ANALYSIS: China digs in as trade doubtful of soybean resolution

US President Donald Trump and Chinese leader Xi Jinping will meet at the G20 meeting this Friday for the first time since November 2018, with the outcome of discussions likely to steer the direction of global soybean, and wider agriculture, markets for the rest of the year.

While there has been muted optimism from the trade that the talks could bring an end to the dispute and relieve some of the pain experienced by US farmers, those on both sides of the divide are less sure.

US Agriculture Secretary Sonny Perdue doubts the meeting will be the end of the story.

“I don't think he'll come home with a deal,” Perdue said on Tuesday.

On Wednesday, US Treasury Secretary Steve Mnuchin estimated that a deal with China was “about 90%” complete, suggesting an impasse has been reached given his repeated use of the figure this year.

It is a sentiment that has been echoed in China.

“Trump’s demand of reforms in China is a red line and I do not think it is easy to get past,” a soybean trader at an international trading house told Agricensus, referring to Trump’s demand for structural reform of the Chinese economy.

If the talks do not result in a deal, it potentially means no further buying of US soybeans by China, an outcome for which Beijing has already made contingencies.

Playing the long game

Nearly all buying of US soybeans from China was cut off in June 2018 after a 25% tariff was levied in response to US tariffs on billions of dollars of Chinese goods.

A truce in the trade war in November 2018 meant state-owned Chinese importers Sinograin and Cofco could buy US beans on government orders, with 13 million mt of beans snapped up as a result.

However, relations have since deteriorated, while almost half of that volume is still due to be delivered to China.

China-based trade sources believe the remaining 6 million mt of these undelivered beans will go into reserves, rather than going straight to the crush as they would typically be,

That could be a sign of Beijing’s willingness to dig in on this dispute rather than look for a quick solution.

“These US beans going into reserves is a sign China is getting ready for a long-term battle,” the same soybean trader said.

Alternative supply

With an effective ban on US beans, sourcing alternative supply from Argentina and Brazil has proven to be the most obvious workaround for China’s importers.

“Given that China is buying no more US soybeans and the ones previously bought [by state buyers] go into reserves, supplies from South America can meet domestic demand,” a China-based grain import manager said.

“Argentina’s soybean production is not down like last year and supply [for China] is abundant,” the same manager added.

Argentina’s soybeans accounted for nearly 7% of China’s 95 million mt of imports in 2017, but its market share plunged to less than 2% in 2018 as a severe drought hit Argentina, slashing its soybean production and squeezing its exports to China to only 1.46 million mt.

“Argentina will be an important force [this year],” Jeffery Xu, senior manager at soybean brokerage Overseas China Investments Ltd told Agricensus.

China’s imports of Argentinian beans are expected to rise to 1.5 million mt in July alone, estimates from market sources previously showed.

It has also stepped up imports from other countries, including Russia – albeit in much smaller quantities.

Domestic capacity

Upping domestic supply has also factored into Beijing’s plans.

"The government has prepared plans including releasing soybean reserves, revitalising domestic production, rotating acreages for soybeans, and expanding rapeseed production ... There is always a method," Monica Tu, a senior soybean market consultant from Shanghai JC Intelligence Ltd told Agricensus.

According to the latest estimate from the Chinese agriculture ministry, total soybean output will jump to 17.3 million mt in the 2019/20 marketing year, up nearly 8% on year.

“The weather has been decent and soybean planting is already finished,” two China-based trade sources said regarding China’s new soybean crop which is to be all harvested in Autumn 2019.

Chinese private crushers have also maintained high stocks of imports.

“Brazilian beans can last China until about November or December this year. The real stress period might be January and February next year,” a soybean trader said.

Those existing stocks may be enough to get China through until the new South American harvest kicks in, with the country needing a 5-6 million mt cushion of supply each month to meet current demand.

China crushes an average of 1.65 million mt per week, and stock levels stood at 5.8 million mt last week, according to data from the Chinese National Grain and Oil Information Centre (CNGOIC).

The ASF effect

Demand for soybean as a feedstock in China has been cut significantly this year due to the ongoing African swine fever (ASF) outbreak cutting the world’s largest pig producer’s herd.

Soybean is imported to be crushed into soymeal which serves as a key source of protein in feedstocks for China’s massive pig industry.

With demand cut by ASF and secure supply from South America, China could live without further purchase of US soybeans in 2019.

“ASF has been very serious this year and there is still no solution yet… I estimated back in April that ASF could cut China’s soybean imports by 4 million mt but the real situation is more serious than my original calculation,” the grain import manager said.

"I estimated that 2019 soybean imports will be 5.5 million mt lower than last year," the manager added.

Conclusion

China’s total soybean imports in 2019 could drop to less than 88 million mt given the 5.5 million mt year-on-year cut from 94 million mt in 2018.

Some 31.75 million mt of beans had already been imported into China between January and May this year and imports for June through August are estimated to reach 8.63 million mt, 9.5 million mt and 9 million mt respectively, according to data from Tu.

This means China only needs to import around 29.12 million mt of soybeans in the remaining four months of 2019 between September and December.

During the same period in 2018, China’s soybean imports reached 35.19 million mt with Brazil supplying more than 67% of the total volume and the US contributing less than 1%.

Given a recovery in Argentina’s soybean output, it seems China could easily reach that target this year.