On May 21, President Trump tweeted that China has agreed to buy "massive amounts” of agricultural products from the United States. Trump also heralded the move as one of the best in years for U.S. farmers as China will practically purchase all the produce of the country’s farmers.

 

These tweets came on the heels of U.S Treasury Secretary Steven Mnuchin’s statement that Trump administration would delay implementation of tariffs on Chinese goods and the trade war with China is "on hold" as the world's largest economies work on a wider trade agreement. Mnuchin further added that the agreement reached by Chinese and American delegators set up a framework for addressing trade imbalances in the future. Mnuchin indicated that the United States expects to see a surge of 35-40% in agricultural exports to China this year.

 

As a result of these talks, China has agreed to import more energy and agricultural commodities from the United States and reduce the annual U.S goods and services trade deficit with China which is currently at $335 billion. However, the Trump Administration did not disclose the magnitude of purchases, timeline or details of the framework.

 

 

The fears of a trade war was triggered by Trump administration’s proposed tariffs of $50 billion on Chinese goods and further escalated with retaliatory tariffs of an equivalent amount, including agricultural products, by Beijing. Trump then threatened to target an additional $100 billion worth of Chinese products.

 

Per U.S. Department of Agriculture Foreign Agricultural Service, China is the second largest destination for U.S. agriculture exports at $19.6 billion in 2017. Consequently, the U.S. agricultural market, soybeans in particular, was expected to be hit hard with these retaliatory tariffs. Notably, China bought 93.5 million tons of soybeans in 2017, according to data from the U.S. Department of Agriculture. In fact, Soybeans is the United States’ second-most valuable export to China after varieties of airplanes. The market for soybeans has gained significantly in China as consumers shifted from a diet dominated by rice to pork, poultry and beef, thus leading to a surge in meat demand. China is unable to produce enough animal feed to meet the growing demand and hence the need to import soybeans from the United States and Brazil.

 

 

This tit-for-tat standoff between two of the world's largest economies had rattled financial markets on fears that this situation could spiral into a trade war and eventually impact global growth. However, the current agreement seems to have stalled a trade war. Consequently, markets have heaved a sigh of relief for the time being.

 

The Dow Jones Industrial Average  rose 298.20 points, or 1.2%, to 25,013.29 — the index’s highest since Mar 12. The S&P 500 gained 0.74% or 20.04 points to 2,733.01, at a roughly nine-week high. The Nasdaq Composite Index surged 39.70 points, or 0.5%, to 7,394.04.

 

 

The United States will now put the brakes on $150 billion in tariffs on Chinese goods. Likewise the retaliatory tariffs by China of around $50 billion on U.S. soybeans will no longer be imposed. This along with the promise of massive U.S agricultural exports will drive revenues for agricultural stocks.

 

The S&P 1500 Agricultural & Farm Machinery Sub-Industry Index rose 1.98% to 174.25. Agricultural equipment manufacturer, Deere & Company (DE Quick QuoteDE - Free Report) jumped 1.98% to close at $158.33 on May 21, following the development. The company would have borne the brunt of the big drop in domestic demand due to the China tariffs and the ban of U.S. agricultural products. The company generates around 39% of its revenue overseas. The rise in agricultural equipment demand will boost its revenues.

 

Another farm equipment manufacturer, AGCO Corporation (AGCO Quick QuoteAGCO - Free Report) gained 1.25% to close at $68.05 on May 21.

 

Titan International, Inc. , which offers rims, wheels, tires, and undercarriage systems and components for various agricultural equipment, rose 5.96% to close at $12.27 on May 21.

 

Irrigation equipment manufacturer, Lindsay Corporation’s (LNN Quick QuoteLNN - Free Report) shares gained 1.12% to $98.79 on May 21.

 

While Titan International sports a Zacks Rank #1 (Strong Buy), Deere, AGCO and Lindsay Corporation carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

 

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