February 11, 2020 / 10:27 AM / 6 months ago

Column: USDA outlooks may be at odds with Phase 1 purchasing targets

FORT COLLINS, Colo. (Reuters) - The U.S. Department of Agriculture seems to be in a tough spot regarding its U.S. supply and demand outlooks, which in their current state probably reflect much lighter Chinese purchases than are promised in the Phase 1 trade deal.

Soybean crops are seen ready for harvest as Iowa farmers struggle with the impact of weather and ongoing tariffs resulting from the trade war between the United States and China that continue to effect their agricultural businesses in Ottumwa, Iowa U.S. October 5, 2019. REUTERS/Kia Johnson

However, the lack of details in the official trade agreement likely prohibits the U.S. agency from an imminent overhauling of those forecasts, as well as fully applying the new assumptions throughout its global projections.

USDA hinted last week that its monthly supply and demand update, due at noon EST on Tuesday, is unlikely to include big changes that may be expected following the deal, such as a boost to U.S. exports. The agency was more diplomatic on the matter in its white paper published on Thursday.

That paper suggested USDA would consider the broad goals of the Phase 1 deal for Tuesday’s update, but the agency cited the deal’s lack of details as limiting, namely the absence of commodity-specific purchases.

Most analysts did not expect USDA to instantly adjust outlooks for largely the same reason, in addition to general skepticism about the huge amount of U.S. farm products which China has agreed to purchase, much more than the previous record. There is also a lot of uncertainty about how the deal might impact the rest of global trade.

It is not clear what tweaks, if any, USDA will make on Tuesday or at any future point in the wake of the deal, but traders ultimately will want to see the Chinese promises reflected on U.S. balance sheets sometime soon.

And if no changes are made this week, that raises the question: at what point does USDA need to start working the deal terms into its forecasts, even if the missing details are not further clarified?

NO DETAILS

The Phase 1 deal states that China in 2020 will increase U.S. agricultural purchases by no less than $12.5 billion above the 2017 baseline, and the 2021 amount will be at least $19.5 billion above the baseline.

One of the roadblocks pointed out in USDA’s white paper is that the Phase 1 deal does not specify the 2017 baseline or the commodity-specific purchase agreements. The fact that the official text would omit a number as important as the baseline is odd indeed, but that figure should not be a complete mystery.

U.S. Trade Representative Robert Lighthizer told reporters at the White House back in December that the 2017 baseline was $24 billion. He did not seem to explicitly confirm the origin of that number, but it matches data from the U.S. Census Bureau showing that some $24 billion of American agricultural and related goods were exported to China in 2017.

Lighthizer also told CBS’s “Face the Nation” in December that the deal includes “specific breakdowns by products” when it comes to the agriculture numbers. That was one of the only parts of the agreement not made public, leading many industry participants to wonder whether they even exist, despite Lighthizer’s confirmation.

The position of USDA on this item is certainly understandable. There is an official agreement in place that allegedly contains specific purchase details, but neither USDA nor the public have been allowed to see them. Why the detailed breakdowns must be kept secret is anyone’s guess, though if they do exist, then what good is it for USDA officials to have to guess them themselves?

But it will eventually become awkward if there is a signed trade deal stating that China will significantly increase U.S. purchases while official U.S. government forecasts continue to reflect the pre-deal assumptions. USDA is not necessarily at fault for this as the blame lies mostly on the deal’s lack of full, public transparency on the agricultural purchases, since they are such a key part of the agreement.

Of course USDA would be able to take action should China start to significantly increase U.S. purchases. But China has not made any notable buys since the deal was signed on Jan. 15.

However, there may be some low-hanging fruit even without the specifics. Soybeans will be instrumental in the Phase 1 goal since they usually make up about half of the value of U.S. farm products shipped to China each year. USDA pegs U.S. soybean exports for the 2019-20 marketing year, which ends on Aug. 31, at 1.775 billion bushels, a six-year low when excluding last year’s outlier.

That is likely much too light if China will truly purchase a record value of U.S. farm goods in 2020, regardless of the commodity-specific targets. But the agency could possibly justify a smaller number if it assumes business to all other countries will dramatically drop off, which is an inherent risk of the deal for more U.S. farm products than just soybeans.

China’s coronavirus outbreak has added to the skepticism toward the Phase 1 trade commitments since the deal includes a clause about the inability to comply in case of a natural disaster or other unforeseeable event. But China eased fears on Friday, telling the U.S. side in a phone call that it would honor the purchasing targets despite the virus-related delays.

TRADE EXPECTATIONS

Analysts predict USDA will reduce 2019-20 U.S. corn, soybean and wheat ending stocks on Tuesday, though these polls were conducted prior to USDA’s statement about the trade agreement.

The ranges and average estimates do not reflect the idea that USDA would massively crank up U.S. exports in the wake of the trade deal. There is a possibility, however, that the expected numbers would be a touch heavier had analysts seen USDA’s statement prior to submitting their guesses.

But the difference, if any, would be slight. A small, informal survey of several of the contributing analysts suggested that USDA’s white paper would not have changed most of their estimates.

The expected supply cuts are somewhat suspect though, especially for corn and soybeans, given that demand has not materially improved within the last month, and recent export sales have been historically light.

There is a possibility that some analysts are looking for changes to the 2019 U.S. corn and soybean harvests, but that is very unlikely to happen this month. USDA’s National Agricultural Statistics Service (NASS) said last month that since there was a significant portion of unharvested corn and soybean acreage in some select northern states, a resurvey would be conducted in the future.

NASS confirmed on Friday that this survey has not yet occurred since most farmers have not had a chance to finish harvesting yet. At this point, April might be the most likely time frame for re-contacting producers, as weather will be the determining factor.

The opinions expressed here are those of the author, a market analyst for Reuters. 

Editing by Matthew Lewis

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