ANALYSIS: US election, pork price to dictate Phase One success

Chinese purchases of key US agricultural products have largely been on hold in October as buyers eagerly await the result of the US presidential election due to take place in less than a week.

China’s soybean demand coverage for 2020 is approaching full capacity, corn buying has already been carried out at a record pace that exceeds the current demand level, and pork imports are limited by the surging recovery in the country’s pig herd and weakening pork prices.

With soybean and meat accounting for nearly half of the total dollar value of US imports purchased so far, the first-year target of the US-China Phase One trade agreement is now in doubt.

Though purchases of agricultural goods have reached more than 70% of the Phase One target for 2020, the remaining 30% could entirely depend on the goodwill of the Chinese government.

Softer pork prices in China signal a supply surplus in the world’s largest pork market and could potentially slow herd replenishment next year – subsequently cutting demand for soymeal, soybean, and corn.

Meanwhile, in the southern hemisphere, Brazil has ramped up its planting pace in the past two weeks after dry conditions raised fears of a supply gap.

With Brazilian farmers rapidly closing the gap to last year, planting is getting back on track meaning its crops could be available as early as January to compete with the US.

Here are three factors that could undo the Phase One agreement:

State buying & covered demand

State-owned purchases of US soybeans mostly stalled in October as Cofco and Sinograin had already covered the majority of their demand for November 2020 through to January 2021 demand back in August and September.

There have been few signs since that state-backed buying will pick up anytime soon.

“There is no point to move now. They can wait a few more days,” said one trade source, pointing to the US election on November 3.

“I think they have purchased enough. The market may have to wait until the end of the year for the next round of buying,” one manager at a major soybean trading house said.

Coverage of soybean shipments through to the end of 2020 has been sufficient with over 90% of November and December shipments covered – mostly US soybeans.

China's demand for November shipment is estimated at around 8.5 million mt while December is expected to be around 6 million mt, both of which would count towards the 2020 target, while most cargo purchases in October mainly came from private crushers.

According to USDA data, China has contracted nearly 25 million mt of US soybeans for 2020/21, and most are expected to be exported between October and January.

As for 2021, China has covered an adequate level of its first-quarter shipments and has started purchasing second and third quarter positions predominantly from Brazil.

Any purchases of US soybeans after the November election would likely be allocated toward the replenishment of national reserves.

For corn, USDA data shows nearly 10.5 million mt has been booked by China with more than 8.8 million mt yet to be exported.

With the ongoing harvest of China's massive 265 million mt corn crop, US shipments are expected for deliveries in the first half of 2021.

Pork, soymeal prices fall

A rapid expansion of the pig herd and a softer pork price are starting to pressure soymeal prices in China during a year in which soybean imports are expected to hit their highest level since 2018.

Average pork prices have fallen to their lowest level since mid-June at CNY42.37/kg ($6.37/kg), according to data from China’s Ministry of Commerce, amid a strong recovery in the country’s pig herd.

However, low prices could slow that recovery and put pressure on demand for soymeal – the main source of protein in pig feed.

“The domestic [market] is a little worried about pork prices next year. So crushers have started selling soymeal basis for June through September,” said one China-based soymeal analyst.

China's pig herd has rebounded to more than 370 million heads as of the end of the third quarter of 2020, a 20% increase from the same quarter of 2019.

The market now expects the herd to recover to around 90% of the pre-African swine fever levels, which would translate to around 395-400 million head by the end of 2020.

That has prompted some crushers to start unwinding their positions, fearing that weaker demand stemming from lower pork prices would squeeze margins for pig farmers, and tighten margins for soymeal sales and soybean crushing.

Moreover, the lower the pork price, the thinner the margin for pork imports.

Brazilian planting

Finally, the acceleration in the pace of Brazil’s soybean planting over the past two weeks has allayed previous concerns around planting delays and made it less likely that US selling will continue into the new year.

In the state of Parana, 61% of the expected total area has been planted as of last week, nearly doubling week-on-week, while Mato Grosso has reached almost 25% complete.

“I feel like the market sentiment is quite bearish. Brazil’s [planting] progress is advancing rapidly,” said one China-based analyst at a large futures brokerage.

Faster planting progress in Brazil means the new crops could be available for Chinese buyers by mid-January 2021.

With Brazil's new crop size estimated to reach a record 133 million mt, China's US soybean purchases could be cut off until the third quarter of 2021.