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Trade agreements bring 2020 optimism

By Staff | Dec 26, 2019

The potential demand for U.S. exports improved dramatically with the announcements in mid-December of two trade agreements. Phase 1 of the U.S.-China trade deal could nearly double U.S. exports to China over the next two years. The deal follows more than two and a half years of on-and-off negotiations between Washington and Beijing that resulted in the trade war.

In addition, the U.S. House of Representatives will likely vote to approve the U.S.-Mexico-Canada Agreement (USMCA). The Senate will delay their approval of this legislation until early 2020. Expect that the USMCA, once approved, should be fully ratified in the first quarter. These two trade deals together cover some $2 trillion in overall trade amongst these counties.

According to U.S. Trade Representative Lighthizer, the Phase 1 Deal with China will reduce some U.S. tariffs on Chinese goods. In exchange, China will increase purchases of U.S. agricultural, manufactured and energy products by some $200 billion over the next two years. Of this amount, ag purchases would total $40 billion to $50 billion over this time frame.

Chinese officials indicated any purchases will be based on economics, domestic needs and be within its World Trade Organization commitments. Note that the U.S. averaged around $22 billion of ag exports to China annually in the five-year period from 2013 to 2017 – ahead of the trade war.

China would also end restrictions on growth hormones for beef and ease its approval process for genetically modified crops. The deal would also include measures to improve protection of intellectual property, open the Chinese financial services market and improve transparency of China’s currency management. In exchange, the U.S. would roll back some existing tariffs on Chinese goods on a phased basis and cancel new levies originally planned for implementation on December 15.

Expect farmers to be cautiously optimistic regarding this trade news. The U.S. has relatively large estimated corn, soybeans and wheat ending stocks from the 2019 crop year. Soybean and corn planted acres in South America are expected to increase. Then next spring, U.S. planted acres for corn and soybeans are will total roughly 12 million more acres as a result of 15 million acres that were prevented planting in 2019. Expect nearby corn and soybean futures prices to find sharp resistance as they approach 50 percent to 62 percent retracement from the October highs of $4.10 per bushel for March corn and $9.70 per bushel for March soybeans as compared to their September lows, respectively.

These trade agreements should also benefit the U.S. animal protein markets. With current record U.S. production, improved global exports are key to higher animal protein prices in 2020.

Steve Johnson is an Iowa State University Extension and Outreach farm management specialist. He can be reached at sdjohns@iastate.edu.

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