optimistic the deal will get signed, traders have been before when it comes to a trade deal. Seth Meyer of University of Missouri’s FAPRI said the market is acting like a deal will be signed this week.

"I mean, that's kind of what the market is assuming," Meyer said. "Part of it is trying to digest hoping to get some details -  which are at the moment lacking -  before it makes any strong determination on what this means. But they're still anticipating it being signed."

Even assuming the deal is signed, Erin FitzPatrick of Rabo AgriFinance thinks the market may not get all the answers it’s looking for this week. She says the best-case scenario is the deal coming with a concrete figure on just how much China is promising to buy.

“I think that we're still going have a lot of questions after the Wednesday signing comes over,” she said.

“What I anticipate finding out is some details, including maybe China promises to buy a smaller number in 2020, so maybe a little less than $40 [billion] in 2020, and a little more than $40 [billion[in 2021,” Meyer added. “Hopefully, we find out what products actually go towards the $40 billion, with corn and beans first, and then you work your way down from there.”

FitzPatrick pointed out that most of the rhetoric about how much China is promising to buy is coming from the U.S., not from China.

“Everything that I've heard and seen is some very detailed numbers coming out of the U.S. in terms of expectations, but very vague sentences and comments and words from China,” she said. “It'll be interesting when they put pen to paper to see what comes out, but we don't have anything clear from China of what to expect.”

Meyer said keeping promises and details vague may be part of the plan for China.

“In some ways, I think the Chinese prefer not to have a line which drops out there which says ‘China, you will buy X number of million metric tons of beans,’” he added. “Nobody wants to be in the position to buy when everybody knows what you're coming to the table for.”

FitzPatrick pointed out that no matter what China says they are buying, price is a key factor in their decisions. And the underlying issue with everything is the spread of African Swine Fever (ASF).

“China is a primarily price buyer,” she said. “That will be a driver going forward. Also, keep in mind that ASF is a big driver behind the total volume of beans that China needs going forward. If they do come and buy more U.S. soybeans, it's a shift of demand, and it's still being driven by what's going on in the lower hog numbers in China, which,  is going to be a multi-year recovery before we get back to some of the recent highs we've seen in terms of their important needs.”

Last week, China also said it wouldn’t raise import quotas of certain U.S. commodities, saying it won’t take such action for just one country. However, Meyer thinks there’s still room for China to import more.

“China's talking about TRQs for corn and wheat and rice,” said Meyer. “They notoriously under fill those, despite the fact that in corn, price suggests those quotas should be filled and more, yet historically they haven't filled them, because it's not very transparent how that all happens.. So even just the Chinese going in and saying 'hey, we're going to fill these TRQ's' is a plus in the marketplace in the global trade for corn.”

Another assumption some in the market were making was China would need to buy more U.S. corn or ethanol to meet an aggressive ethanol mandate the country set for 2020. Last week, however, Chinese leaders came out and said they were abandoning the mandate for 2020. FitzPatrick thinks that announcement wasn’t a deal breaker, as the market knew the mandate would be a hefty goal to meet.

“They've been talking about this E10 for years, and they've got nowhere close to filling it,” she said. “At best, with their domestic ethanol consumption now, we will see 2.9% blend. So, there's a huge gap for them to try to get from that type of a blend to a 10% blend rate. And they're not going to ramp it up in one year to do that. So I don't think that the market was expecting them to go from a sub 3% to 10% in one year. “

“I think if you do 100 billion gallons of additional imports going into China, that only gets them to a little over 4%. It's not it's not pushing them to 10% [blend rate],” added Meyer.

The signing ceremony is scheduled to take place at the White House on Wednesday, January 15, at 11:30 a.m.

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