By Karen Braun
FORT COLLINS, Colo. – The next supply and demand update from the US Department of Agriculture could feature some drastic adjustments if it is to fully incorporate China’s lofty agricultural commitments as outlined in the Phase 1 trade deal.
The deal, signed Jan. 15, states that China’s purchases of US agricultural goods will be at least $12.5 billion above the 2017 baseline, which is about $24 billion, and sales are to rise at least $19.5 billion above that baseline in 2021.
Traders have been very skeptical over the feasibility, especially since the record value of US farm goods to China was $29 billion in 2013, when commodity prices were substantially higher than today. The caveats of “buying under market conditions” and “not disrupting other suppliers” have made the entire scenario nearly impossible to imagine.
USDA has always operated under “policy in place,” which means that only officially enacted policies can figure into its estimates. Even though the Phase 1 signing was just days away at the time, USDA’s Jan. 10 update did not include any related assumptions.
This also means that USDA’s forecasts are often less speculative than those from most private analysts, as the US agency only acts on official policies and concrete data.
Since the deal has been signed, the terms will factor in to the discussion for USDA’s next supply and demand update, due on Feb. 11. In the most basic sense, one might expect to see huge surges in US soybean or meat exports and a large corresponding boost to Chinese imports, for example.
But it is likely not so simple, especially since the market is receiving no signals that would suggest those things, so it is unclear what USDA will do. There is a chance that numbers do not shift dramatically next month, though market-watchers must be prepared for that possibility.
USDA officials probably have no easier a time than other market participants in interpreting the conditions of the Phase 1 deal, especially given Beijing’s comments in the days after the signing.
The portion of the deal that addresses trade specifically states that the “purchases will be made at market prices” and that market conditions “may dictate the timing of purchases within any given year.”
China had said both before and after the signing that its US farm purchases would be based on market conditions, and most market participants took this as pertaining to volumes, not timing. But the exact wording in the trade deal would suggest that market conditions are no excuse for China to fall short of the implied $36.5 billion target by the end of 2020.
Beijing also insisted that trade with other suppliers would not be disrupted as a result of the Phase 1 deal. That language is not a part of the actual trade document, but that seems to offer up yet another roadblock in fulfilling the deal as it is near impossible to hit the dollar target while purchasing based only on market conditions, all while leaving other trade flows unharmed.
It is important to remember that the trade deal takes 2020 as beginning on Jan. 1. The 2019-20 US soybean and corn marketing years, for example, end on Aug. 31, 2020. USDA will issue its first official domestic and global supply and demand estimates for 2020-21 on May 12.
There has been minimal action from China ever since the trade deal was inked two weeks ago. Traders know how significantly purchases must increase to reach the 2020 target, and the lack of even a daily US soybean sale has been unnerving. – Reuters
