OPINION: What happens if the trade war triggers a new China soybean strategy?
Daniele Siqueira of Brazil-based consultancy AgRural explains why the trade war between China and the US may not only be a problem for US farmers
Soybeans are not only Brazil’s main export product, but also the flagship of its agribusiness sector – accounting for 23.5% of Brazilian GDP in 2017.
Increasing soybean production and exports has been Brazil’s plan A for years.
With just a week from Brazilian general elections, however, none of the candidates with a real chance to become the next president seems to have a plan B, or indeed do anything to secure the plan A.
And some kind of plan will be needed if China ever changes its soybean strategy.
In the soybean market, Brazilian farmers, at least so far, have been the greatest winners of the trade conflict between the US and China.
According to Brazil’s Foreign Trade Ministry, from January to August Brazil exported 50.9 million mt of soybeans to China, 6.6 million mt up from the same period a year ago and 14.6 million mt higher than from January to August 2016.
That means that China has bought 79% of all soybeans exported by Brazil so far in 2018, compared to 78% and 75% in the same period of 2017 and 2016, respectively.
Prices have also risen as a direct result of the trade war.
The average FOB price for Brazilian soybeans shipped to China since January 2018 is at $399/mt, compared to $377/mt in the same period of 2017 and $370/mt in the first eight months of 2016.
Considering the Brazilian currency has weakened 21% since the beginning of the year, prices are even more attractive to farmers when converted to reais.
In the meantime, prices in Chicago have reached their lowest level in 10 years.
Dependence
All the numbers above mean that Brazil is getting even more dependent on soybean exports to China.
In 2017, Brazilian soybean exports totalled $25.7 billion and accounted for 12% of all Brazilian exports. From that total, China bought $20.3 billion worth of the oilseed.
The opposite is also true. China Customs data show that Brazil was the origin of 53% of all soybeans imported by China in 2017, compared to 44% in 2016. Now in 2018, the Brazilian share will be even larger, due to smaller US exports to China.
For many years, the Chinese government favoured the domestic expansion of other crops, especially corn. Soybeans, on the other hand, lost area and did not have almost any yield improvement.
Even with a 1.9-million ha increase (29%) in the last three years, China’s soybean area is still 10% smaller than it was in 2000, according to the USDA.
The average yield of 1.8 mt/ha is only half of what the US, Brazil and Argentina normally get. But, to meet demand that has increased by about 8% a year since 2000, China now imports seven times more soybeans than it did 18 years ago.
And that was a good arrangement for all the parties involved.
With China always ready to buy more, the US, Brazil, and Argentina started growing soybeans like never before.
It is not by chance that Brazilian production tripled in the same period: it’s a direct consequence of China’s insatiable appetite and made possible by Brazilian farmers’ technical excellence and resilience.
Profound
The trade war, however, could have a profound impact that threatens farmers beyond those in the US Midwest.
Indeed, it might bring structural changes that go beyond the mere momentary switch from US to Brazilian soybean imports.
And that is my main concern right now, as a Brazilian soybean market analyst.
The Chinese government announced that China’s soybean imports in the 2018/19 marketing year, which starts on October 1, are likely to reach only 83.65 million mt, 10.25 million mt down from the forecast for 2017/18.
Moreover, China has given signals that the cut in soybean imports will be accompanied by a reduction in the soybean meal use, since a lower-protein feed is not seen as a bad alternative for local livestock and poultry production.
The reduction in the soybean meal use, along with a 29% increase in the Chinese soybean area in the last three crop seasons combined, already seems to be at least a start to a pivot away from relying on three countries for almost all its imported protein needs.
Even if the trade war ends in the near future and China resumes its soybean purchases from the US, maybe this entire situation will make China realise that a change in the soybean strategy outlined years ago could be an interesting thing to do.
What would China do?
Grow more and more soybeans at home?
Encourage alternative countries to grow and export soybeans to the Chinese market?
Keep replacing soybean meal with other sources of vegetable protein?
In any case, a radical, and so far very hypothetical, cut in China’s soybean imports in the coming years would be a disaster not only for Brazilian farmers, but for the entire economy of a country that has already been struggling to keep afloat.
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