Todd's Take

Pesky Math and Item Five of Phase One

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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This chart shows FOB soybean prices at the U.S. Gulf trading 6 cents above those in Paranagua, Brazil, after China presumably agreed to make $36.5 billion of U.S. ag purchases in 2020. (DTN ProphetX chart)

As often accompanies political events like the signing ceremony for the phase-one trade agreement with China on Wednesday, Jan. 15, there was a lot of self-congratulating and verbal high fives in the room. Various officials thanked each other for putting together such a fine document -- a win-win for both sides.

It's not the first time I've felt like the nerd in the front row of math class -- and I don't mean to ruin the party -- but before farmers go out and buy those bigger tractors President Donald Trump talked about, we need to understand some basic math about what to expect from the agreement.

Unfortunately for our purposes, the part of the agreement that specified just how much of each U.S. ag product China would buy was not made public, understandably. China is already making a big financial commitment and doesn't need to make it any easier for the whole world to front-run its trades.

For now, let's assume that China did agree to a total of $36.5 billion of U.S. ag purchases in 2020 and $43.5 billion in 2021 as the document describes. What kind of impact will that much buying power have on ag prices?

Thanks to USDA's Global Agricultural Trade System at…, we are able to reference trade data and see China's past purchases. Previous purchases of U.S. agricultural and related products totaled $25.22 billion in 2016, $24.00 billion in 2017, $13.16 billion in 2018 and $14.58 billion in 2019. No matter how you look at it, $36.5 billion in 2020 is a big jump.

When it comes to U.S. soybean purchases, there is no doubt that China was king for several years before the trade dispute. China's U.S. soybean purchases totaled $14.20 billion in 2016, $12.22 billion in 2017, $3.12 billion in 2018 and $7.05 billion in 2019.

It's helpful to see that in the baseline year of 2017, before tariffs were enacted, China's soybean purchases accounted for 51% of China's total U.S. ag purchases. In that year, 1.164 billion bushels (bb) of soybeans were bought for an average of $10.50 a bushel. The $10.50 average price was close to the one-year average for FOB soybean prices at the Gulf in 2017.

In the past 52 weeks, FOB soybean prices at the Gulf have averaged roughly $9.50 a bushel but are now trading near $10.00. Generously assuming we give FOB soybean prices room to trade at $11.00, how many bushels would 51% of $36.5 billion buy in 2020?

As you may have guessed, the number is outrageous. At $11.00 per bushel, $18.61 billion could theoretically buy 1.69 billion bushels (bb) of U.S. soybeans in 2020. Judging from USDA's supply and demand estimates from Jan. 10, it would be extremely difficult for China to buy that many U.S. soybeans in 2020 without dramatically running up U.S. soybean prices.

OK, you might say: unlike 2017, China probably won't spend 51% of its 2020 budget on soybeans, as it will be pushing dollars into several parts of the U.S. ag economy. Let's say they spend 40% of the 2020 budget on soybeans. How does that look?

Forty-percent of $36.5 billion is $14.6 billion. Priced again at $11.00 a bushel, $14.6 billion theoretically buys 1.33 bb of soybeans, close to the amount China purchased from the U.S. in 2016 and still a high number in today's supply situation.

We could continue with a whole matrix of possibilities, but the main point of this exercise is to give readers a sense of just how difficult it may be for China to achieve Wednesday's agreed upon goals as they relate to soybean purchases.

Now we come to item five of the agreement, on the second page of chapter six.

Read it here:…

Item five says, "The Parties acknowledge that purchases will be made at market prices based on commercial considerations, and that market conditions, particularly in the case of agricultural goods, may dictate the timing of purchases within any given year."

If we're being generous, "based on commercial considerations" could just mean that China wants flexibility as to when they will make purchases. They still want to get a good deal on prices and that's understandable.

However, if the clause, "based on commercial considerations" means that China doesn't have to buy U.S. soybeans when Brazil's beans are cheaper, then we've got a big problem and the phase-one agreement doesn't mean much for U.S. agriculture. I am not a legal scholar, and I will leave that point for others to debate.

On one hand, we have a trade agreement that appears to be so bullish it could severely distort the markets. On the other hand, China may have agreed to nothing more than a decision to act in their own self-interest.

It is no wonder March soybean prices were down 13 1/2 cents on the day that the phase-one agreement was officially signed, and if this leaves you confused, you are not alone. It's going to take a lot more than bigger tractors to actually see China make $36.5 billion of U.S. ag purchases in 2020.

Todd Hultman can be reached at

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Todd Hultman