What Renegotiating China Phase One Agreement Would Mean for Grain Prices

After years of trade turmoil, the export picture is picking up, with China importing more agricultural products from the U.S. American Farm Bureau Chief Economist John Newton says agricultural exports to China jumped 200% in September 2020 compared to September of 2019.

According to analysts on U.S Farm Report this weekend, China is ramping up its buys because it needs the commodities, not because the country is trying to live up to the Phase One Trade Agreement between the U.S. and China.

“Let’s face it, their stocks were definitely getting depleted,” says Naomi Blohm of Total Farm Marketing, a subsidiary of Stewart-Peterson. “Going forward and in the short-term, I think they have what they need to get by, but they’re going to be needing more because of that hog herd rebuilding and the feed demand that’s there.”

“I would agree that they’re buying largely what they need right now,” says Arlan Suderman of StoneX Group, Inc. “If they were really committed to the Phase One trade agreement, we would see them remove barriers to import large volumes of ethanol and dried distillers grains, and they’re not doing that. That shows me they’re not really committed.”

Chinese media recently reported China will work to renegotiate the Phase One Trade Agreement under a Biden Administration, citing the trade deal is viewed as “twisted” in the United States’ favor.

As agriculture awaits what a Biden Administration will mean for the future of trade, especially when it comes to doing business with China, one agricultural leader thinks agricultural trade market share could grow under President-elect Joe Biden.

“The President-elect understands, just like your listeners do, that 20% of our agricultural income is directly related to trade,” said Michael Scuse, former acting United States Secretary of Agriculture, during an interview on AgriTalk. “If you look at the numbers over the last few years, because of the trade situation between the United States and in China, those numbers have plummeted. And I do believe that he [President-elect Biden] will do what he can to enforce that Phase One agreement, so that we can get trade with China back to, not just where it was a few years ago when we were exporting about $24 to $25 billion worth of Ag products to China, but up between $35 and $40 billion, which is what the commitment is.”

Scuse, the longtime Delaware Secretary of Agriculture, says based on working with former Senator Biden, he thinks as President-elect, Biden will do more than just enforce trade with China. He thinks Biden will also explore other areas to open new trade opportunities for U.S. agriculture.

Renegotiation or not, Suderman thinks China will continue to buy from the United States because it needs the goods, not because it’s trying to live up the agreement. He says signs already show Chinese leaders aren’t making good on the promises made.

“Another one of the big parts of that agreement was transparency in their TRQs, or their import quotas, and we’ve seen them go less transparent,” says Suderman “They’ve imported largely what they’ve needed. And I think they will continue to do that.”

Suderman thinks if renegotiation takes place under Biden, the main revisions China will push include reversing the hefty dollar amount tied to Phase One.

“I do think that they’ll reduce the dollar amount that they’re committed to, or switch it to a volume, which they should have done in the first place,” says Suderman. “They should have made it more of a quantity versus a value, because we have much cheaper prices now than when some of those records were set previously. And then I think a lot of the other changes will be in the non ag issues going forward.”

Blohm says even if renegotiations take center stage, volatility will continue to overtake the commodity markets.

“Honestly, I think it would be a short-term downside risk, because I think that they truly need the product,” says Blohm. “What I wouldn’t be surprised to see happened, we saw some news Thursday that Russia was going to actually be increasing their grain export for wheat for the spring. So to me, that tells me that some of these grain prices for corn and soybeans maybe are getting a little higher. And if I’m an end user, I’m going to try to start to substitute wheat.”

Blohm says the story for wheat right now is oversupply, with available stocks year-round. She thinks that may entice China to by more wheat, or other commodities like sorghum, and use those for livestock feed supplies.

“I think each category of grain will have its turn, maybe one week corn is the big market mover, and the next week it could be the wheat market,” she says. “So stay tuned, there’s going to be volatility.”