January 29, 2020 / 10:21 AM / a month ago

Column: Big changes ahead? USDA faces data dilemma after U.S.-China deal

FORT COLLINS, Colo. (Reuters) - The next supply and demand update from the U.S. Department of Agriculture could feature some drastic adjustments if it is to fully incorporate China’s lofty agricultural commitments as outlined in the Phase 1 trade deal.

Soybeans being sorted according to their weight and density on a gravity sorter machine at Peterson Farms Seed facility in Fargo, North Dakota, U.S., December 6, 2017. REUTERS/Dan Koeck/File Photo

The deal, signed Jan. 15, states that China’s purchases of U.S. agricultural goods will be at least $12.5 billion above the 2017 baseline, which is about $24 billion, and sales are to rise at least $19.5 billion above that baseline in 2021.

Traders have been very skeptical over the feasibility, especially since the record value of U.S. farm goods to China was $29 billion in 2013, when commodity prices were substantially higher than today. The caveats of “buying under market conditions” and “not disrupting other suppliers” have made the entire scenario nearly impossible to imagine.

USDA has always operated under “policy in place,” which means that only officially enacted policies can figure into its estimates. Even though the Phase 1 signing was just days away at the time, USDA’s Jan. 10 update did not include any related assumptions.

This also means that USDA’s forecasts are often less speculative than those from most private analysts, as the U.S. agency only acts on official policies and concrete data.

Since the deal has been signed, the terms will factor in to the discussion for USDA’s next supply and demand update, due on Feb. 11. In the most basic sense, one might expect to see huge surges in U.S. soybean or meat exports and a large corresponding boost to Chinese imports, for example.

But it is likely not so simple, especially since the market is receiving no signals that would suggest those things, so it is unclear what USDA will do. There is a chance that numbers do not shift dramatically next month, though market-watchers must be prepared for that possibility.

MURKY TERMS

USDA officials probably have no easier a time than other market participants in interpreting the conditions of the Phase 1 deal, especially given Beijing’s comments in the days after the signing.

The portion of the deal that addresses trade specifically states that the “purchases will be made at market prices” and that market conditions “may dictate the timing of purchases within any given year.”

China had said both before and after the signing that its U.S. farm purchases would be based on market conditions, and most market participants took this as pertaining to volumes, not timing. But the exact wording in the trade deal would suggest that market conditions are no excuse for China to fall short of the implied $36.5 billion target by the end of 2020.

Beijing also insisted that trade with other suppliers would not be disrupted as a result of the Phase 1 deal. That language is not a part of the actual trade document, but that seems to offer up yet another roadblock in fulfilling the deal as it is near impossible to hit the dollar target while purchasing based only on market conditions, all while leaving other trade flows unharmed.

It is important to remember that the trade deal takes 2020 as beginning on Jan. 1. The 2019-20 U.S. soybean and corn marketing years, for example, end on Aug. 31, 2020. USDA will issue its first official domestic and global supply and demand estimates for 2020-21 on May 12.

BAD SIGNS

There has been minimal action from China ever since the trade deal was inked two weeks ago. Traders know how significantly purchases must increase to reach the 2020 target, and the lack of even a daily U.S. soybean sale has been unnerving.

Half of the 2017 value of U.S. agricultural exports to China came from soybeans, and the oilseed will be instrumental in fulfilling the Phase 1 terms.

Through Jan. 16, China had purchased 11.6 million tonnes of U.S. soybeans for delivery between September 2019 and August 2020. Aside from last year’s anomalous low, that is the smallest volume for the date since 2008 and down 55% from two years earlier.

Overall U.S. soy sales are faring a little better at 31.2 million tonnes through Jan. 16, down 28% from the same date in 2018. But based on recent purchases and the likely record Brazilian harvest that is in progress, USDA would probably have no justification to raise U.S. soybean export predictions in the absence of the trade deal.

Business with China may be slow to nonexistent for at least this week and likely the next due to the Lunar New Year holiday that began on Saturday. It is also unclear how the recent coronavirus outbreak, which originated in China, may impact routine commodity purchases and overall demand.

Chinese consultancy JCI last month suggested that Beijing could partially satisfy such a huge agreement by importing 45 million tonnes of U.S. soybeans this year, surpassing 2016’s record of 33.66 million. But with Chinese demand still reeling from African swine fever, such a high import volume seems very suspect, especially if it is not to disrupt trade with China’s main soy supplier, Brazil.

USDA’s current peg for 2019-20 U.S. soybean ending stocks is 475 million bushels or 12.9 million tonnes, not a whole lot of wiggle room when considering aggressive estimates such as those from JCI.

There is not any precedent for the situation USDA faces ahead of next month’s estimates, but the closest example may be from July 2018, when China officially imposed the 25% tariff on U.S. soybeans. USDA slashed U.S. soybean exports by 11% from the previous month, and full-year shipments eventually fell another 14% from there to the final figure, largely driven by the loss of business to China.

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

Editing by Matthew Lewis

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