March 14, 2019 / 11:04 AM / 2 months ago

Column: CBOT market worn out by stagnant U.S.-China negotiations

FORT COLLINS, Colo. (Reuters) - Chicago-traded futures have endured a rough few weeks, and while it is not the only explanation, the lack of a trade deal between the United States and China has likely been an anchor on prices.

Chinese and U.S. flags are set up for a meeting during a visit by U.S. Secretary of Transportation Elaine Chao at China's Ministry of Transport in Beijing, China April 27, 2018. REUTERS/Jason Lee

Originally, December’s agreement between the two sides to talk and establish a trade deal within 90 days was supportive of prices, as U.S. leaders suggested that China might return to the U.S. agriculture export market in a big way.

China has returned, but not to the degree the market was led to believe. Now that the U.S.-imposed deal deadline of March 1 has been pushed back indefinitely, traders are unsure of how soon a resolution may be reached. This lingering uncertainty has become the ag market’s version of the elephant in the room.

U.S. agriculture participants continue to await news on the progression of trade talks, but the language is often vague, and many worry it could be a sign that nothing is truly happening. Other times, new reports can seemingly contradict previous ones.

Over the weekend, a Chinese official said the two sides were communicating “day and night” to reach a trade deal. On Wednesday, U.S. President Donald Trump said he is in no rush to make a deal, since he wants any deal “to be right.”

As the largest buyer of U.S. soybeans, China’s presence on that front is vital, especially with record U.S. stockpiles waiting to find a home. However, the market has also been expecting China to buy U.S. corn, wheat, and other agricultural products, which largely has not happened yet.

China has been relatively insignificant in U.S. corn and wheat trade for about five years now, but the U.S. sorghum market depends on Chinese purchases. The United States is by far the world’s largest sorghum supplier and it exports more than half of its crop. China accounted for 81 percent of those shipments last year.

There was a glimmer of hope last week when China bought its first U.S. sorghum cargo of 2018-19, the largest single purchase in a year, despite the imposed tariffs.

But the United States exports far more corn, wheat and soybeans than sorghum, and the ongoing trade negotiations and curiosity over how much U.S. product China plans to buy and when have been wearing down both market participants and futures prices.

Export demand for U.S. corn has recently slowed and although wheat sales and shipments have picked up, the pace is not up to traders’ liking as other origins are still competitive. But some Chinese interest could be just what the grain market needs to spring back to life.

TALK, BUT NO ACTION

It could be argued that some of the recent news surrounding the trade talks that months ago would be viewed as positive is having the opposite effect on ag markets now because of the lack of details, follow-up, or follow-through.

One classic example came three weeks ago when Bloomberg reported that China was expected to propose buying an additional $30 billion of U.S. agricultural imports a year, more than double the value of U.S. ag exports to China in 2017.

This sounded awfully familiar to the late May comment from Trump that China had pledged to buy “massive amounts” of U.S. farm products. Although markets responded very favorably to this news back in May, as of Wednesday, U.S. exporters were still waiting for the rush of business.

On Feb. 22, U.S. Agriculture Secretary Sonny Perdue posted on Twitter that China had agreed to buy an additional 10 million tonnes of U.S. soybeans. No time frame was specified, but Perdue told the press a couple of days later that it would happen in the “near term.”

Two things are unsettling there: Chinese officials never confirmed this commitment themselves and there has been little buying activity since. Through Monday, USDA had confirmed soy sales to China of 1.74 million tonnes since Perdue’s tweet.

On Jan. 31, Chinese Vice Premier Liu He offered to purchase 5 million tonnes of U.S. beans, and it is likely the target has already been met. Between Jan. 4 and Feb. 21, China bought about 5.5 million tonnes, but the timing of some of those sales is unclear due to USDA’s delayed reporting following the partial government shutdown.

The market is barely getting excited about Chinese soybean purchases anymore, as they are falling short of what was expected. Most-active soybean futures on Monday cruised past the 926,000-tonne Chinese sale to the lowest levels of 2019. Traders know that such a sale is a mere blip when faced with record U.S. ending stocks of 900 million bushels or more.

Even U.S. farmers who largely supported Trump in the 2016 election have grown tired of the rhetoric. Trump posted on Twitter on Feb. 25 that farmers “will be treated better than they have ever been treated before” in the event of a deal with China. Frustratingly, no details were provided, and it only created more confusion when Trump’s 2020 budget unveiled on Monday proposed a 15 percent cut in USDA funding, citing “overly generous” farmer subsidies.

Awaiting an elusive U.S.-China deal has grown wearisome for both traders and farmers. One might wonder whether markets would have been better off had the United States increased tariffs on China on March 1 as originally planned instead of pushing it off. That way, at least something would have happened.

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

Editing by Matthew Lewis

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