Trade agreement is signed amid market doubts

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The expected phase one of the U.S.-China trade agreement was finally signed last Wednesday, the 12th. In a big ceremony in Washington, which was attended by several officials and businessmen, U.S. President Donald Trump and Chinese Vice Premier Liu He were responsible for signing the document that brings obligations for both countries in the next two years. Despite the signing, the lack of clarity about some points of the agreement brings distrust to the market.

On the agricultural side, the phase one of the agreement establishes a Chinese commitment to buy additional USD 32 billion (relative to 2017 purchases) in U.S. agricultural produce until the end of 2021, with USD 12.52 billion in 2020 and USD 19.5 billion in 2021. The list of products is very wide, ranging from soybeans to food for pets, and what is worrying is the lack of detail of the volumes to be bought of each product. Yet, the financial volume can be considered high and brings the possibility of some forecasts.

As soybeans account for an average of 65% of the sales of U.S. agricultural product to China, we can consider that out of the additional USD 12.5 billion forecast for 2020, USD 8.1 billion may be aimed at soybeans. This volume can represent up to 22 million tons of the oilseed. Adding this volume to the 32 million tons exported from the United States to China in 2017, the total volume would reach record-breaking 54 million tons exported by the country to China in one season. The big question is that the market does not believe that sales will reach this level, because, as mentioned, there was no commitment on specific volumes of products, but on the total value of products.  Besides, no deadline has been set for the start of large-scale purchases by China.

Therefore, Chicago is very skeptical after the signing of the agreement, expecting that the Chinese will start to empty U.S. stocks as soon as possible. In the meantime, Chicago must not have strength to overcome the barrier of USD 9.50 for the nearest contracts.

Despite this current market sentiment, we believe that China must buy at least 45 million tons of U.S. soybeans in 2020, which would already be a very relevant volume. If this volume is confirmed, Brazil will naturally lose an important share of its additional sales obtained during the trade war, which could be decisive for the Brazilian market this year, directly affecting our export demand. Such a possibility deserves extra attention from now.