By Jon Hilsenrath
In an 1892 mystery story by Sir Arthur Conan Doyle, Sherlock
Holmes figures out what happened to a missing racehorse named
Silver Blade by observing a dog that didn't bark in the night.
Likewise, sometimes what doesn't happen in markets can be a clue to
something significant.
In the case of the recently signed U.S. trade deal with China,
the dogs have been notably quiet in Chicago's agricultural futures
markets. Despite China's commitment to buy more American farm
products, prices haven't gone up -- a sign that investors and
traders don't see the accord having much real economic impact.
The price of a bushel of soybeans is lower than it was when
Donald Trump was elected president in November 2016. It is little
changed from when Mr. Trump ramped up his trade confrontation with
China and has lost ground in the days since the deal was announced.
Prices for wheat, pork and dairy products have been similarly
stable.
Prices are supposed to be the market's barking dog. When they
rise, it is a signal of soaring demand or a shock to supply. When
they fall, the opposite. Because markets are forward looking,
especially futures contracts traded in Chicago, expected changes in
demand and supply should move prices almost as much as actual
changes.
Soaring stock prices are a sign of broad optimism about the U.S.
economy and likely some relief that trade confrontations are
receding. At the same time, quiet commodities markets suggest
investors and others don't see foresee any big shifts in the supply
of, or demand for, farm products.
Investors and others might doubt China will live up to its
commitments or that its promised purchases will simply shift demand
from one country to another, or from one year to the next --
without fundamentally changing the fortunes of American
farmers.
Soybeans, by far the largest component of U.S.-China
agricultural trade, are a window into all of this.
Chinese negotiators committed to increase purchases of U.S. farm
products by $32 billion over the next two years. The deal is part
of a broader agreement by China to increase purchases of a wide
range of U.S. products, including energy and manufactured goods, by
$200 billion over two years.
Scott Henry, an Iowa soybean farmer, said he is looking to
invest in farmland because he's optimistic about the sector with
trade disputes receding. "We think the buying opportunity is now,"
he said. Still, he harbors some skepticism that China will follow
through on its commitments after months of back-and-forth
negotiations.
"Let's see that first ship go to China," he said.
The dynamics of global commodities markets explain some of the
investor skepticism.
Brazil and the U.S. are both major exporters of soybeans. Of the
85 million tons of soybeans that China imported in 2019, 57 million
tons were supplied by Brazil, estimates Ken Morrison, a former
commodities trader for Cargill Inc., the agriculture giant, who now
writes a newsletter on the industry.
If China shifts its purchases from Brazil to the U.S. to comply
with the new deal, global demand wouldn't change. Such a shift
might push up the price of U.S. soybeans relative to Brazilian
soybeans. But Brazil's soybeans would then be cheaper in other
markets, giving it a new advantage outside of China. The result:
the gap between U.S. and Brazilian soybeans would likely close,
leaving the price of U.S. soybeans little changed.
If the price doesn't change, are American farmers better off?
The answer is yes if they are able to sell more. Right now, at
least, that's not in the outlook. The U.S. Department of
Agriculture estimates that American farmers will plant 84 million
acres in the 2020-2021 planting year. While that is more than the
76 million acres in 2019-2020, it is less than as much as the 87
million planted the year before.
What if China bought more soybeans on global markets overall,
rather than simply shifting purchases from one country to another?
China could order its state-owned storage companies to buy more.
But without an increase in national demand, the extra soybeans
would end up in storage facilities, putting downward pressure on
prices down the road. China could buy more next year to meet its
goal, then buy less in 2022.
Another challenge: Beyond two state-owned enterprises, Mr.
Morrison noted, most of China's soybean market is driven by private
firms.
"This thing can't work in a competitive marketplace," Mr.
Morrison said of the trade deal.
Mr. Morrison does see potential benefits for U.S. farmers in the
agreement, including possible reforms to how China manages import
quotas for wheat, corn and rice. When it comes to broad purchase
promises, though, he said the deal leaves China the option of
coming up short if market forces dictate.
"The parties acknowledge that purchases will be made at market
prices based on commercial considerations and that market
conditions, particularly in the case of agricultural goods, may
dictate the timing of purchases within any given year," the
agreement says.
The U.S. and China have ended up in an odd position. China, a
one-party state with communist roots, insists that market forces
determine the outcome of its purchase commitments. Meanwhile the
U.S., a voice for capitalism, depends on massive state intervention
to meet purchase commitments.
Mr. Morrison said he's not buying it. His trading portfolio is
short soybeans and long corn.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
(END) Dow Jones Newswires
January 19, 2020 10:14 ET (15:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.