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 optimistic.
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.