Agricultural commodities have
continued to suffer the past year. This is because of the ongoing trade
conflict between the United States and China. The chart below shows the performance
of corn and soybeans, which are very important crops from the US.
The reason for the weakness in
price is that the United States is the biggest producer of the two crops. China
on the other hand is the biggest consumer of the two crops. Therefore, when the
US implemented tough tariffs on China, the country retaliated by issuing
tariffs on the two crops. This led to an increase in unsold inventories from
the US as China looked for alternative producers. Brazil was the leading
contender but it had different seasons from the US. To make matters worse,
China got a major problem that affected the soybean demand. This problem was
the African Swine Fever which has led to the death of thousands of animals.
Most of the soybeans imported by China is used as feed for pigs.
In recent weeks, as shown above,
the prices have become a bit stable as China and the United States push on with
the negotiations. There are two main reasons why they are right to be
First, with the United States
headed to election, Donald Trump is incentivized to have a deal. This is
because if the election happens without a big trade deal, it may spell the end
of his presidency. This is because among the biggest casualties of the trade
war have been Trump’s own supporters. Therefore, he desperately needs a deal.
Further, since he watches the performance of stocks closely, he wants a deal
that will help push US stocks much higher.
Second, China too wants a deal
because of its weakening economy. In recent months, the country has continued
to release weaker data. For example, its GDP rose by 6.5%, which was the lowest
level in years. Recent data show that the manufacturing sector is easing, with
the PMI being in the contracting segment. Other data too has been weakening. There
are also reports of large manufacturers moving to other Asian countries so as
to avoid the US tariffs.
The next 50 days will be crucial.
As you recall, the US has put a deadline of 1st March for the deal
to happen. If it doesn’t, the US may impose 15% more tariffs on Chinese goods.
This will bring the tariffs to 25%, which may lead to more retaliatory tariffs
from China. This may lead to lower soybeans and corn prices.