Agricultural News
US-China Phase One Trade Deal Called a Real Breakthrough
Fri, 13 Dec 2019 09:03:16
Duane Lowry with Farm Futures offers the following commentary/analysis on the reports that there is a US-CHina Phase One Trade Deal.
"US and China achieve a Phase One trade deal. Early indications are that US agriculture will be a be winner. At face value and to the extent execution actually takes place, China has committed to purchasing $50 bil per year in US ag products, with this total reportedly to be fairly evenly spread through each quarter. It that is true, then we will have a good handle on the sincerity of this deal by March 31.
"Dr. Michael Pillsbury, Director of Chinese Strategy at the Hudson Business Institute, and someone who has been talking directly with President Trump, said that this trade deal is "A real breakthrough." He indicated that US agriculture will quickly see benefits and that intellectual property protections in the trade deal are real and enforcement mechanisms exist. He indicated that a large signing ceremony will not take place between President Xi and President trump until after the US 2020 elections. Dr. Pillsbury suggested that this may be due to the scope of movement by China towards President Trump's demands and that ceremonial decisions were made based on decisions to play down these movement/concessions. There might be some political spin in that last sentence, but honestly, based on what I have seen about this trade deal, I think there may well be truth in that statement also.
"The US/China trade deal will reduce the US trade deficit with China, as it will increase broader purchases of US products, including energy. Ethanol is expected to be in a favorable position with the Chinese.
"It is important to see this US/China trade deal in the context of what took place this week with the US Federal Reserve. Despite the strength of the US economy in almost all measurements, inflation has been subdued and remains below the Fed's target of 2%. They left interest rates unchanged and indicated/suggested that there would be no interest rate increase in 2020. It is clear by the Fed's own statement that they have a strong desire to see inflation build. If that is true, then they will need to see sustained inflation above 2% for a period of time. When the Fed wants inflation, you best believe that they have the tools to make it happen.
"As I have discussed many times during the past several months, when/if a US/China trade deal occurred, it would be bearish the US Dollar. The US Dollar Index is currently trading at the lowest levels seen since July 19. Charts appear ominous and poised to build downside momentum. As I have also discussed/warned during the past several months, the US Dollar is poised for a period of protracted weakness. IF this is all a correct analysis and the Fed wants inflation, which a weaker US Dollar is one of the tools to achieve it, then large investment money will seek to move away from stocks and into dollar-denominated products, such as agriculture and energy products. When the Fed wants inflation, there is nothing better to set that in motion than 3 things-a weak US Dollar, agricultural prices and energy prices. Things that are produced from the ground are commodities that are relatively easy to be pushed and fuel inflation, when the Fed wants inflation-just my opinion/observation from my many orbits around the sun. My final thought on this US/China trade deal-don't underestimate its ability to build sustained influences in the price structure of agricultural products, as well as other industries. Until proven wrong, you should take this deal at face value and believe that China will follow-through, at least for the first year! Now, in judging that statement, realize that markets ebb and flow and they sometimes don't immediately do what is expected. But, do not analyze the long-term impact of this trade deal with a 15-minute bar chart.
"There will be a default setting to have skepticism towards the US/China trade deal. I think that will prove to be a mistake. It is not only important as to how China reacts in different commodities, but I argue that it may initially be most important to see how both global and domestic users respond. I believe the users, globally and domestically, are very uncovered and I believe they will quickly see the need to establish ownership.
"It is possible that cash basis initially experiences some weakness from a futures rally, but in reality, it is likely that the cash market will quickly return to be the core component and actually strengthen. Producer selling interest will be limited, as reduced 2019 yields just don't "dollar-up" at current values or close to current values. Expect the US producer to be a skeptic, but not take selling action based on that skepticism.
"One final observation: Again, the US Dollar developments here are a big deal. It can cause large investors to make longer-term changes to their portfolio. If there will be a loser from the US/China trade deal, it will be the US stock market valuations. "
Source- FarmFutures.Com
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