China’s absence from the U.S. soybean market has put tremendous pressure on both soybean growers and Chicago-traded soybean futures over the last several months. But the United States’ new trade pact with Mexico and Canada may offer some hope for a similar outcome with major U.S. trade partner China.
The United States and Canada reached a deal late Sept. 30 to salvage the three-country, US$1.2-trillion open-trade zone agreement with Mexico that was on the verge of collapse after more than two decades. The agreement is expected to be signed at the end of November and will replace the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA).
The deal has been viewed as a win for President Donald Trump and his strategy in the international trade arena. Trump had been an open critic of NAFTA even before his November 2016 election, and he vowed to supplant it if elected.
But U.S. soybean farmers might be having trouble seeing the end game of Trump’s trade actions with China. The ongoing U.S. harvest will surge to a new record partially due to the assumption that China, which usually accounts for about 60 per cent of U.S. soybean exports annually, would continue to participate in the U.S. market.
The United States slapped US$200 billion in tariffs against Chinese goods last month and China still refused to make concessions. Beijing’s July 6 imposition of a 25 per cent tariff on U.S. soybean imports has perhaps been the biggest burden on U.S. agriculture resulting from trade disputes.
But Trump has confidence these harsh tariffs will ultimately pave the path to a deal, and USMCA certainly supports his claims. The U.S. president said the following morning that a trade deal would not have been reached with Canada and Mexico without the strong leverage created by the tariffs.
So, could the tariffs eventually bring China to the negotiating table? Perhaps, but Trump thinks it is too soon to talk with China on trade because a forced decision may not end up being the best one for the country.
China has been largely absent from the U.S. soybean market since early April when Beijing initially threatened to target U.S. beans with tariffs. The lack of Chinese demand and the record-yielding U.S. crop may push domestic soybean supply close to 900 million bushels by next August, well above the previous record carry-out of 574 million in 2006-07.
Trump noted that signs of economic weakness in China and its sliding stock markets are proof that the U.S. tariffs are impacting the Chinese economy. But just how long can China hold out, especially when it comes to soybeans?
The next interaction between the United States and China could come at the G20 summit in Buenos Aires on Nov. 30, though economic adviser Larry Kudlow said a pact with Beijing was not imminent.
China’s peak weeks for buying U.S. soybeans typically fall in October and November. On average over the last five years, China has secured roughly 77 per cent of its annual U.S. soybean purchases by Nov. 30.
Through Sept. 20, it has 1.3 million tonnes on the books for 2018-19 compared with eight million on the same date a year ago.
As of Sept. 30, soybean stocks at Chinese ports were at an all-time high of 8.8 million tonnes, some 30 per cent more than a year ago. Given the average rate at which China consumes soybeans, these stocks would last just over four weeks.
The U.S. Department of Agriculture puts current Chinese soybean supply at 22.5 million tonnes, not including the expected crop of 15 million, which together would last the country through at least January. However, soybeans are grown very far from the country’s crushing facilities, which is a huge cost consideration for the users.
Market participants are not entirely clear on China’s stock situation. But assuming the USDA numbers are in the ballpark, Chinese buyers could theoretically remain sidelined from U.S. soybeans through most of their primary exporting season, though it may be difficult and costly. Top supplier Brazil could start shipping larger volumes of soybeans as early as late February if the harvest is large enough and without delay.
One key difference between Mexico and China was that as trade tensions escalated with Mexico earlier this year, political pressures or other barriers did not prevent Mexican buyers from snatching up cheap U.S. corn and soybeans. Soy purchases rose well above record levels beginning in March, and corn sales also started pulling away.
Mexico is the top buyer of U.S. corn and is usually No. 2 in U.S. soybeans, though through late September it had purchased more beans than China for delivery in 2018-19. Through Sept. 20, Mexico had 1.97 million tonnes of U.S. soybeans on the books.
Canada, China and Mexico are the top three destinations for U.S. exports of agricultural and related products, amounting to US$68.2 billion last year, some 43 per cent of the total. Canada accounted for US$16.4 billion in consumer-oriented products such as prepared foods, fresh produce, and meat, while China took in US$12.3 billion in soybeans.
Karen Braun is a Reuters market analyst. The views expressed here are her own.