Trade War Fears Ease: Will Agriculture Stocks Rake In Gains?

Fears of a trade war between the United States and China had gripped markets over the last two and a half months. However, the fears somewhat subsided after Treasury Secretary Steven Mnuchin on May 20, said that tariffs against China have been put on hold. This saw markets finally bouncing back on Monday. As investors' confidence got reinstated, stocks rallied, with the Dow and S&P 500 registering their best performances in more than two months.

Additionally, President Donald Trump's tweet that China has agreed to buy huge amounts of agricultural farm and agricultural products saw agricultural products and farm equipment manufacturer stocks rallying. Understandably, agricultural products and related sectors stand to be one of the biggest winners if a trade war is averted. Consequently, China is likely to import more agricultural products to bridge the huge trade deficit with the United States.

China to Import More Agricultural and Farm Products

Fears of a trade war between the United States and China eased on Monday, as both the countries continued trade negotiations. On Sunday, Mnuchin had said: "We are putting the trade war on hold." Taking the new-found camaraderie forward, the next day, China commented that it would import more U.S. goods including energy and agricultural products. This gave investors' confidence a huge boost.

Trump had earlier accused China of unfair trade practices that have piled up a huge trade deficit. China's decision to import more agricultural products is a move to bridge the $337 billion trade deficit with the United States. However, it was Trump's tweet that saw agricultural stocks rallying.

On May 21, Trump tweeted: "China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products - would be one of the best things to happen to our farmers in many years!" This saw a rally in agricultural stocks, with the S&P 500 Agricultural and Farm Machinery Index rising 2%.

Agricultural stocks were reeling under pressure since China had announced retaliatory tariffs on a number of U.S. agricultural and farm products. China imports huge amounts of U.S. agricultural and farm products and higher duties would have surely affected the profits of a large number of U.S. companies. China's decision to import more energy and agricultural products could initially amount to $200 billion.

Agricultural Products, Farm Equipment Stocks to Gain  

More imports mean more sales, which will result in higher revenues for companies. China imports huge amounts of cereals and other farm products from the United States and going by the latest development, imports are only going to increase in the days to come. The announcement was applauded by investors, with agricultural stocks gaining on Monday.

It goes without saying that companies that export huge amounts of farm products to China stand to be the winners. Shares of The Andersons, Inc. ANDE jumped 1.6%, while Bunge Limited BG increased 0.4% on Monday.

Given that China imports a number of agricultural products from the United States, beef, soybean, corn, wheat, sorghum, fruits and nuts could be the key beneficiaries. Interestingly, China already accounts for 60% of the United States' annual soybean exports. China imported $14 billion worth of soybean from the United States in 2017.

Understandably, this is also an opportune moment for agricultural equipment manufacturing companies. Monday's announcement also saw shares of farm equipment companies rallying. Shares of Deere & Company DE gained the most, with a 2% rise, followed by AGCO Corporations' AGCO 1.3% uptick on Monday.

Summing Up

The United States and China seems to be finally taking all necessary steps to avoid a trade war, which definitely has reinstated investors' confidence. Given that China has decided to import more agricultural and farm products in order to taper the huge trade deficit gap with the United States, agricultural products and agricultural equipment stocks seem to be the a key beneficiaries.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report