Why Can't Soybeans Rally on a China Deal?
Dec 04, 2018
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After a reportedly successful dinner conversation between President Trump and President Xi at the G-20 summit in Argentina soybeans were sharply higher Sunday night into Monday. However, by mid-day Monday the strength in soybeans had simmered down significantly. While President Trump had some vey encouraging thigs to say, what is lacking is the details. So, where do we go from here?
The trade dispute between the US and China had a significant impact on soybeans. US soybean exports to China (the world's largest soybean buyer by a huge margin) are down 97% from last year. This comes at a terrible time as US soybean production has risen dramatically in the last few years encouraged by seemingly insatiable Chinese demand. The end result is likely a new record US soybean surplus by a large margin. Prices have been under a significant amount of pressure, in part to reduce soybean acres planted next year.
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The G-20 meeting however, provided a ray of hope. The initial comments from the White house were very optimistic for soybeans suggesting that China will be buying massive amounts of US agricultural products immediately. President trump went as far to tweet - "Farmers will be a a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural product immediately. We make the finest and cleanest product in the World, and that is what China wants. Farmers, I LOVE YOU!". This sounds great.
The problem is the details, or lack of. The market wants to know how much and when? These are very important details as we currently have more soybeans available to sell China than ever before, and our window of opportunity may be closing soon. The soybean crop in south America is looking very good and in just a few months they be ready to sell. If reopening trade with China is going to have an impact on the projected record soybean surplus we need to start selling a massive amount of soybeans and we need to do it immediately.
To make the outlook even more confusing, Trump's tone seemed to change on Tuesday. His social media account provided a rant about if a deal is possible and suggesting that if not "I am a Tariff Man". Some traders see that as another shot at China. This came after earlier in the day China said they were working on drafting laws to protect Intellectual Property (a large part of the White House's contention).
I would like to believe that soybean trade will begin again immediately and will be massive. I optimistically think that it will, at least for a time. But the market does not seem to be as optimistic. We are going to need to see proof of large soybean sales to China in the next few days or the market could become even more skeptical of a deal. Any disappointment could erase any bullish thoughts and bring significant pressure on soybeans once again.
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January Soybean Daily Chart:
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