SHADES OF LAST YEAR
Just prior to the start of the trade war, roughly 60% of annual U.S. soybean exports went to China, which crushes the imported oilseed and feeds the meal to its hog herd, the world's largest.
When the trade war began last year, China essentially cut off purchases of U.S. soybeans and turned largely to Brazil, the leading global exporter. Luckily, Brazil had plenty of soybeans to ship.
U.S. soybean prices crashed in June 2018 and Brazilian prices soared by comparison, and China continued buying from Brazil even when U.S. prices plus the 25% tariff were more economical.
But the rest of the world (ROW) was not interested in paying such steep Brazilian premiums, and U.S. business to those countries soared. The United States exported 38 million tonnes to ROW in 2018, topping 1982’s record of 25 million. That was also 90% larger than the previous five-year average.
Brazil stayed focused on China, exporting a record 68.6 million tonnes of beans to the Asian country in 2018, some 27% more than 2017’s high. That was also 82% of Brazil’s exports last year, also a record.
In each month between September 2018 and January 2019, more than 90% of Brazil’s soybean exports sailed to China, and that was the first time the share rose past that mark. It also coincided with what is usually the peak shipping time for U.S. soybeans.
U.S. and Brazilian prices finally started to converge at the end of 2018, and U.S. sales to ROW began to normalize. Through Nov. 7, 2019, the United States had sold 14.4 million tonnes of soybeans to ROW for 2019-20, down 33% from the previous year but almost identical to the same point in 2017.
Any trade deal that quantifies commitments for China to purchase U.S. goods could produce the opposite effect of what happened last year: all the non-China customers may flock to Brazilian beans instead. And the larger the quota, the worse it could be for the American soybean market.
An agreement from China to buy large amounts of U.S. soybeans and other agriculture products would be initially glamorous and likely lead to a rise in U.S. prices. But high U.S. prices would deter other buyers if there is cheaper product in Brazil, which is expecting a record-large harvest this year.
Since trade agreements do not genuinely increase global demand, whatever Chinese business Brazil loses to the United States is likely to be mostly picked up by ROW, who usually seek the cheapest beans.
For the U.S. side, the amount of agricultural products China will commit to buy has been a big sticking point. U.S. President Donald Trump last month said that China had pledged to spend up to $50 billion on U.S. agricultural products annually, which would be nearly double the previous record, set when commodity prices were a lot higher.
But Beijing said last month that it would prefer to buy based on market conditions instead of agreeing to large volumes in advance, as an oversupply of farm products would be a huge blow to local Chinese prices. China has suggested that normal trade might resume should both sides agree to remove tariffs, but Washington seems less interested.
Normal, nonregulated trade is probably best for the U.S. market, even if the resulting exports are relatively disappointing. And disappointment may be likely at first given China’s recently stunted feed demand as it deals with the deadly outbreak of African swine fever (ASF).
ASF emerged in China's pig herd in August 2018, and it has curbed the country's need for soybeans. It was not obvious to the market at the time how much demand would fall, but along with Brazil's hefty supply, ASF perhaps allowed China to unexpectedly survive most of the peak 2018-19 U.S. soybean shipping season with minimal purchases.
The ASF problem has not gone away as new cases are still being discovered, though at a slower rate. China has largely driven recent global trends in soybean demand, and without continuous growth, this surely poses a problem to the U.S soybean industry trying to sell more product, at least in the near term.
(Editing by Matthew Lewis) ((email@example.com; +1 (312) 408-8059; Reuters Messaging: firstname.lastname@example.org; Twitter: @kannbwx))