Agricultural Markets Can’t Wait For This Trade War To End

By: Spencer Israel

When news that the U.S. and China had agreed to “phase one” of a trade deal last month, it seemed to be the first real sign in months that the end of the trade war is on the horizon.

Perhaps no group is as hopeful for a deal as the agricultural community, which has been held hostage as China—the world’s largest buyer of many commodities, including softs—has repeatedly yielded their purchasing as a weapon in the trade war.

Production for soft commodities like sugar, corn, wheat, and soybeans had already been hitting record levels heading into the 2016 Presidential election, creating a drag on prices. And the trade war has not helped. As China has leveraged its buying power, U.S. exports have fallen precipitously, creating increased stockpiles across the board.

Source: WSJ

Source: WSJ

The soft commodity most exposed to trade headlines has thus far been soybeans. China accounted for just 18% of U.S. soybean exports in 2018, after accounting for as much as 60% in previous years. Jim Sutter, chief executive of the U.S. Soybean Export Council, called soybeans the “barometer for how the whole thing is going.”

But trade optimism is in the air. The first real glimmer of hope for the market came in July, when China purchases of soybeans rose to an 11-month high. That trend has continued to October, with reports indicating that China had made some of its largest soybean purchases in over a year.

Soybean and wheat futures have both rallied off the lows seen in May, with the former rallying 15% to levels not seen since May 2018 and the later rallying 21%. Soybean meal futures have rallied 7% since May as well, though they’re still well off the highs from April 2018.

China’s recent resumption of purchasing could be seen as a step in the right direction, or it could be seen as a negotiating tactic. Either way, with Trump recently saying we are “close” to signing phase one of the trade deal, markets are hoping for the best while preparing for the worst.

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