Corn To Gain From US-China Trade Deal, Soybean Benefits To Lag

A trade deal between the U.S. and China will help boost agricultural commodities, such as corn and sorghum, by restoring U.S. producers’ access to the key Asian market, Terry Reilly, senior commodity analyst at OTC Global Holdings' Futures International said.

But Reilly told International Business Times that the largest U.S. agricultural export commodity -- soybeans -- will only see limited gains in the current marketing year even if a deal between the two countries is reached as Brazil and Argentina are well-positioned to meet current demand with their harvest cycles.

The marketing year for soybeans and corn runs September through August.

A trade deal between the U.S., which exports 60 percent of the soybeans grown in the country, and China, the world's largest importer of soybeans, is expected in April, Reilly said. He expects the two countries to agree to a deal that will drop the additional 25 percent tariffs on Chinese products.

“I don't think the VAT is going to be lowered. The pre-existing one [tariff] will remain in place, but the 25 percent tariffs will probably be dropped,” he said.

“South America’s new crop supplies will undercut U.S. soybean exports even if a trade deal gets done. For the total marketing year, we don't see more than 10 million tons of U.S. soybeans going to China -- which is down dramatically from the previous year.”

The trade war hit U.S. soybean exports to China in 2018, pulling it down to 16.6 million tons, from 32.9 million tons in 2017. Soybeans last traded around $9.07 per bushel.

Reilly sees very little in the way of recovery of prices for the soybean market. He expects soybeans to remain below $9.25 a bushel from now until Aug. 31.

Another factor undermining soybean demand is the African swine fever outbreak in China. “This has impacted the soybean meal consumption and derivatives of soybeans as the African swine fever has wiped out a good chunk of the pig population within China,” he said.

“So, even if China returns to the U.S., they're only going to buy so many soybeans because they don't need as many (as they bought in the previous year). Forecasts for next year would be definitely bearish.”

For the crop year Sept. 1, 2019 - Aug. 31, 2020, Reilly expects a 50 cent-per-bushel appreciation in soybean prices.

Reilly said the drying up of soybean exports to China over the past several months has made a huge contribution to the widening of the U.S. trade deficit.

Many U.S. producers depend on Chinese importers for selling their soybeans, and the trade war has turned some of the operations in the U.S. companies into negative margins, he said. “The trade war has also put an economic strain on the rural communities and has created a backlog of soybean inventories in the U.S., which is driving prices lower.

The U.S. saw an overall trade deficit of $621.0 billion in 2018, which is 12.5 percent higher than the previous year and the largest since 2008. The deficit with China increased $43.6 billion to $419.2 billion in 2018. Exports decreased $9.6 billion to $120.3 billion and imports increased $34.0 billion to $539.5 billion.

CORN TO BENEFIT

While China has reduced soybean imports from the U.S. amid trade tensions, Reilly said many producers plan to switch to corn this spring.

“Corn is still being consumed in the industrial sector. And many other Southeast Asian countries have been buying U.S. corn over the recent months.”

He expects the corn market to benefit in the short term in case of a positive trade deal with China and the country agrees to buy not just soybeans, but also corn, ethanol, sorghum and DDGS (Dried Distillers Grains with Solubles). “A trade deal will possibly lower extremely high import tariffs on ethanol and that could be a good boom for the U.S. corn industry,” Reilly said.

“This opens doors to U.S. producers because the U.S. didn't export a lot of corn to China to begin with. Now China is talking about importing a lot of corn from the U.S. if a good trade deal comes in place,” he said.

“I think that [corn] may have the most potential market impact and then over the long run it would be soybeans that stands to benefit from the deal,” he added.

Reilly expects corn prices to trade at an average price of $3.75 a bushel for the current marketing year. But given the large global supplies, including those from Ukraine and Brazil, corn price upside might be limited to an average of about $3.95 a bushel for the marketing year 2019-2020, he said.

Corn last traded at $3.72 per bushel.

“And if China buys a lot of U.S. corn, $3.95 a bushel could turn into an average crop-year price of $4.20 a bushel,” Reilly added.

“A lot of the price outlook really does depend on what China brings to the table -- not only in the resumption of U.S. soybean imports but also if they're going to come in and buy corn,” he said.