Feb. 11, 2019
President of American
Bartolomeu Braz Pereira
President of Brazilian
Soybean Producers Association
President of Argentine
Soybean Chain Association
Head of INTL FCStone’s Asia
Attorney of Dorsey & Whitney
consultant from Chile
In April 2018, the US government released a list of Chinese goods that may be subjected to new tariffs, and the Chinese government quickly counterattacked and decided to impose tariffs on the US-origin soybeans, automobiles, chemicals and other goods, which initiated the US-China trade war. Soybeans, as a very important bulk agricultural product in the US-China trade, unfortunately become the "sacrifice" of the political battle between the two superpowers.
China is the world's largest importer of soybeans, while the US is the world's largest soybean producer. China is traditionally the number one export market for the US, importing US soybeans worth US$13.9 billions in 2017, which is 60% of the total US exports and nearly one out of every three rows of annual US soy production. Therefore, the trade war will certainly have a huge and far-reaching impact on China, the US, and even the global soybean market.
Recently, a seemingly inspiring event occurred with respect to the US-China trade war – on December 1, 2018, the leaders of China and the US reached a 90-day truce at the G20 Summit held in Buenos Aires, the capital of Argentina. According to the agreement, both sides will not increase tariffs for 90 days, and both sides should take this time to resolve trade disputes between the two countries. Before this article was completed, i.e. January 10, 2019, China re-launched two rounds of US soybeans purchases. However, industry insiders are still not optimistic about the trend of the US-China trade war after 90 days and the resulting impact on the soybean industry.
As a very important bulk agricultural product in the world, soybeans involved in the US-China trade war will have a considerable impact on many countries and industries. Countries, such as China, the US, Brazil, Argentina and Russia, and related industries, such as soybean planting, exports, agricultural inputs and the futures market, will undoubtedly be influenced. It is impossible to cover all aspects of the US-China soybean trade war in a small article. To have a relatively more comprehensive understanding of the impact of this white war on the global soybean industry from the perspective of the subjects involved, AgroPages invited experts from the American Soybean Association, the Brazilian Soybean Producers Association (Aprosoja Brasil) and the Argentine Soybean Chain Association, independent consultant from the Chilean agriculture industry, experts from the famous American financial services firm INTL FCStone and Dorsey & Whitney LLP, to sit together to discuss the topic. Unfortunately, we tried and failed to get the views from relevant organizations of China, one of the absolute important subjects in this trade war.
Soybean exports: Who is cheery and who is morose?
US soybeans: a sharp drop in exports to China and record high inventory
The impact on the soybean industry is significant. According to data compiled by the US Department of Agriculture, the effect of China’s reduction in soybean purchases is expected to be a reduction of 16 million tons on an annualized basis. That would equal about US$5.2 billion in export earnings based on current prices for US exported soybeans. Dorsey & Whitney attorney Dave Townsend, who is in the firm's Corporate Group and its Technology Commerce and National Security Law Practice Groups, revealed that the US Congress and the Trump administration are providing $3.6 billion in payments to US soybean farmers to partially offset the lost export opportunities.
“US soybean exports have been slow because China was the largest buyer”, said Brett Cooper, head of Asia Pacific Commodity Division of INTL FCStone, a leading US financial services firm. Cooper also provided us with some more detailed data: At the start of December, the US exported 13.3 million metric tons (for the marketing year from September 2018 to August 2019). At the same time last year, it was 23.0 million metric tons (MMT). So far this year, the US has shipped 0.38 MMT to China, while at this time last year it was 16.2 MMT.
For the 18/19 marketing year, which ends in August 2019, the US Department of Agriculture expects the US to have stocks of 25.99 MMT, which is the highest on record. In the previous 10 years, the average amount of soybean stocks was only 5.5 MMT. “The US farmers are in a difficult position because they just harvested their biggest soybean crop ever (125 MMT) and their biggest export customer isn’t buying their soybeans,” said Cooper.
Davie Stephens, president of American Soybean Association, expressed great concerns about the long-term cooperation between China and the US. “There has been a drop of approximately 20% in soybean prices since talk of the tariffs first started. We have worked on our relationship with China for many years, and China has made decisions to subsidize the domestic production of soybeans and other protein crops, and to maximize soybean imports from other exporting countries, particularly Brazil. We welcome an end to this trade war before those decisions become long-term policies for China.”
Brazilian soybean exports hit a record due to US-China stalemate
In dramatic contrast to the US soybeans that have suffered heavy losses in exports, Brazil's exports have hit a record. From September 2017-August 2018, Brazil shipped 76.19 MMT, compared to 63.14 in the previous year, which is an increase of 20.1%. Brazil's shipments to China during that time were 61.12 MMT compared with 49.25 MMT the previous year. During the 2013/2014 marketing year, 71.8% of Brazil’s soybean exports were to China. In 2017/18, that number was 80.2%, which is a record.
Bartolomeu Braz Pereira, president of Aprosoja Brasil, stated that in this last harvest, a drop in the base price of a bushel, as quoted in the CBOT, was something around 10 points, compared to the average prices quoted in the last three years. “Our exports to China in recent years have grown a lot. In the last year, the growth was 11 points, compared to the immediate past year, representing an increase of seven million tons in grain exports. This growth in our exports reflects the impasse between China and the US, which resulted in an increase in the prices charged at Brazilian ports, despite the drop in the figures at the CBOT. This was due to the appreciation of the premium* charged at Brazilian ports, reaching an increase of 190%. The price was US 55 cents per bushel and reached US160 cents per bushel (price paid at the Port of Paranaguá, in the state of Paraná). This scenario contributed to the increase in soybean prices paid to the producer.”
* The premium is an extra remuneration for the delivery of soybeans for export. The payment of premium is negotiated between trader and international buyers. The basis of calculation is a percentage of the Chicago quotation, discounting the logistics costs.
Argentina faced a small impact due the trade war duo to the reduction in the yield of soybeans because of severe drought
As a large soybean producer, Argentina suffered a severe drought in 50 years in the 2017-18 planting season, resulting in a serious production loss of 20 million tons.
Argentina soybeans market
From the perspective of exports, despite 85% of its soybeans (beans) are exported to China, Argentina participates with almost 3% of the Chinese soybean imports. “China's demand for grains increased, but Argentina, with its small volume, was able to contribute less than 50% of the amount exported the previous year in terms of lower domestic crushing”, said Rodolfo Rosso, president of the Argentine Soy Growers Association.
Pablo Broussain, an independent agricultural consultant from Chile, told AgroPages: Up to now more than 90% of the crop is growing under standard/very good weather conditions. According to the numbers showed above we are not expecting any impact on planted area that would be close to 18 million hectares, similar to the last three seasons. If we compare a standard season like 2016/17 with a production level similar to the expected for this coming season, we would have a 50% increase in our exports expectations.
“In addition, During G20 meeting in Buenos Aires it was signed an agreement with Sinograin to increase soybean exports in 3 Million metric tons and 0.3 to 0.4 metric tons of oil. This is also an important event that is good for export", expressed Broussain.
The global soybean trade pattern is changing substantially
The trade dispute has made many substantial changes to the global soybean trade pattern. Previously, soybean shipments to China would shift between North America and South America depending on the season. “For example, we would see the largest shipments from the US after harvest during October through December. Then we would see Chinese purchases switch to Brazil. And Brazil would export large amounts from April through June,” said Brett Cooper.
“This year, we barely saw any soybean shipments from the US to China. But we saw a large number of shipments from Brazil to China during America’s normal export season. We’ve also seen strange things such as the US exporting soybeans to Argentina, which is normally one of the world’s largest producers. Argentina had a bad crop last year and had limited supplies, but they also wanted to sell soybeans to China because the US couldn’t. So Argentina is exporting its own soybeans to China, while importing soybeans from the US and using the US soybeans to feed its domestic market. At ports in Argentina, ships exporting soybeans are passing ships importing soybeans at the same time,” added Cooper.
Soybean planting area in Brazil and Argentina keeping stable, American farmers facing difficult choices
For US farmers, the situation is difficult because they have a lot of soybeans stored, and prices for corn and soybeans have been low for many years. Soybeans are cheaper to plant compared to corn, so farmers might still plant soybeans even though the price isn’t good. It also depends on whether there is a trade deal. Cooper said, “Farmers still have a few months before they need to make their decisions so they will watch the news closely.”
Stephens said: “While we are hopeful that soybean farmers will be able to resume delivery of high-quality soy to China, the recent sales are only the first step in rebuilding soybean exports to China and will not fix the prolonged period of low prices soybean farmers have faced since the trade war began. The roughly $2.00/bu drop in soybean prices experienced since last May continues to harm soybean farmers.”
"US soybean farmers make planting decisions factoring in not only expected soybean prices, but also the prices of other commodities that they can substitute for soybeans. The planting decision is made at the individual farmer level. Also, while the US-China trade war makes for an uncertain situation, this uncertainty is in the context of a broader downturn in the US farm economy," said Townsend.
In Brazil, in general, there is a good development of culture in the field. However, the South region has gone through a long period without rainfall, causing stress on plants and a decrease in production. There are also reports of breakage in regions of Paraná of up to 50%.
Cooper believed that farmers in Brazil have benefited from strong demand for their soybeans but are now nervous and waiting to see what happens. If the tariffs stay, then it’s good for the Brazilian farmer. However if the tariffs are removed, it’s bad for the Brazilian farmers because they will have to compete with US farmers who are eager to sell soybeans and might get low prices.
For Argentina, the situation of sowing soybeans has not been affected so much by external issues, but by the internal situation. The current season (2018/19) is almost finished and the expected planted area will not be modified. The maintenance of export taxes on soybeans at a level greater than 30% does not allow the increasing of the sowing area significantly.
Although the government once again taxed maize and other competing soy crops, the planting situation will be very similar to the previous year. Broussain does not expect major changes in planting intentions. In addition, it seems that the producer prefers to keep the proportion of soy in the rotations more balanced with respect to corn, to make the system more sustainable.
“We must consider that the participation of Argentina in beans exportation is pretty low, due to high internal consumption, that uses almost 75% of the production for industrialization to make oil, flour and biodiesel for local use and exportation,” commented Broussain.
“In conclusion”, Rosso said, “Argentina has an opportunity in the medium term, which will take advantage of it more, generating favorable internal conditions rather than in response to the commercial war and its consequences.”
In addition to the situation in the US, Brazil and Argentina, Cooper also told AgroPages what he knew about China and Russia.
“The Chinese government has been encouraging Chinese farmers to plant more soybeans so we will probably see some increases in planting. But many farmers are familiar with planting corn and have planted corn for many years in a row. So, they might be hesitant to change,” said Cooper.
In addition, Cooper reckoned Russia will probably continue to plant more. “There are many farms in Eastern Russia that border China and can supply to the Chinese market. And the relationship between Russia and China is very strong now so they will probably feel comfortable expanding their production to sell to China,” commented Cooper.
US-China trade war enters the truce, but the future is still uncertain
In the opinion of Stephens, the news of resumed sales represents a positive step under the current 90-day agreement to suspend new tariffs and negotiate on trade issues agreed to by President Trump and President Xi. Beyond the recent sale announcements, it is vital that this 90-day process results in lifting the current 25% tariff that China continues to impose on US soybean imports. Without the removal of this tariff, it is improbable that sales of US soybeans to China can be sustained.
“We don’t know the possible impact, and that remains highly uncertain,” Townsend said, “It could be, if this interim-agreement becomes the impetus for momentum on a broader trade agreement between the two countries. But it could also merely delay another cycle of tariffs, retaliation and counterretaliation. It’s too soon to know what the 90-day truce represents in terms of the US-China trade relationship.”
“As for the agreement signed between China and the USA to postpone for 90 days the issues of raising US taxation on 25% of those products exported by the Chinese, it is perceived that there is a tendency towards reaching agreement, as well as a possible ending of the economic conflicts between the two super powers. Earlier this month, Meng Wanzhou, the vice president of Huawei, was arrested in Canada as part of US investigations, leading to a further weakening of relations between China and the US,” said Pereira.
“We believe that an agreement to buy agricultural products between the USA and China may not be advantageous for Brazil. The Chinese account for 80% of Brazilian soybean exports. Although the Chinese demand is not supplied by American soybean, a reduction in our exports can generate some economic impact,” added Pereira.
Rosso believed that the situation of the "commercial war" is a reality that is here to stay. Despite favorable changes, China has felt this trade war, and in the case of soybeans, it is preparing to be a very important player in South America, more than expected, with the investments and market capture that it has been making in recent years.
“It is also true that a temporary relaxation of this commercial war helps to increase prices, without reaching normality. Therefore, Argentina, like its neighbor Brazil, has to rethink the strategy of an increased production of grains with that destination. In the case of Argentina, there will be more industry competition for the grains to industrialize, which is the majority of our business, which will surely give soy a greater opportunity to grow,” concluded Rosso.
Cooper said that it’s very difficult to predict what will happen with the tariffs. But either way he thinks there is a long-term trend of China importing fewer US soybeans.
Firstly, this is because China probably realizes it was relying too much on the US and Brazil for its soybeans. China will see this trade dispute with the US as an opportunity to diversify from where it buys soybeans and grains.
Secondly, this trade dispute will encourage farmers in other areas of the world to plant more crops such as soybeans, rapeseed, or sunflowers. “We’ve seen China looking to buy soybean meal from India, soybeans from Russia, sunflower meal from Ukraine. More farmers are now thinking about selling to China,” commented Cooper.
“Thirdly, I think Chinese importers are now aware of the new alternatives and more comfortable dealing with these new suppliers. For example, many countries only imported corn from the US and never looked at different suppliers until the US had a bad drought in 2012. Those importers had to look at countries they never dealt with before, such as Brazil and Argentina. After the drought was over, the importers bought US corn again, but they also were comfortable buying from Argentina and Brazil based on which country offered the best price. So the US faced more competition because importers made connections with suppliers in other countries. So even if the tariffs go away, the Chinese buyers are now more comfortable buying from different locations, or buying alternative products. This means US soybeans will face more competition,” he concluded.
This article will be published in AgroPages' Annual Review 2018 magazine. This issue will come out by the end of February, 2019.