- Geopolitics dominate the holiday news
- President Trump says he will sign US/China trade deal on Jan 15
- Chinese purchases of U.S. soybeans should soar through early 2020
Geopolitics dominate the holiday news — The news over the holidays has been dominated by geopolitical events. The markets are still waiting to see whether North Korea will launch or test a new weapon within the next several days. North Korean leader Kim Jong Un on Wednesday promised “shocking” action with a debut of a “new strategic weapon.” Kim Jong Un said that the U.S. would “pay for the pains” that U.S.-led sanctions have caused. Kim Jong Un has ramped up his threats after the U.S. refused to engage in new negotiations prior to his deadline of Dec 31, 2019.
Meanwhile, the U.S. embassy in Iraq was under a siege earlier this week by Iran-backed militia supporters who were protesting U.S. airstrikes this past Sunday on the militia’s bases. The U.S. airstrikes were retaliation for a rocket attack on a U.S. base in Iraq that killed one U.S. military contractor. Iraq’s government said the protesters at the U.S. embassy left by Wednesday, thus relieving the pressure on U.S. diplomats trapped in the compound. US/Iran relations remain very tense and the markets are waiting to see if Iran launches more provocations against U.S. military or diplomatic assets in the region.
President Trump says he will sign US/China trade deal on Jan 15 — President Trump on Tuesday tweeted that he will sign the US/China phase-one trade deal on January 15 at a ceremony at the White House with high-level Chinese officials, likely Chinese Vice Premier Liu. Mr. Trump also tweeted that, “At a later date I will be going to Beijing where talks will begin on phase two.” Chinese officials did not immediately confirm that plan, which means that it is not clear whether the Jan 15 signing date is firm or whether Mr. Trump was simply making an offer to China.
The China Morning Post this past Monday reported that Chinese Vice Premier Liu would travel to Washington this Saturday and stay in town until the middle of next week in order to sign the US/Chinese phase-one trade deal. The report said that the U.S. extended the invitation to Mr. Liu and that China accepted. In response to that report, China’s Ministry of Foreign Affairs refused to comment on Mr. Liu’s U.S. travel plans. For his part, White House trade advisor Navarro on Monday said that the phase-one trade deal was “in the bag” and would be signed in the next week or so.
Whatever the signing plan turns out to be, the markets will be pleased when the phase-one trade agreement is signed since that would eliminate the possibility of any last-minute glitches on how the agreement should be interpreted.
The markets are waiting to see the details of the agreement, which will not be released to the public until the agreement is signed. The U.S. has claimed that China agreed to buy $40 billion of U.S. ag products annually in 2020 and 2021, and President Trump has claimed that the purchase obligation is even higher at $50 billion. China has yet to confirm any exact figures on agriculture purchases. Also, there has been no public information about whether China has committed to buy certain amounts of specific commodities.
China is expected to struggle to buy $40 billion of U.S. ag products in 2020 since that is far higher than the pre-tariff level of $24 billion seen in 2017 and the record high of $29 billion seen in 2013. If Chinese ag purchases do not meet President Trump’s expectations, then Mr. Trump might quickly impose new tariffs on China.
After the phase-one agreement is signed, the markets will be looking forward to a timetable for the phase-two talks. The phase-two talks are likely to be difficult as China drags its feet to see if President Trump wins reelection in November 2020. The markets will remain on guard for the possibility that Mr. Trump might get frustrated with a slow pace of the phase-two talks, leading him to impose new tariffs or penalties.
The markets are generally expecting the U.S. pressure on Chinese tech companies such as Huawei to continue in 2020 on a largely separate track from the trade talks.
Chinese purchases of U.S. soybeans should soar through early 2020 — In some positive trade news, China on Tuesday announced the approval of a new strain of genetically-modified soybean, which will make it easier for China to meet its obligation to substantially boost its purchases of U.S. ag products. The approval was for an insect-resistant GMO soybean variety developed by Dow AgroSciences. China on Tuesday also renewed permits for ten GMO crop varieties including canola and corn. China, like many countries, sometimes uses thinly-veiled regulatory barriers to protect domestic producers from foreign imports.
China’s purchases of U.S. soybeans have picked up in recent months as a goodwill gesture as the US/China phase-one trade deal neared completion. China is providing tariff exemptions on U.S. soybeans to make it feasible for Chinese companies to buy U.S. soybeans. Chinese imports of U.S. soybeans in 2019 partially recovered after dropping to negligible levels in the last nine months of 2018 when the U.S. and China exchanged penalty tariffs.
China’s purchases of U.S. soybeans in November 2019, the last reporting month, reached a 21-month high of 2.6 million metric tons. Based on historical seasonal patterns and the phase-one trade deal, China should be buying a least 4-8 MMT of soybeans from December through March as U.S. farmers sell off last summer’s harvest to make room for this coming summer’s harvest. March U.S. soybean prices in December 2019 soared by +7.2% as the market looked ahead to the phase-one trade deal that was announced on Dec 13.
