Todd's Take

It seems like a long time ago when the U.S. first started its campaign of raising tariffs, and you would be forgiven if you forgot the first U.S. tariffs were charged on the imports of washing machines and solar panels back in January 2018.

You would also be forgiven for losing track of where the U.S. and China now stand in their evolving, ever-changing trade dispute. In less than two years, there have been numerous tariff threats, actual tariffs and counter-tariffs enacted, tariffs delayed, tariffs increased and tariffs waived.

Thanks to a timeline provided by private consultant Dezan Shira and Associates at China-Briefing.com, we can see that the U.S. currently holds tariffs on $550 billion of Chinese goods, while China is charging tariffs on $185 billion of U.S. goods ( https://www.china-briefing.com/…).

U.S. tariffs on $250 billion of Chinese goods were slated to increase from 25% to 30% on Oct. 15, but the increase has been postponed as a part of a tentative trade agreement the U.S. and China are currently negotiating.

The phase one agreement, if realized, has China buying up to $50 billion of U.S. ag products and increasing intellectual property protections in exchange for lower tariffs. Just how much lower is part of what is still being negotiated and, again, there is no written agreement yet.

Granted, $50 billion of U.S. ag products is significant and there are no specific breakdowns promised, but it is fair to assume soybeans and pork are popular candidates on the list.

In the case of soybeans, this hopeful news comes at a time when USDA just lowered its estimate of U.S. ending soybean stocks to 460 million bushels (mb) for 2019-20, down from 913 mb the previous year. The new bullish tone for soybeans has taken cash prices to their highest levels in over a year.

However, caution is in order. As grandmothers across the Midwest would say, "No ring, no husband." In other words, China is known for being difficult to pin down to a written document and last-minute changes penned by China in May torpedoed the previous agreement.

Looking at recent market clues, I have a different explanation of what is happening. A look at FOB soybean prices in Brazil shows a new 2019 high of $10.24 a bushel reached on Tuesday, a possible signal that Brazil's soybean supplies are dwindling.

Also supporting the notion of shrinking Brazilian supplies, USDA is estimating that Brazil will only export 2.54 billion bushels (bb) or 69 million metric tons (mmt) in their local season ending on January 31, 2020, leaving 178 mb (4.85 mmt) of ending stocks. That is down from 3.09 bb (84.2 mmt) of soybean exports the previous season.

The willingness of the Chinese government to waive tariffs on soybeans and pork in mid-September was in line with the usual time of year when China comes knocking at the U.S. door for winter groceries.

In short, it appears China is willing to use its shopping list as part of a negotiation for lower tariffs, but it is difficult to see any evidence of major trade concessions that would suggest the two sides are reaching the kind of agreement that would restore U.S. soybean demand to pre-tariff levels.

Why should this matter to U.S. agriculture? Because roughly six months from now, U.S. farmers are going to begin a new planting season. Winter wheat prices are at multi-year lows and are not likely to entice any increase in wheat acres.

If the spring of 2020 has anything close to normal weather conditions, 181 million acres will be planted, either to corn or soybeans. According to USDA, 76.5 million acres of soybeans were planted in 2019, the lowest in eight years.

Part of the reduction can be blamed on this year's poor planting weather, but it is also true that farmers were not eager to plant a crop without knowing if the world's largest buyer would participate in the U.S. market.

I've said it before and I'll say it again, if U.S. agriculture doesn't have better hope for trade with China by next spring, 100 million acres of corn plantings is a legitimate possibility and a potentially bearish disaster for the king of crops.

On the other hand, six months is a long time and surprises can happen. One possible scenario that would keep China actively buying from the U.S., with or without a trade agreement, would be adverse weather in South America in early 2020. In the past, that has been a low-probability bet, but it is certainly a situation DTN will monitor through winter.

Realistically, it is difficult to see a way out from under all the tariffs now in place and it may be that negotiations go on for years. From China's perspective, the U.S. has become the soybean supplier of last resort and the tentative phase one effort doesn't change that.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/CZ )

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