It was a rollercoaster week for the markets. After China signed the Phase One agreement with the U.S., corn and soybeans closed lower for two consecutive days. On Friday, corn prices popped higher, sparking some hope.
Kevin Duling of KD Investors thinks the U.S. deciding to leave tariffs in place is a negative factor for the markets.
“The fact [is] that we’re enforcing this deal with tariffs—the markets are always really sensitive to the ‘tariff’ word,” he said. “I think that’s why you’re seeing a negative effect right now, but going forward, it’s a sea change. It’s a psychological shift. The only thing we need to confirm the deal is a few sales, but it may be a month or more before we start seeing any sales.”
Duling pointed out the key thing to watch is the cash market first.
“If you start seeing a basis pop, that’s a good sign something’s going on behind the scenes,” he added.
Duling said with the Chinese Lunar New Year quickly approaching, plus China needed some time to align purchases, he thinks it could be anywhere from 30 to 120 days before China comes back to the market in a major way.
“If I was in their shoes, I’d pull back and I’d sit on my hands for a month,” said Duling. “Then I’d start rolling [with purchases] when everybody’s given up on the deal. That’s when I would be sneaking in with a futures position or cash. It’s just such a massive amount to go that much over our 2017 baseline.”
John Payne of Daniels Trading also acknowledged the skepticism in the market, as the $40 billion promise is considerably larger than what they bought before the trade war started. Yet, he thinks just because China isn’t buying today, it doesn’t mean China won’t meet those targets.
“Take them at their word,” said Payne. “I think you fight city on this your own your own risk. If beans are trading in the $11 range this summer, what happens then? What happens when those prices rally?”
Payne said if prices do rise, that’s when he thinks this trade deal – and the trade promises — will be tested.
“The big questions aren’t when everything is rosy,” he added. “What are they going to do when things get tough? What if pries jump by one-third and they’re required to buy [U.S. products]? If they’re required to buy, it could change things.”
Duling said two export terminals in the Pacific Northwest were putting out bids for soft white wheat on Friday. He said those are terminals that had been out of the market for more than one month. Duling said why he couldn’t confirm that’s interest from China, but he didn’t think it was coincidence it happened the same week as China signed a trade deal with the U.S.
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