January 16, 2020 / 10:57 AM / 13 days ago

Column: U.S.-China deal creates much uncertainty over Brazil’s soybean business

BOSTON (Reuters) - China finally placed a dollar value on its planned boost of U.S. agricultural purchases during Wednesday’s trade deal signing ceremony, something it was previously unwilling to do, validating some of the earlier unconfirmed figures cited by the U.S. side.

Soybeans stocks are seen in Rio Verde, Goias state, Brazil January 31, 2019. REUTERS/Jose Roberto Gomes

There are still many important details that are unclear to market-watchers, such as the specific breakdowns by commodity, but another large unknown lurking in the background is how the newly inked agreement will impact trade between China and its No. 1 soybean supplier, Brazil.

As part of the Phase 1 trade agreement signed on Wednesday, Beijing has agreed to purchase an additional $32 billion of U.S. agriculture products over the next two years. The intention is to buy $12.5 billion worth above the 2017 baseline of $24 billion in 2020 and $19.5 billion above that baseline in 2021.

That places the average annual total at $40 billion over the next two years, which matches the number the U.S. side has been quoting since October. China emphasized at Wednesday’s ceremony its plans to adhere strictly to this promise.

The list of planned agricultural purchases broadly includes oilseeds, meat, cereals, cotton, seafood and other agricultural commodities like dairy, ethanol, distillers dried grains, and fruits and vegetables.

Traders still seem skeptical over the feasibility of this deal given that the agreed-upon value is much larger than the previous maximum and because of the “market condition” caveat. Chicago-traded soybeans reflected this uncertainty on Wednesday, as the most-active contract finished down 13.5 cents per bushel, closing at its lowest point in nearly four weeks.

SOYBEAN-DRIVEN

The sheer size of China’s U.S. soybean imports versus all other U.S. farm imports suggests that only soybeans possess enough power to truly move the needle to the degree needed to achieve the purchase agreement. In 2017, soybeans accounted for 51% of the total value of all U.S. agricultural and related products shipped to China.

Looking at the previous maximum amounts of non-soybean U.S. exports to all destinations would also lead to the same conclusion about the importance of soybeans. Industry analysts have speculated on how exports of other farm products to China could increase to meet the target, and in some cases, those increases are way outside the scope of what was previously possible, adding to market skepticism.

If China plans to buy at least $36.5 billion worth of U.S. farm goods in 2020, a great deal of that would have to be soybeans. Given China’s slower feed demand of late following a sharp decline in its hog herd from African swine fever, a major increase in U.S. soybeans to China would probably have to cut in to Brazil’s share to the Asian country.

The largest annual value of U.S. soybeans shipped to China came in 2012 at $14.9 billion, when commodity prices were significantly higher than today. Brazil’s best year to China was 2018, when soy exports totaled $27.2 billion. That was unusually high as it coincided with the onset of the U.S.-China trade war, and only $3.1 billion worth of U.S. soybeans were sent to China that year.

In 2019, Brazil’s soy business to China was valued at $20.5 billion, just 1% higher than in 2017. U.S. data has not been finalized yet, but last year’s soy shipments to China likely came in just under $8 billion.

The largest combined value of U.S. and Brazilian soybean exports to China came in 2017 at $32.5 billion, which accounted for the bulk of all soybeans shipped to China globally. And that represented 69% of the total value of soybeans exported by the two countries that year.

But the United States has relied much more on non-Chinese soybean customers than has Brazil, as about 80% of Brazil’s annual soy exports go to China. On average over the past decade, the value of U.S. exports to other buyers has been almost double that of Brazil, and this is the area where Brazil could gain share in the next two years.

Assuming soybeans would constitute at least half of this year’s $36.5 billion in U.S. farm shipments to China, a similar share as 2017, it is easy to speculate on how much is left over for Brazil given the figures discussed above.

BASELINE QUESTIONS

The exact origin of the $24 billion 2017 baseline is not totally clear. This appears to be the value of all agricultural and related products exported to China as given by the U.S. Census Bureau data. Some have speculated that this could be representing China’s actual import cost, which would reduce the amount of exports required to meet the target.

China’s customs agency used to publish more detailed data about the country’s monthly imports prior to the onset of the trade war with the United States. That data is thinner these days, but some of the older data can shed a little light on China’s approximate import costs.

Customs data suggests that the total cost of China’s soybean haul in 2016 amounted to $34 billion. Although not an exact comparison based on the timing, Brazil and the United States together exported $28.6 billion worth of soybeans to China in 2016 based on data from each respective government.

Unfortunately, the origin breakdown for 2016 is not readily available, but customs data shows that 88% of China’s 2017 soybean imports came from Brazil or the United States. Assuming 2016 was not much different, it implies a relatively small difference in export cost from the origin versus landing cost at the destination, and either method still requires very large purchases.

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

Editing by Matthew Lewis

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