Crop traders obsessing over the deadly coronavirus in China may be overlooking another key challenge to the Trump administration's phase one trade deal: the U.S. dollar.
The virus's spread is upending supply chains and cutting food demand in China, delaying billions of dollars in American sales of everything from pork to soybeans. Making up for the losses later in the year may be difficult if the dollar continues to strengthen against currencies in Brazil and Argentina, two of the U.S.'s top agricultural rivals.
China has pledged to buy $36.5 billion in U.S. farm goods this year under the trade deal, $12.5 billion more than in 2017. But some tariffs remain in place, and China has said its purchases need to make economic sense with both Washington and Beijing acknowledging that the timing of the sales depends on market conditions.
"We are already dealing with retaliatory tariffs and now coronavirus presents challenges for China to fill its obligations," said Dan Kowalski, vice president of research at CoBank, a $145 billion lender to the agriculture industry. "If the dollar remains strong, that has tangible impacts on market conditions. And that could or could not play a part in China filling its purchases."
Traders were already skeptical China would reach the phase one targets before the virus hit. Even the U.S. Department of Agriculture's own export projections cast doubt on the deal. Now, with the Brazilian real and the Argentine peso hitting record lows against the dollar, the trade-deal targets are even more in doubt.
"We always have to be mindful that the Chinese are price buyers," said Stephen Nicholson, a senior analyst for grains and oilseeds at Rabobank. "I don't think that's going to change under phase one. They are going to do what they do. I think they will continue to buy what they need and they will buy at the best price. It's an ingrained behavior."
For now, U.S. authorities are dismissing the currency threat. Agriculture Secretary Sonny Perdue said at a USDA forum last month that he expects China to live up to its pledges, and Ted McKinney, the undersecretary of agriculture for trade, added that their $36.5 billion commitment stands despite the dollar strength.
Gregg Doud, U.S. chief agricultural negotiator at U.S. Trade Representative, also dismissed the idea. But he delivered a scary prospect for American farmers already dealing with high debt, several years of low prices and piles of corn and soybeans from last year's harvest still stashed in their bins.
"At least in my mind, as an old commodity analyst, I don't think that's an issue here," Doud said at the USDA event. "It just means that as that gap gets further, the U.S. price has to come down to be competitive with what's going on in South America."
Brazil is already harvesting a record soybean crop and with a weaker real boosting farmer profits, the incentive will be there to expand plantings in the years to come. On Wednesday, Brazil's economy posted a third consecutive year of sub-par growth.
"Maybe China doesn't reach $36.5 billion," said Dan Basse, president of consulting firm AgResource. "But I think if you were to ask the market today, and say it's going to do the same as in 2017 — $24 billion, $28 billion — we'd probably be OK there."
There's no reason to sound the alarm bells at this point, said CoBank's Kowalski. The lender believes China will make a "good faith" effort to meet the targets and said the nation will have a bigger opportunity to buy American farm goods in the second half of the year.
Concerns about the slowdown of the Chinese economy may also end up helping the nation meet its pledges. That's because the agreement allows for nations to impose tariffs equivalent to the size of the damage without retaliation in the case of non-compliance.
"They signed an agreement, they know it's enforceable," Steve Censky, the USDA's deputy secretary, said in an interview last month in Arlington, Va. "Given their economy and everything else, they don't want to be back in the soup, battling the U.S. on tariffs."