SNAP ANALYSIS: Does China need another 10m mt of US soybeans?

On Tuesday, news emerged that Chinese authorities were poised to exempt 10 million mt of US soybeans from additional import tariffs arising from the trade war with the US, taking the total that can be imported without the 30% levy to 30 million mt.

The announcement comes ahead of a next round of trade talks expected to make headway in Santiago, Chile next month.

It is part of a long running saga that has seen the US hold off on escalating the trade war by raising tariffs on Chinese goods, providing China continues to purchase US agricultural goods.

However, it's likely for two reasons that this quota may not be fully used.

Firstly, Chinese demand for beans is expected to fall by 10-15% this year compared to 2017 due to the ongoing outbreak of African swine fever.

China’s ministry of agriculture estimates that soybean imports will fall in the 2019/20 marketing year to 84 million mt from 94 million mt two years earlier, although private estimates are as low as 81 million mt.

And trade sources estimate that following yesterday's buying spree of November cargoes from Brazil, just 7 million mt of Chinese demand is still open before yet another mammoth Brazilian harvest hits in February.

Secondly, Brazil soybeans are simply much cheaper from February onwards.

According to Agricensus data, from February onwards delivered Brazilian soybeans into North China are 40-60 c/bu cheaper than the US oilseed on a like-for-like basis.

That means in the absence of Chinese government stockpiling, the quota of 10 million mt is unlikely to be used.

“It is interesting… As the Chinese government releases quota, some parts of it have to be fulfilled, but there might not be profits in those purchases. US margins cannot compete with Brazil’s,” said one soybean trader at an international crusher.

With offers in the US Gulf for January shipment at 50 c/bu over futures, for US farmers to be competitive, they would have to offer soybeans at ports at parity to futures contract – a dynamic that rarely happens.

“US beans [crush] margins are pretty bad,” a second trader said, responding to the news that some Chinese crushers could be seeking December shipment out of the US Gulf on Tuesday.

It boils down to this, given China has said any purchases will be in line with market competitiveness, this will not be a blank cheque for US farmers.

And US soybean exports to China will still hit a six-year low in 2019, and largely because of a decline in demand rather than any trade war impact.