New US soybean export rule could hit 50% of cargoes, force export prices up

New rules that will see the USDA stamp China-bound cargoes of soybeans with warning stickers if they don’t meet fresh contamination limits could erode US market share of soybean sales into China, according to market sources.

Earlier this month the USDA agreed with the China Inspection and Quarantine Bureau that it would inspect cargoes heading to China, labelling those that contain more than 1% foreign matter in return for China expediting the discharge of vessels that meet the new threshold.

While typical specification of yellow soybeans are of a maximum 2% foreign matter, the move is an attempt to placate Chinese officials, who have since September consistently raised complaints about the level of foreign matter in US-origin cargoes, which they say has been abnormally high.

But the move has angered traders and could now threaten US market share of soybean sales to China just seven weeks after Chinese buyers pledged to buy more US soybeans during a presidential visit by US President Donald Trump.

“There is general outrage that the USDA went in and negotiated with the Chinese without asking the industry what their feelings were on it,” said Charlie Sernatinger, a broker with ED&F Man Group.

“The general feeling is that if the Chinese come to elevators and need a 1% guarantee on FM, initially they will say it’s a 15-cent premium, but soon enough we will have to absorb that cost and it will hit market share,” Sernatinger said.

While that 15 cents per bushel equates to just under 2% of the purchase price of soybeans at ports such as the US Gulf, many farmers, traders and exporters are operating on thin margins due to successive years of bumper crops, particularly in Brazil, the world’s biggest seller of soybeans.

Bad tempered

Sources say around 70 companies involved in the farming, sale and export of US soybeans held a bad-tempered conference call on Tuesday with the USDA, which explained the new process for labelling cargoes that will come into effect on January 1.

And while the USDA has been explicit that China has pledged not to reject shipments with the warning sticker, forcing them instead to be cleaned up, it effectively means a lower cap on foreign matter and higher costs as few exporters would want to take the risk of delayed shipments.

“The clean-up is going to be done here. If you take it to China then they are going to subject it to further inspection and cleaning. So ask yourself the question, where would you rather get it done?” said a second source, who declined to be named.

Brokers say the problem stemmed from shipments of the first few cargoes in the current marketing year.

According to US government sources, China claimed those September cargoes contained foreign matter above 2%, which brokers said could be due to heavy rains in the US southern harvest that proved a breeding ground for bugs.

However, market sources say the problem has now been solved as the harvest has been completed and average foreign matter content has been 1.1%.

Nevertheless, agribusiness giant Archer Daniel Midland (ADM) was said to be leading lobbying efforts to unwind the new rule.

ADM declined to respond to questions.

Half of cargoes to be impacted

According to official data analysed by McDonald Pelz – one of the world’s largest physical brokerages - the new rules would have impacted about 50% of all cargoes in 2016 and 2017.

Of 484 vessels shipped this marketing year, 240 were graded at 1% or less, while 327 of the 652 vessels shipped last marketing year were graded at 1% or less.

“So, for all intents and purposes, every other cargo will fall under scrutiny within this new policy,” Paul Sylvester at McDonald Pelz told Agricensus via email Thursday.

With premiums at US ports over futures expected to rise as a result of the clean up costs, there could be a widening of the differential between the price paid at port and futures prices on the Chicago Board of Trade, which state a maximum of 2% foreign matter can be delivered.

Asked how the new rules would impact prices on the Chicago Board of Trade – the main arena where US farmers and Chinese buyers hedge future trade, Sernatinger said: “It’s not bullish. The USDA fixed a problem that didn’t exist.”

Sylvester agreed: “I can’t imagine it is going to help US market share, put it that way.”

US market share of soybean sales into China is already falling as a result of a record crop in Brazil last year and the fact South American soybean has higher protein content.