Market analyst: Crunch negotiation time

02/19/19 — The U.S. and China have been negotiating on trade for the past 80 days, working to come to some agreement on trade issues between the #1 and #2 economies in the world. However, to date, the elusive agreement has not been reached, and both sides are running out of time to reach an agreement before March 1, 2019. That was the deadline for negotiating, or U.S. tariffs would rise $30 billion on Chinese imports (up 15% on $200 billion in goods).

While the Chinese have been trying to buy U.S. soybeans in good faith during this period, news of an 800,000 MT cancellation in early January last week (delayed reporting due to the government shutdown) sure rocked the soybean markets, pushing markets down to double digit losses. Subsequent export reports were also dismal, making it look like the expectation for large Chinese purchases hasn’t come true.

Instead, the Chinese have dangled the possibility of large Chinese soy purchases in front of U.S. negotiators — waiting for them to pounce on the offer. So far that has not occurred, as the U.S. has pressed for Chinese reforms on intellectual property and state controlled tech businesses.

Sunday, Pres. Trump tweeted, “Important meetings and calls on China Trade Deal, and more, today with my staff. Big progress being made on soooo many different fronts! Our Country has such fantastic potential for future growth and greatness on an even higher level!”

Some difficult decisions will need to be made, as it appears China is not offering much in the way of reforming intellectual property rights and state sponsored capitalism/control of major businesses. We also aren’t sure how much more access to Chinese buyers U.S. companies will get. But China continually offers to buy more U.S. goods. It’s possible that an agreement will be made, but it might be one where we simply agree not to impose additional tariffs if the Chinese purchase the things they promise to purchase, and also grant the U.S. companies at least some access to Chinese consumers. However, existing tariffs may not change at all in the mean time. And if the Chinese do not honor their promises, the U.S. will have the ability to put additional tariffs on the $200 billion we originally threatened as well as the $250 billion we haven’t tariffed yet. Current tariffs would imply $32.5 billion of revenue to the U.S. government, and $18.5 billion of tariff revenue to China. Chinese and U.S. consumers and exporters are the ones who will pay it unless they go away or are waived.

But it appears that the U.S. and China will be making some kind of deal, if for no other reason but to keep their economies and stock markets from plunging lower on trade fears (as well as the rest of the world). But from the way it sounds there will be no great breakthrough — something we have been saying for some time as the Chinese are communists and we are capitalists. Just like Russia, Ukraine, Estonia, Latvia, Lithuania, Belarus, and all the other 15 former Soviet Union Countries are capitalists now and have been since the early 1990’s. So we actually have a lot more in common now with Russia and all the other 15 FSU countries than with China. With a communist system, it’s obviously a completely different system and worldview than the U.S. capitalist system.

In fact, China and Cuba are the only prominent communist countries still intact as Venezuala’s communist system is failing, and a new leader and system are imminent. Cuba is in bad shape and has been for years. So the only communist country thriving is China, and that is only because their communist leaders decades ago decided to allow capitalism into their system. Now, their current leader Xi Jinping is trying to re-impose central government, communist control over more industries. And the result after six years is the worst GDP performance growth in 28 years.

Ironically, at the last U.S. State of the Union speech this year, half the members of the U.S. Congress didn’t approve of the statement that “the U.S. will never be a socialist country!” That from the legislature of the strongest economy in the world, perhaps the greatest economic engine the world has ever seen the past 200 years at generating new wealth and ideas. Is the American dream being threatened with an early death, and we ourselves are to blame?

South American weather forecasts have turned to basically normal precip in Brazil the next 14 days, with the southern half also seeing normal precip and basically normal to below normal temps. That means crop stress on soybeans will likely end. But did it end soon enough? Harvest is upon us for about 30% of the Brazilian crop, so the only benefit would be on a portion that still is in a vegetative stage. That could be less than half the crop. Meanwhile, Argentina is seeing slightly below normal precip the next 2 weeks, with temps above normal. Argentina does have some time left before maturity, so there could be some stress on Argentine crops late in the season.

Look for the Chinese-U.S. negotiations to give the market direction the next few weeks, with some major decisions ahead for both countries on the direction they will take the current trade dispute.