By Eric J. Brooks
An eFeedLink Hot Topic
Making good on its recent G20 summit promise to purchase large quantities of US agribusiness products, China re-started its purchases of US soybeans in a very big way. On December 13, AgriCensus stated that its Chinese sources had reported the purchase of 40 cargoes of US soybeans. With each cargo amounting to approximately 60,000 tonnes, this implies that China purchased a whopping 2.4 million tonnes of US soybeans valued at US$200 million in one day.
AgriCensus cited reports from at least three sources, stating that "Sinograin and COFCO bought 30 cargoes of US beans overnight from Cargill, Dreyfus, and Marubeni for loading in January through March, mostly off the [US] Pacific Northwest [ports]." Ten other cargoes were reportedly purchased from US Gulf of Mexico ports, adding that these beans may also have been purchased from "possibly CHS and ADM."
This report from AgriCensus was later followed by more conservative reports from the New York Times. (www.nytimes.com/reuters/2018/12/12/business/12reuters-usa-trade-china-soybeans.html) and Reuters, which quoted more western analysts but relied on fewer direct reports from Chinese buyers themselves. In reports not based on the actual number of cargoes stated by Chinese sources, USDA reported on December 14 sales of 1.13 million tonnes to China, though more sales of this or higher volumes are expected from the USDA next week and in weeks to come. The US Soybean Export Council conservatively estimated 1.5 to 2.0 million tonnes in sales but expects this figure to be revised upwards as it receives more information.
Due to be loaded and shipped in January, February and March, these cargoes were reportedly purchased for 130 cents/bushel or approximately 14% above the March CBOT futures prices, which implies an above market price of at least US$10.60/bushel. Based on an earlier Bloomberg report, these shipments are being imported without Beijing's usual 25% import tax on US soybeans.
According to AgriCensus, "That price nets back to a 30 cent per bushel premium over futures on a FOB basis – around 5 cents higher than where it was offered on Tuesday." The New York Times quoted a European trader stating that "The Chinese evidently want the beans quickly as they have not been able to cover all their needs in South America."
These purchases are in lockstep with a December 10 2018, Bloomberg News report (www.bloomberg.com/news/articles/2018-12-10/china-is-said-to-announce-resumption-in-u-s-soy-purchases-soon). It stated that China's government would approve the purchase of 5 to 8 million tonnes of US soybeans to replenish state reserves, and possibly two million tonnes for use by integrators –all without the 25% import tax.
Bloomberg stated that "Ministry of Finance officials led a meeting last week to discuss restarting American [soybean] imports, the people said. It remains unclear… if the shipments will be taxed first and reimbursed later, or if it will follow a cut in tariffs."
–Hence, even before it purchased these 40 cargos of US soybeans, China had already decided it would import 7 to 10 million tonnes of US soybeans for delivery in 2019, when South American supplies are usually not available. Bloomberg's report also implies that barring any further diplomatic upsets between America and China, the latter will buy an additional 75 to 125 cargoes of US soybeans for shipment in Q1 2019, or another 4.6 million to 7.6 million tonnes.
But do remember: China is not trying to help Donald Trump; it is merely doing this to help itself. Once a new crop of South American soybeans become available in Q2 2019, we should not expect Beijing to allow the tariff-free purchase of US soybeans until Q4 2019, and then only as much as it requires.
All this belies the fact that China is purchasing significantly fewer soybeans than was expected, and that this is not entirely due to its tax on US imports. In the twelve months ending in November, China imported 4.3% fewer soybeans than in the comparable period a year earlier.
–Prior to this announcement, it was on track to purchase 90 million tonnes of soybeans in the 2018-19 marketing year. It would have been significantly down from 94 million tonnes in 2017-18 (when 97 million tonnes of imports were anticipated before the trade war broke out). It remains far less than the 103 million tonnes that were projected for 2018-19 before trade hostilities broke out.
Markets immediately reacted, with soybeans jumping nearly 2% on the day of this announcement, from US$9.14/bushel to US$9.32/bushel. Over the medium and long term however, China's purchases do not do much to lift a depressed, moribund world soybean market.
If Bloomberg's report is correct and only two million tonnes of US imports are for use by Chinese integrators, then 5 to 8 million tonnes of soybeans will merely be shifted from US inventories to Chinese government storage facilities. From their December USDA estimate of 115.3 million tonnes, China's aggressive buying will only lower world inventories to a bloated, record-setting 113 million tonnes.
With world soy consumption only rising from 351.5 million tonnes to 353.5 million tonnes, the 2018-19 closing world soybean stocks-to-use ratio falls immaterially, from 33% to 32%. In fact, even if China changes its mind and decides to import 10 million tonnes and give all of it to livestock integrators, the world soybean stocks-to-use ratio will only fall to 29% --but it needs to be below 25% before a sustained oilseed rally can happen.
That is why even two days after the announcement was made, CBOT soy remained 14% below its March peak of US$10.85/bushel –shortly before the 25% import tariff was announced.
Another medium-term cloud hanging over Chinese soybean demand is African Swine Fever (ASF). With hogs consuming nearly 60% of China's feed, AgriCensus reports that it has spread to two-thirds of China's provinces. With Chinese New Year looming, Chinese hog inventories are due for their seasonal Q1 downturn.
If ASF keeps its hog herd of nearly half a billion from recovering as expected, China's demand for soybeans may fall below trend from Q2 2019 onwards. That would be bad news for South American bean exporters, which traditionally dominate mid-year soybean shipments.
For now, Chinese purchases of US beans should narrow the price spread between US and Brazilian beans which has persisted for most of 2018. After Q2 2019, assuming the 25% import tariff on US imports is put back in place, a large spread between American and southern hemisphere beans could again widen –unless ASF decimates Chinese hog herds and China's Q2 and Q3 soybean demand falls below expectations.
For now, G20 horse trading coincides with Beijing's need to replenish state soybean reserves. It is likely that similar large Chinese purchases will follow in the days to come or in early 2019. This narrow (but bountiful) export window is good news for US farmers, but it will not be bad news for soybean buyers.
With these 40 cargo purchases, 2018-19 US soybean exports rise from their projected 52 million tonne level back into the 54 to 55 million tonne range. Should China really buy 7 to 10 million tonnes as reported by Bloomberg, US soybean exports will total 59 to 62 million tonnes –approximately the same or greater export volume as was shipped in the record-setting 2016-17 and 2017-18 marketing years.
That however, does not mean that US soybean farmers are enjoying the prosperity they did in 2016-17, when 58 million tonnes were exported: Prior to this announcement, this year's US soybean harvest was 7% or eight million tonnes larger than that of two years ago and unsold inventories three times larger.
It would also cut US soybean inventories from nearly 26 million tonnes to just under 16 million tonnes. That's still more than triple their level of three years ago, but a great improvement over the previous forecast. While this provides much-needed income for US soybean farmers, buyers will not suffer –with world supplies still bloated, prices will not rise much.
It does mean that if China really purchases 7 to 10 million tonnes of US soybeans tariff-free, the world soybean market will function normally for three and a half months. The prevailing artificial spreads between US and Latin American soybeans will close for about three months. Come April, should the US-China trade war persist, trade war bean trading will resume, with Europeans and East Asians mostly buying US soy, China sourcing from South America and large spreads between US and Latin shipping ports re-opening.