What is the best play from China of Trump? The Chinese are very smart traders and they have done in-depth analysis of every aspect of our President who they know demands respect and has an autocratic perception of himself. When Trump threatens to drown them in vinegar, do they do likewise tit for tat? Or do they appeal to Trump differently, pushing other buttons? They put tariffs on U.S. sorghum, beef and pork which alarmed Trump’s rural ag constituency who sounded that alarm in Washington.
The Trump campaign has to hold rural red states and a full out trade war with China that upends the ag economy would have pealed support away from the Trump base. China showed Trump that they could hurt him politically by directing their tariff retaliation, as with sorghum, at his base. What would more of the same have gotten them? Just one angry President looking for ways to get even.
China responded to the Korean confrontation with sugar toward Trump bringing forth praise from him that he would reward their help with North Korea with a better deal on trade. China controls the kind of deal that Trump gets with Chairman Kim, and Trump politically needs a win over Korea to again help him politically at home. China turns Kim on and off showing Trump that it can go both ways. They have leverage there.
The bottom line is, decisions of policy made by Beijing have serious implications to Trump politically and domestically. China can make Trump look like a chump or they can make him look like a hero. Let me repeat for effect. China can make Trump look like a chump or they can make him look like a hero. I think Trump gets it. He has incentive to cooperate. Trump gets a summit with Chairman Kim and he can’t wait to pick up his Nobel Peace Prize. . . . Trump the hero. China drops the tariff on U.S. grain sorghum and Trump is declared the hero of the southern plains.
There were trade talks with China. . . and given the depth of the trade issues and subject matter, a reported agreement to hold off on further tariffs while they continue to work on a framework for a larger agreement as reported was the best outcome likely possible. I have seen the Chinese trade surplus with the U.S. calculated, as both $335 bln and $375 bln depending on what is included. U.S. trade deficits make Donald crazy. He hates them. He demanded that the trade deficit with China be reduced by $200 bln. That is a nice round number but it is very difficult to find the items that can add up to that amount. China agreed to try to make major efforts to reduce the deficit but refused to get tied to a number. So, in general Beijing agreed to the concept of a mutual effort to reduce their trade surplus. The two areas of focus for which there were numbers reported are Agriculture and Energy.
Again, these sectors are both bastions of Trump base political support. The numbers were to boost Chinese ag purchases by 35-40 percent and energy purchases by $50-60 bln annually. That would be “YUGE!” for those sectors. Previously, they have canceled some existing US soybean contracts, stopped buying U.S. soybeans and slowed down or halted the entry process for U.S. soy imports. They still have duties on U.S. DDGs and ethanol. They have tariffs on U.S. pork and beef. If this is all reversed and then China comes into the market with new scale and urgency with purchases they could spark an economic boom in both sectors.
The bigger the hero that they can make Trump in farm country the better. Trump was reportedly angry that they only opened their beef market to ractopamine-free U.S. beef which is a small niche market. Commerce Secretary Wilbur Ross needs to get it right this time and convince them to accept commodity beef like that which Americans eat. Same for pork.
Narratives seem to change quickly, every few hours. There were about three narratives over the weekend until they got to the one where Mnuchin announced that they were putting the trade war on hold and that China had promised to step up ag and Energy purchases. They can create a new less friendly narrative very quickly but I have to admit that I like this one a lot. I hope that China follows through and sparks a mini-surge in the U.S. ag economy that raises farm prices. Beijing can make that happen. The Democrats could say Trump was beaten in trade talks but that will not sell in farm country if prices and incomes surge from Chinese demand. It would sure be nice to have an income that benefits from the tax cut.
The soy complex and cattle took the lead. China can come with demand to offset growing cattle supplies. Live Cattle futures had sold off into a basis hole that could prove to be a bear trap.
I have been calling for 16-18-week cycle lows in soybeans in late May. Last week’s low was in the early window for such a low. The May low in soybeans held the March low. The most bullish chart look would be for the chart gap higher open on Sunday night May 20th, created by the news that tariffs were being sidelined, to remain open. It stood the test as of this writing. It could be a breakaway gap for a new leg up in soybeans that frankly could bring back a target of $12 soybeans. If China is going to make an impression buying U.S. ag products, the soybean market would be a great place to let her rip.
I will end with a question. . . what would the opposite of a Russian Grain Embargo look like? The answer is coming.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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