NEW ENGLAND, N.D. – Trade talks and tariffs continue to dominate the market, and recent negotiations between the U.S. and China may turn out to be the break U.S. producers have been waiting for.
Other trade issues with other countries are either in the works or just starting the negotiations.
At the G7 summit, President Trump and Chinese President Xi Jinping met and made the decision to stop the trade war and start negotiating.
Trump put a 90-day limit on the talks, so March 1 is the end date for a new U.S.-China agreement.
“If there is no trade agreement by then, we may go to a whole new level of tariffs,” said Frayne Olson, NDSU Extension crops economist and marketing specialist.
Update - Currently, trade negotiators are in Beijing and because the talks are going well, are hoping to push back the March 1 deadline for higher U.S. tariffs on Chinese imports. Trump has indicated he may push back the deadline.
Olson spoke to producers at the Hettinger Crop and Livestock Day in the morning and at the Taylor Farm Institute in the afternoon.
Chief U.S. trade negotiator, Robert Lighthizer, and his team have been meeting or calling/video-conferencing almost daily with Chinese negotiators to try to strike an agreement.
“Lighthizer said there was substantial progress made in technology transfer and intellectual property, which were the two main issues,” Olson said. “What Lighthizer said they are looking for on those issues from the Chinese is to be more specific, to narrow the field, be more encompassing and to have enforcement.”
One sticking point for the U.S. has been, “How do we make sure the Chinese follow through?”
China has made promises before, and has been very slow to follow through, if at all.
Tools to make sure this happen: “If they don’t follow through, we may put tariffs back on.”
Besides those main issues, transportation, energy and yes, agricultural products, are part of the negotiations.
Neither side has talked about lifting the current tariffs.
The Chinese newspaper said there were “frank, concrete discussions and progress was made.”
Will trade talks be successful?
With the trade talks and comments between negotiators, Olson said it was “impossible to predict if there would be success.”
Earlier in the week, Olson said he believed there was a 60 percent chance the two countries would come to a deal.
On Feb. 1, because of the Jan. 31 trade meeting, Olson said he would increase that number to a 70 percent chance the U.S. and China would be successful.
But at the end of the day, both parties have to gain from the deal.
The trade deficit on the U.S. side is large.
“We buy a lot more China products than they buy from us,” he said.
To level the playing field, China has agreed to purchase up to 1 trillion dollars of U.S. products over 6 years, and energy, auto and ag products will be part of that purchase.
China also recently offered to purchase an additional five million metric tons (mmt) (185 million bushels) of soybeans from the U.S., but the country has not purchased much yet.
“That is putting some additional market support into soybeans,” he said.
But that would not be all in one purchase.
Usually, China would buy some soybeans after harvest, but in 2018, they waited until December to buy any soybeans.
Before the tariffs, China purchased about 21.07 million metric tons from the U.S. In addition, China would have bought 103 mmt from the entire world, but it is expected to now only buy 84 mmt.
From December 2018 to Jan. 7, 2019, China bought from 3.014-3.734 mmt of soybeans, with that agreement to buy another 5 mmt.
“That is way below what China normally buys, and they didn’t buy anything at harvest. Normally, they do,” he said.
Ag products part of trade deal
While China has promised to buy more ag products, the country may not go back to buying soybeans from the U.S. Other countries, like Brazil, also produce soybeans, and even if the U.S. removes tariffs, China can easily buy Brazil’s soybeans right off the combine.
However, U.S. negotiators indicated they want to ensure buying ag products would be part of any trade deal.
Other ag products China might purchase include: pork, beef, chicken, distillers grains, corn, sorghum, cotton, spring wheat or rice.
Some 15 years ago, China made the decision to produce rice, wheat and corn, and they would buy soybeans to feed livestock. It is illegal for any GMO product to be used for human food in China.
“China has the largest crush facility in the world to crush soybeans for feed,” Olson said.
That facility could also crush canola, if China wanted to buy canola in lieu of soybeans. China does buy canola from Canada, and is now buying sunflower from Russia, plus other feed products from other countries.
Meanwhile, the USDA is forecasting less soybean exports this year than last year.
What is going to happen to our export sales the rest of the winter and summer?
“If we don’t sell soybeans to China, we have to sell 100 percent to the rest of the countries in the world buying soybeans,” Olson said.
Regardless of sales, the U.S. will more than likely have a lot of soybeans left in the bins before harvest next year.
China, the number one export country for soybeans, purchased 94.125 mmt from 2017-2018. Number two, EU, only bought 15,000 mmt. In fact, the total for the other countries, besides China, in 56 mmt.
Spring wheat purchase
For spring wheat, the U.S. exports 542.9 mmt a year. The number one buyer is the Philippines, but China is the number four buyer.
Could China buy more spring wheat under the new trade deal?
China is actually the world’s largest wheat producer, but it is not high protein, milling quality wheat. They import a small amount and export nearly zero, and use their wheat for feed and bread.
More than 50 percent of the world’s wheat is stored in China.
“They have massive wheat reserves, but they store in flat storage, not in bins,” Olson said.
China reported it would purchase between 3 and 7 mmt of wheat, not spring wheat, but U.S. wheat.
“The amount would depend upon how the trade talks go,” Olson said. “Much of this is not economics, but politics and putting pressure on the other side.”
Why did China put import tariffs on U.S. soybeans? For the same reason - politics.
Looking at markets
Producers in the group asked, “Where are we headed from here?”
Old crop soybeans are at the highest point the U.S. has seen in a long time.
“If you have soybeans in the bin, do you sell? It depends on the trade deal with China. There is still enough hesitation in the trade market as to how the trade talks will play out,” he said.
Olson’s expectation is that the market will continue to see an uptick in prices.
“The cash market can handle it now,” he said.
If China actually buys a large amount of soybeans and other ag products, the railroad, trucks and other transportation and storage are operating smoothly, and can now handle the influx. The local elevators have cleaned out their storage from harvest.
What is going to happen to the basis?
“If China starts buying a significant amount – they are going to buy some beans, some corn, some wheat – logistically, the easiest, cheapest place to get those things from is us…. We can get it there (to China) faster and cheaper than anyone else in the world,” Olson said. “More than likely, if a large volume of grain is purchased, it would come from this region.”
If soybeans are purchased, the soybean market would go up.
However, if corn is purchased, it probably won’t affect the soybean market.
Old crop corn is sitting back waiting for something to happen.
What will happen in 2019?
The wheat market has not been as impacted by the China trade deal as soybeans has.
“We don’t sell a lot of wheat to China,” he said.
Normally, the U.S. keeps about 5 percent of “our total needs” in reserve.
For the last seven to eight years, the U.S. has left about a 5-6 percent margin for error, but based on USDA export forecasts, the U.S. will have 23 percent carryover to start with, which is a lot.
“We need to cut soybean acres, to bring the reserve back down in line,” Olson said.
Where could the extra soybean acres go?
The corn market could absorb extra acres without crashing prices.
“I do think we will see an increase in corn acres,” he added.
What about wheat?
The U.S. will probably lose from a million acres of winter wheat.
Spring wheat cannot absorb many more acres without crashing the market.
On March 8, USDA will release its report.
November soybeans are more than $9 – will the prices be low enough to lose acres?
That depends on where you are located in the U.S. If a producer pencils it out, he could still make money off the soybean market.
“It becomes a psychological barrier because it is understood those prices are where we have been before. It is a find line we are walking in the soybean futures market,” Olson said.
What happens in the soybean market will have an affect on the new crop.
With spring wheat futures, the market does not need a lot of extra acres.
With corn futures, it is a wait and see scenario.
It is a good idea to purchase fertilizer, especially nitrogen, now.
“Everyone I have talked to in the fertilizer industry says N prices will continue to rise because they did not get enough put down in the Corn Belt,” he said. “There is a lot of anhydrous that did not get put on last fall and we don’t have enough capacity to put it all on in the spring.”
“We are back up to these levels where we haven’t seen these kind of prices in a long, long time,” Olson said.
What is going to happen in the soybean market will impact most other markets – not for old crop but for new crop.
The only way Olson sees the prices for soybeans holding prices is, “we are going to need to lose 6 million acres.”
USDA forecasted a 6.5 million cut, so Olson is close.
Last year, the U.S. planted (top five crops) 90 million acres of soybeans, 90 million acres of corn, 48 million acres of all-wheat, 14 million acres of cotton and 8 million acres of sorghum.
Corn is always going to be more expensive than soybeans. Soybeans in Iowa are grown for rotation.
The price relationship between corn and soybeans favors beans. So the Midwest Corn Belt won’t flip acres.
The U.S. will probably lose about 200,000 acres of the 1.87 million acres of durum grown. The southern durum is only grown to break up the disease cycle.
Canada has forecasted a 25 percent drop in its durum acres, along with some cuts in pulse acreage, and will increase its canola and spring wheat acres slightly.
Pulse crops depend on India with its 50 percent tariffs. India has more pulses than it needs, and it begins harvesting its winter crop when the Northern Plains plants. Yields are expected to be average to below average.
“Right now, the thought is India will slightly reduce tariffs, and we can be competitive with that,” he said.
If 6 million is lost from soybeans, there may be a 3 million acre increase in corn, a million in cotton, a half-million or so of winter wheat, a million in spring wheat, and a split increase between all other crops, such as canola, sunflower and pulses.
“Based on the number, we will more than likely only see a 4-5 million shift in that 6 million soybean acreage,” Olson said.
Producers now wait for March 1, and the results of the U.S.-China trade negotiations.