Soybeans were flowing from the heavens when the U.S. and China finally agreed to phase one of a comprehensive trade agreement ahead of the Dec. 15 deadline. Washington scrapped the planned import levy and pledged to slash the September tariffs in half, from 15% to 7.5%, while Beijing promised its “best effort” to buy up to $50 billion in American agriculture. Equities cheered the developments but are the good times here again or will we just go back to where it all started? To answer that question, here is a number to consider: 230%. This is how much China is expected to increase its agricultural imports from the U.S.
Soybean There, Done That
Under the provisions of phase one, China will purchase up to $50 billion in agriculture. Since Treasury Secretary Steven Mnuchin and the rest of the administration are still performing a technical review of the agreement, we are still unaware of the full details, so what agricultural commodities and how much Beijing will buy are unclear. The biggest victims over the last 18 months have been American soybean farmers, many of whom have endured rotting inventories, soaring storage costs, and even insolvency due to the trade war.
It would make sense if U.S. trade representatives negotiated with the Chinese government to buy soybeans. Even if this commodity were to account for one-fifth of total purchases, the main question is: Can the world’s second-largest economy do it?
For the last several months, China has endured a horrendous case of African swine flu. The situation has led to about 100 million pigs being wiped out, representing roughly one-third of the country’s pig population. As a result, the nation is witnessing a pork crisis, decimating farmers’ demand for soy, which is used for animal feed. Reports suggest that the worst is over and that a recovery is underway, but it may be some time until China can return to pre-crisis pork production levels.
Meanwhile, China’s dependence on foreign soybeans has been interesting, to say the least. Prior to the first phase being agreed upon, the federal government extended tariff waivers to importers on an additional one million tons as they had used up the 10-million-ton waivers in October. With the exemptions, importers acquired about 300,000 tons of soybeans for shipment in January and February.
At the same time, China scooped up roughly 20 cargoes of Brazilian soybeans to take advantage of the fresh crop. The world’s biggest soybean consumer has also been buying supplies from Argentina. The problem may be right there.
During the September-August marketing year, soybean sales to China have topped 10 million tons, according to the U.S. Department of Agriculture (USDA). This is up from 455,000 tons from the same time a year ago, but more than half of the total amount in the 2017 marketing year. With the first phase scheduled to be ratified next month, it is unknown how China will proceed with its current contracts and agreements with the South American markets.
Goldman Sachs sounded the alarm, noting how these terms could be “hugely disruptive to global agricultural markets” because they would crowd out “Argentine and Brazilian supplies that have taken substantial market share since 2017 due to the trade war and much weaker currencies.”
It should be noted, however, that the Brazilian real, which has been the worst-performing emerging market currency in 2019, has rebounded in the last couple of months. Also, with a new left-leaning populist government installed, Argentina is set to apply export tariffs on wheat, soybeans, and corn. So, a stronger currency and additional costs might dissuade importers.
We’ve Bean There Before
The bigger the lie the more people will believe it. Are global financial markets lying to themselves about phase one of the U.S.-China trade deal? Investors can hardly be faulted – after a year and a half of whiplash and “will they or won’t they?” – for being delusional and desperate for anything to be true. Unfortunately, reality will eventually sink in and we will go back to where we started. Don’t believe it? Administration officials already issued a veiled threat, warning that Washington could add tariffs if China does not live up to its end of the bargain.
Considering the improbability of China hiking U.S. agricultural imports by more than 200%, international commerce will likely return to the battlefield and try to survive the trade war.
Read more from Andrew Moran.