Transcript

Last week's meeting between Donald Trump and Zijing Ping has put agricultural trade back at the centre of US China relations. Following the summit, both sides signals progress on tariff reductions, expanded market access and renewed Chinese purchases of US farm goods. But despite the optimistic political messaging, grain markets reacted cautiously to help us understand what was actually agreed, what it means for agricultural markets and whether this could be a genuine. Turning point in US China farm trade. We're joined today by Stonex Senior Commodities economist, Mike Castle. Thank you for joining us, Mike. Thanks for having me. Good to be back. So, Mike, what exactly appears to have been agreed during this summit and how significant are these commitments in practical terms? Yeah, So obviously, ton of eyeballs on this, right? This is a really big event for the commodity markets. And kind of what we've seen is, is something very familiar where we're getting these headlines that are whipsaw markets back and forth kind of this, for lack of a better term. He said, she said kind of game. But a concise way to think about this summit is that the US side has kind of presented as a framework for renewed Chinese purchases of American goods, especially AGG, right along with some market access and licensing concessions. That kind of thing. The headline item, what we got over the weekend was China potentially increasing their imports of USA products by roughly 17 billion annually over the next three years. And that would be allegedly on top of the 25, 000,000 tons a year of soybeans. But the key nuance at this point and why the market has been so cautious is the Chinese side is not publicly confirmed. Many of this, especially the dollar value commitments, their statements are a lot more general kind of focused on stabilizing relations, expanding. Cooperation, healthy competition, all that kind of stuff. So in practical terms, the summit probably did improve the near term outlook for US AG exports, reduces the risk of further escalation. But markets are trying to kind of treat these as cautious until they actually see buying activity because you know, it's not the first time we've seen this. We saw something very similar during the phase one deal where the US announced these very large purchase targets, but ultimately China only, you know, fulfilled part of them. Um, and that's 17 billion figure of non soy demand. I think I, we may have a graphic we can show on that, but just to kind of give some context, you know, folks will point out like this is kind of the average of what we saw from 21 to 23. And that is true, but it's worth looking back at history. I just pulled going back to 2010 and that is it would be the third largest number in that span. And for context, 2025 we were barely over 5 billion. So it would be a big step up, but again, we have to actually see confirmation before we can really fully. Believe it. Now you were with us last week to discuss the latest WASDE report, which remained relatively cautious on soybean exports and US ending stocks. What does that tell us about how seriously the market viewed the prospect of a major Chinese buying program? Yeah. So I think everyone kind of has to be cautious, right? And just looking at the numbers, USA is definitely more optimistic for China soy demand in the year ahead. I mean just looking at the difference between the waste that's our USDA numbers and the Kazda, the numbers that are put out within China, just looking at their soybean balance sheets, you know are USDA target for Chinese soy imports in 2627. At 1:14, that's eighteen and a half million met tons above what China themselves are saying. Uh, they're crushed target is 16,000,000 metric tons larger and that, you know, compares to roughly double the gap that you saw in the year prior. So USDA kind of is picturing this, you know, big return of buying in China or at least continued buying, whether that's from the US or Brazil. Overall, China is kind of trying to show a smaller soy demand and it seems like them trying to say, hey, maybe soybeans aren't our best opportunity moving forward here. So I think USA kind of published safe numbers. You assume some partial Chinese buying maybe not that full 25,000,000 net tons. That's 919,000,000 bushels in US units. If China actually did purchase that amount, we'd be looking at much tighter US supply and would likely need to see prices rise enough to ration off the non Chinese export demand. Especially in the context of record high and still expanding domestic crush. USDA pegged out at 2.75 billion bushels on their first balance sheet for 2627. In my opinion that's likely low, especially if you have crush margins. Say this robust given the fact that now you know this is our first year in history biofuels the biggest demand category for US soybean oil, the domestic market will have to pay up to keep the beans right. We need to satisfy that demand. And you know over the last decade just looking at what we export to non Chinese destination over the last 10 years, the average is right about 1 billion bushels. The lowest in that span is 786 million a couple years ago. And for context since that 786 are crush demand has expanded by 465 million. So there's a lot more demand here at home. So if you did see that actual, you know, purchase volume, we would be looking at a lot tighter situation in the US and that's why I think USDA is assuming we probably won't get to that number. And what about the market reaction, Mike? Yeah. So obviously, last week, we were expected to see some kind of headline that we would, you know, see this meeting as basically a formality of announcing what all was agreed to. We didn't see that Thursday and Friday and the market was very quick to sell off. And a lot of this is really exacerbated by fund positioning coming in. You have these big net length, this big net length built up by the funds, these speculative traders who, you know, in some cases are kind of looking to find something that they consider. Safe outside of the equities with all that's going on and as soon as we don't get that reaction, we expected something super positive, you get some selling all of a sudden these folks who have been carrying this link say, all right, let's take our profits, call it good. You're triggering all these momentum signals to the downside and that just again exacerbates the selling and there is a fair amount more. We had the funds is pretty aggressive sellers to end last week. Obviously today we're seeing the pop on this news over the weekend. So it kind of just gives you this highlight of what's at stake when the funds are carrying these big. Positions, the risk going in that opposite direction based on headlines and one notable admission from the summit discussions was corn. Given current global grain balances and feed demand trends, were you surprised that Korn played such a limited role in the announcements? Yeah, I think it would make sense from China's perspective to kind of focus on generalities like we're seeing, you know, an overall dollar figures instead of committing to specific volumes for specific commodities. Even though I think corn is one that makes a lot of sense, but it gives them more flexibility to make more targeted purchase of commodities in need where it makes sense and would also kind of let economics play its role. Because Simply put, we're too expensive on soybeans on a delivery China basis. We're roughly $0.70 a bushel out of the market today, even without tariffs. With tariffs, it's really not even a conversation. But that's not the case with every product. And I think that's again part of why you're seeing just a dollar figure instead of specific. You know, buy commodity targets and corns, a prime example of this. We're actually in the mix on core and maybe slightly more expensive than some competitors, but not by a prohibitive amount in the grand scheme of things. And even looking at China's own figures, you know, I pointed to those capacity numbers on soybeans. They're a lot more supportive on the corn side of things. You know, USDA's consumption targets are a bit higher than what China is showing, but China in their own number shows a drawdown in stocks in 2526. They show their own. Corning stocks going down by about 5.7 million tons in it even in 2627. They show a much lower consumption figure, but they're still showing their own production being outpaced by their own consumption. So USDA has Chinas overall corn ending stocks in 2627 and a 13 year low carry out to use at a 14 year low. And you know do they need to carry these massive stockpiles? No, not necessarily, but still it is a much more, I guess I would say clear. Uh, you know, need for China relative to soybeans, they have plenty of soybeans right now, right? We have record South American supply for multiple years in a row. They're much cheaper. So corn does feel like a very good target And you know, something that I think we could build on again, the specifics. I don't think China wants to commit to anything specific today, but that is certainly one of them that I think is worth keeping a close eye on as long as the other, you know, corn products like DDG's a prime example and beyond grains, the Summit also produced. Concrete developments in beef and poultry market access. This was a another, you know, kind of whipsaw back and forth on headlines where initially, you know, people see on this website that hey, all these, you know, beef companies have their export licenses that had expired like trying to just let them expire amid the trade tensions. Hey, they've been renewed and then all of a sudden they were halted and now over the weekend it sounds like they're back to being renewed. So you know, obviously we'll continue to watch the back and forth of the headlines but the most. Tangible livestock or I guess protein sector development from the summit appears to be that renewal, you know, of registrations for the facilities, especially beef plants, some poultry related access. But beef again is really the headline that's kind of the hotter topic. So you know, earlier this year again they let them expire. Now they're renewing them. It appears like they're, you know, kind of wanting to get back to importing some more beef. The significance here is less. About opening a new market it's really more about preserving and normalizing access to a market that had become kind of constrained by these moves in this matter is because China is, you know, obviously a high value export destination. But that said, this is you know, again, not any kind of long term commitment. We haven't seen him any specifics and it's also a very politically sensitive topic, right. Inflations returning high beef prices are certainly one of the big headlines in that something that. Consumer cares about and it's something the administration's kind of been pointing to as a sticking point that they're not happy about trying to probably wants to resume importing higher end beef cuts. But what are the political optics of, you know, us importing potentially record volumes of Brazilian beef while also potentially increasing the price domestically of high end cuts for our own consumers? And that's kind of the calculation that has to be kept in mind here. And then finally, Mike, let's take a step back from the headlines. Do you think this summit marks a genuine research in US, China, agricultural relations or are we looking at a more tactical and temporary arrangement? So first and foremost, I would say it's absolutely a step in the right direction. Both sides are in a better position when there's continuous communication and relationship building. And it's important to keep in mind not just the context for the ag industry itself, but the global macroeconomic picture more generally because these are the world's two largest economies. With that said, it's clear that tensions remain. This is likely more of a tactical and temporary arrangement and. The lack of confirmation of these details from the Chinese side is likely a calculated move. So what we're seeing is probably a, you know, pragmatic pause rather than an actual, you know, longer term reconciliation. China willing to buy US AG products when it makes economic sense or political sense, especially, again, soybeans, feed grains, protein, but it's also longer term still shifting away from the US, right? It, you know, kind of both of us have been. Diversifying away to be less reliant on this relationship, soybeans, prime example of that, China buying more from South America, the US expanding domestic uses so we're not as reliant on exports. So that longer term backdrop remains and that's why the markets are treating this summit, you know, kind of positive, you know, as we sit here today to start the week, but cautious the immediate measures like renewing those registrations, potentially increasing purchases or meaningful. But they don't necessarily reverse this broader trend of each other kind of trying to diversify away. And phase one obviously is kind of important context of this too. We announced, you know, these ambitious purchase targets and China didn't necessarily, you know, confirm them and then didn't end up meeting them. So investors, commodity markets, you know, everybody is kind of waiting to see actual sustained buying activity before we fully believe that for lack of a better term before viewing this is kind of a. Through longer term reset. Well, thank you very much for your insights once again, Mike. Anytime. Thank you for more videos like this, please do like and subscribe.