Feb. 5, 2019
By Tyne Morgan
During President Trump’s talk with Vice Premier Liu He in the Oval Office during the latest round of trade talks, a simple handshake caused quite the stir. As the two grasped hands, the Vice Premier was heard saying China would committing to buy 5 million metric tons of soybeans from the U.S. a day; a statement that caused Trump to perk up. The statement was lost in translation, as the White House later clarified China committed to a one-time purchase of 5 MMT of U.S. soybeans. However, that big sale still isn’t on the books.
“I don't think soybeans are the big sticking point in trade talks,” said Ken Smithmier, director of research, agricultural markets for ClipperData. “In my opinion, these look like statements from China that buys them time in the trade negotiation and makes U.S. officials happy, but for those of us in the grain market every day running the numbers to see how much they typically buy every year, it really doesn't amount to a whole lot.”
ClipperData keeps track of vessels loaded with agricultural and energy products. The group then tracks when cargo leaves and where those vessels arrive. Smithmier has been watching China closely. He said with China saying it would buy another 5 million metric tons of U-S soybeans, in addition to the previously reported 5 million, current shipments of U.S. soybeans to China fall well short of the 10 million metric ton mark.
“For the calendar year, we estimate that China has offloaded about 4.48 MMT,” said Smithmier. “If you look at the most recent export inspections report, there's only been about 18 or 19 vessels that have loaded out of the United States so far this calendar to China.”
He said seasonality is a factor at this point, with Brazil’s harvest now being an option to supply China’s soybean needs.
“We're seeing load outs in Brazil pick up exponentially,” said Smithmier. “In fact, in January they loaded out over 2 million tons, and in February so far - even for the first couple days - their load-out rate is better than last year and the year prior. While we’ve seen China say they're going to buy 5 million tons, and then again last week arguably buy another 5 million tons, the fiscal load out rate that we're seeing - and the offload rate that we're seeing in China - doesn't match up with that at this point. “
Brian Splitt, who just started a new ag marketing firm with two other veteran analysts called AgMarket.Net, is watching the same trend. He said China would need to start importing U.S. soybeans on a regular basis to make up for lost ground.
“China needs to import just over 1.6 MMT per week to hit their stated target for the marketing year,” said Splitt. “However, per ClipperData, actual Chinese offtake from beginning of October to January 29 was just over 20.36 MMT; the number should’ve been closer to 29MMT to stay on pace.”
“I think the market likes the idea” of China buying a lot of US soybeans, but when the sales are announced many traders notice the math is equaling up to lower export demand than currently forecasted,” said DuWayne Bosse of Bolt Marketing.
Smithmier said the market structure today doesn’t suggest anyone should be aggressively buying soybeans in the April to July contracts, as any buyer would be paying a premium price. However, he says if China would step up and by the 10 MMT figure that’s being thrown around, it would help eat away at the hefty carryout situation.
“When you look at 10 million tons, that's just shy of 400 million bushels,” said Smithmier. “If China were to actually buy 10 million tons, you'd be looking at a 35 to 36 percent draw in U.S. ending stocks. That's significant; the market is going to pay attention to that.
Now the question becomes not just if China can make up for lost ground, but if China will back away from soybean purchases from all of its suppliers. As the spread of African Swine Fever creates less soybean meal demand, some analysts fear China could see waning demand for soybeans across the board.
“If you look at the numbers today and assume that China is buying soybeans at the same rate as last year, which was a pretty substantial rate of purchasing, you only have China’s imports basically at 83 to 84 million tons,” said Smithmier. “USDA’s projections are sitting out there 90 million metric tons, and the Chinese ag minister has been out there at around 84 to 85 million tons for quite a time now. I think it's reasonable to assume that the USDA can cut 5 MMT - on the aggressive side - from their import demand forecast.”
While ClipperData believes CHian may only import 83 to 85 million metric tons, Smithmier doesn’t think USDA will make such an aggressive move in its updated WASDE report, which is scheduled to be released Friday. Though, he said he won’t be surprised if China does cut 5 MMT of demand from China before the marketing year is over.
Splitt said the potential cut to demand is something to watch, even if it’s hard to know the true impact of ASF in China.
“I’ve seen recent estimates that as much as 5% of the Chinese hog herd has been culled, but I think we’ve all been reminded recently how difficult it is to get a true representation of what’s going on in China with Chinese corn stocks being case in point,” said Splitt.
China is buying fewer soybeans from around the globe compared to a year ago. So is China’s fading demand a factor of the trade war or due to ASF and other issues? Smithmier said it’s an answer we’ll know in a few months.
“I think the farmers should know that there are a lot of question marks as to why China isn't buying as many beans as we thought at this point,” he said. “Some believe it's demand, some people believe it's just economics slowing the country. Some believe that it's China using their domestic stocks and that they're going to have to reload on those inventories come this spring, which that opinion is one I share.”
He said the proof will be this spring, when Brazil’s soybeans are harvested and China’s demand typically picks up.
“I think that here in the next couple months we're really going to get a nice view of how they are sitting in China, just based on the idea that there is plenty of supply in Brazil for them to take,” he said.
If China isn’t buying from Brazil., Smithmier fears Brazil could start exporting to the European Union and southeast Asia, two areas that have been strong in buying from the U.S. recently.
“The other problem is that if there is a demand problem in China, and they continue to not take as many beans as we thought they would, and the Brazilian supply is there and they're loading out at an accelerated pace this spring. Those beans are going to find a home, and it creates a more competitive global market,” he said. “If they're not seeing the demand from China that you would normally see, then Brazil is going to be out there looking to move beyond Southeast Asia looking to move to the EU to buy. You have to keep that in mind here this spring, it’s really going to depend on if China is in fact going to buy a level in which we would deem strong demand. And so far this year, the signs aren't there that everything's okay.”
If demand is an issue in China and Brazil starts exporting to other countries currently purchasing from the U.S., there’s renewed fear that it could add to the already burdensome U.S. soybean balance sheet.
“Soybeans are a global product and we need our South American competitors to see additional crop losses for the world balance sheet to improve relative to the American producer,” said Splitt.”
“I think in order to trim down the U.S. balance sheet you know it can happen in a number of ways - one of which we don't plant as much in the U.S. next spring - and the other one is creating new demand,” said Smithmier. “We're doing that in the EU and Southeast Asia but we're not China, and that's just a big problem that you can't hide from. “
He said U.S. farmers head into planting, they should keep in mind that there’s likely 5 MMT of “fluff” in the Chinese soybean import number. If that’s true, then the 5 MMT could easily go back into the world ending stocks number, which would create further pressure on soybean prices.