February 26, 2019 / 10:32 AM / 8 months ago

Column: China's soy promises may not alter U.S. export outlook

FORT COLLINS, Colo. (Reuters) - The second half of the 2018-19 U.S. soybean marketing year will begin this Friday, though it is still unclear exactly how those six months will play out as a U.S.-China trade deal hangs in the balance and South American supply enters the market.

Farmer Lucas Richard of LFR Grain harvests a crop of soybeans at a farm in Hickory, North Carolina, U.S. November 29, 2018. REUTERS/Charles Mostoller

However, the next six months could still be challenging for U.S. soy shippers despite recent commitments from China.

The U.S. Department of Agriculture’s weekly U.S. export sales finally came up to date last Friday, after a record-long partial government shutdown delayed that data. Friday’s report showed that 6.5 million tonnes of U.S. soybeans were sold for 2018-19 delivery during the six weeks ended Feb. 14.

That was an average of 1.09 million tonnes per week, well ahead of the weekly average of 688,000 tonnes observed between September and December. However, the annual total stands 17 percent below the same point a year ago due to lead buyer China’s general absence amid the trade war.

U.S. Agriculture Secretary Sonny Perdue sparked more hope for the soybean market on Friday, posting on Twitter that China has agreed to buy another 10 million tonnes of soybeans during a meeting in Washington.

Perdue said on Monday that these purchases would happen in the “near term,” but did not specify how soon. After the previous two times that China agreed to buy soybeans during the trade negotiations, the purchases started to roll in within one to two weeks.

Those bookings showed up in the daily sales announcements, which USDA posts each weekday morning. Sales of 100,000 tonnes or more of one commodity must be reported through this system, though no soybean sales were shown Monday morning.

For now, the market will stay glued to the daily and weekly sales in anticipation of increased Chinese activity, but the longer-term, supply-heavy picture has not necessarily changed.

NOT ENOUGH?

Through Feb. 14, China moved back into its usual spot as the top buyer of U.S. soybeans with 7.4 million tonnes on the books for 2018-19, which began on Sept. 1. That is down 72 percent on the year.

But even if the promised 10 million tonnes were added in right away, the new Chinese total of 17.4 million would still lag year-ago by 34 percent, or 9 million tonnes.

U.S. soybean sales to non-China destinations are close to 30 million tonnes, up 67 percent on the year. But this could be a negative factor for the second half of 2018-19, as non-China buyers likely front-loaded their purchases late last year when U.S. soybeans were being offered at record-steep discounts to their Brazilian counterpart.

This forces us to question just how many more soybeans the “other” buyers will realistically need this year.

Sales to key customer Mexico through Feb. 14 totaled 4.44 million tonnes, some 56 percent larger than on the same date last year and just 60,000 tonnes below the full-year total for 2017-18, which was record-large.

Sales to European Union countries totaled 6.17 million tonnes through the same period, already surpassing the previous record for full-year bookings by half a million tonnes.

USDA projects 2018-19 U.S. soybean exports to reach 51.03 million tonnes (1.875 billion bushels). This would be down 12 percent from the previous year and the smallest annual volume in four years.

Although overall U.S. soybean exports are not expected to impress in 2018-19, some remarkable things need to happen to reach USDA’s current target. And the recent China promises may not necessarily cut in to USDA’s huge U.S. carryout forecast of 24.8 million tonnes (910 million bushels).

HOW MUCH MORE?

As of Feb. 14, U.S. soybean merchants still had about 14.1 million tonnes of soybeans to sell by Aug. 31 in order to reach USDA’s full-year target. This is very close to last year’s record sales for the period of about 14.6 million and would require average sales of 500,000 tonnes per week going forward.

Even if this large volume of soybeans is sold, it must be shipped, too. Export inspections, which can be used as a proxy for actual exports, totaled 25 million tonnes through Feb. 21, down 34 percent on the year.

This implies that for the rest of the marketing year, an average weekly shipment pace of about 950,000 tonnes is required to reach 51 million by Aug. 31. Second-half pace was around 675,000 tonnes per week and record-high in 2017-18, for comparison.

Unfortunately, official U.S. export data will not provide clues all that soon. The U.S. Census Bureau will publish December trade data on March 6. Data for February will follow on April 3, ahead of the January numbers which are set for release on April 5.

BRAZIL VS. USA

A potential U.S.-China trade agreement, especially if it includes more soybean promises, would not come at the best time for top exporter Brazil. The South American country is currently harvesting its crop at a blistering pace, and shipments usually peak out around May.

Brazilian farmers had harvested about 45 percent of the soybean crop as of Monday, some 20 percentage points above last year’s pace and above the five-year average of 27 percent.

Soybean traders will have to closely watch U.S. and Brazilian export prices, which have been competitive with one another in recent weeks. China still has a 25 percent tariff on U.S. soybeans, but the prices will also help dictate whether other buyers will prefer U.S. or Brazilian beans.

Market participants had expected a conclusion in the U.S.-China trade talks by this Friday, but U.S. President Donald Trump pushed back that U.S.-imposed deadline over the weekend, citing good progress.

However, this somewhat extends the window of uncertainty over global soybean exports. It is also unknown if a trade agreement will include China’s removal of tariffs on U.S. soybeans, and how soon that would happen.

Brazil is not the only South American country that will be seeking Chinese business in the coming months. Argentina is expecting a healthy soybean crop, though its harvest typically picks up in earnest in April, so new supplies would not be ready for another several weeks.

The opinions expressed here are those of the author, a market analyst for Reuters. 

Editing by Matthew Lewis

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