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Arms Sale Could Affect Farm Trade

“China has a lot more to lose in any trade war than the United States does.”

China, angry over the United States’ planned $6.4-billion arms sale to Taiwan, is unlikely to stop buying U. S. soybeans as America is among three nations that have large, cheap supplies needed by Chinese industries.

China is the No. 1 importer of soybeans from the United States, the top global exporter ahead of Brazil and Argentina. U. S. purchases this season are valued at around $7.5 billion.

“My sense is that China needs soybeans,” said Anne Frick, an oilseeds analyst with Prudential Bache Commodities in New York. “There are really only three countries in the world they can get soybeans from and during the first half of the world crop year, the United States is predominantly the world’s largest supplier.”

The market was watching out for any cancellation of Chinese purchases as the arms sale row comes at a time when soy prices for South American supplies have fallen below U. S. prices amid prospects for record crops in Brazil and Argentina.

Soybean buyers typically buy the bulk of their soybeans from South America during the first few months of the year before turning their attention to the United States ahead of harvest in September and October.

SALES ON THE BOOKS

China has bought about 21.3 million tonnes of U. S. soybeans in the current marketing year ending Aug. 31 but around 5.7 million tonnes – worth about $2 billion at current export prices – have yet to be shipped.

“A lot of analysts are suggesting that the Chinese may take some action against importing U. S. soybeans given the announcement of U. S. military sales to Taiwan, but this has happened in the past without any general trade problem,” Charlie Sernatinger, an analyst with Fortis Clearing Americas in Chicago, said in a note to clients. “China has a lot more to lose in any trade war than the United States does.”

Beijing is irate over U. S. proposals to sell $6.4 billion of weapons to Taiwan, the disputed island that China treats as an illegitimate breakaway province. China has said the arms dispute will damage cooperation with the United States over internat ional issues.

“If China wished to make a statement about this, there is obviously no better avenue to do it than through agriculture, through the farm lobby, which tends to be very vocal and powerful in Washington,” said Rich Feltes, senior vice-president of MF Global Research in Chicago.

China also said this week that a possible meeting between U. S. President Barack Obama and the Dalai Lama would further harm Sino-U. S. relations.

The availability of cheaper supplies from South America makes it possible for China to roll some of its U. S. purchase commitments until later in the year.

But outright cancellations were more troublesome as it would require voiding some shipping contracts and could damage their image as a reliable business partner.

“In this sector, China is clearly highly dependent upon the world for the importation of soybeans,” MF Global’s Feltes said. “They have somewhat of a reputation to maintain as a buyer that stands behind their contracts.”

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