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Deal? What Deal?

There was a ceasefire in Trump's trade war escalation with China.

On January 13, I commented Trump and China to Sign Trade War Ceasefire.

Details were scant. Some items were even classified. But one of the key disclosed aspects was that China was supposed to renew buying massive amounts of soybeans.

But China’s promise to buy more U.S. farm products did nothing to pump up agricultural futures. This is a sign of doubt about the real economic impact of the deal.

The Dog That Didn’t Bark

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Please consider The Dog That Didn’t Bark: What Soybean Prices Say About Trade Deal

Chinese negotiators committed to increase purchases of U.S. farm products by $32 billion over the next two years. The deal is part of a broader agreement by China to increase purchases of a wide range of U.S. products, including energy and manufactured goods, by $200 billion over two years.

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Brazil and the U.S. are both major exporters of soybeans. Of the 85 million tons of soybeans that China imported in 2019, 57 million tons were supplied by Brazil, estimates Ken Morrison, a former commodities trader for Cargill Inc., the agriculture giant, who now writes a newsletter on the industry.

If China shifts its purchases from Brazil to the U.S. to comply with the new deal, global demand wouldn’t change. Such a shift might push up the price of U.S. soybeans relative to Brazilian soybeans. But Brazil’s soybeans would then be cheaper in other markets, giving it a new advantage outside of China. The result: the gap between U.S. and Brazilian soybeans would likely close, leaving the price of U.S. soybeans little changed.

If the price doesn’t change, are American farmers better off? The answer is yes if they are able to sell more. Right now, at least, that’s not in the outlook. The U.S. Department of Agriculture estimates that American farmers will plant 84 million acres in the 2020-2021 planting year. While that is more than the 76 million acres in 2019-2020, it is less than as much as the 87 million planted the year before.

What if China bought more soybeans on global markets overall, rather than simply shifting purchases from one country to another? China could order its state-owned storage companies to buy more. But without an increase in national demand, the extra soybeans would end up in storage facilities, putting downward pressure on prices down the road. China could buy more next year to meet its goal, then buy less in 2022.

Truce Bottom Line

The bottom line of Trump's "amazing" trade war ceasefire is US farmers will be no better off than before.

The second to last paragraph in the WSJ article merits a spotlight.

The U.S. and China have ended up in an odd position. China, a one-party state with communist roots, insists that market forces determine the outcome of its purchase commitments. Meanwhile the U.S., a voice for capitalism, depends on massive state intervention to meet purchase commitments.

Mike "Mish" Shedlock