CHICAGO (Reuters) - The recent meeting in Argentina between U.S. President Donald Trump and Chinese President Xi Jinping seems to have gone better than expected by many agriculture market participants, as it suggested a possible end to the ongoing trade war and a prospective boost to U.S. exports.
The White House announced over the weekend that Beijing had agreed to buy an unspecified but “very substantial” amount of U.S. commodities, and that purchases of agricultural goods would start “immediately.”
Soybeans are the most obvious starting point, as they accounted for half of the value of all U.S. agricultural and related goods shipped to China last year, which totaled $24 billion. U.S. Agriculture Secretary Sonny Perdue said on Monday that rice, poultry, grain sorghum and wheat could also be in China’s line of sight.
The only thing still missing from the equation is confirmation from the Chinese that they actually plan to remove tariffs on U.S. farm products, which would certainly signal intent to purchase. But if the weekend developments come to fruition, sorghum and pork could be among the big winners, aside from soybeans.
Looking quickly at soybeans, China has booked just over a half-million tons of U.S beans for delivery in the current marketing year. Last year at this time, Chinese purchases totaled close to 20 million tons.
Aside from the tariff outcome, Chinese bean demand is another major unknown. Back in May, the U.S. Department of Agriculture predicted that China would import a whopping 103 million tons of the oilseed in 2018-19, up 6 percent on the year.
But the agency’s estimate has since fallen to 90 million tons, which would be down 4 percent from the previous year. This reduction was largely based on lower protein feeding for livestock, but also on the higher use of domestic supplies.
A deadly outbreak of African Swine Fever (ASF) may also curb soybean demand as there would be fewer hogs to feed. More than 70 cases have been reported across Chinese farms since early August.
If ASF is to curb feed usage, it may be a little contradictory to assume that China would be aggressively looking to import other feed grains right now. But it is possible given the miniscule amounts of U.S. agriculture products Chinese buyers have scooped up recently.
Even though U.S. sorghum is a smaller market than soybeans, it is getting stung just as badly over China’s absence. The United States produced around 9.2 million tons of sorghum in both 2017 and 2018.
On average over the past five seasons, some 60 percent of the U.S. sorghum crop was exported annually. China accounted for 83 percent of those shipments, and 94 percent of China’s sorghum imports came from the United States in 2017.
Through Nov. 23, 2017, the Asian country had booked just under 2 million tons of U.S. sorghum for delivery in 2017-18, and that number increased to 4.4 million by the end of the marketing year. But as of Nov. 22, there were no commitments from China and U.S. sorghum sales for 2018-19 were at the lowest levels in more than a decade.
Distillers’ dried grains or DDGs, a byproduct of corn-based ethanol production, is another animal feed additive that could re-enter the equation. U.S. exports to China peaked in 2015 at 6.5 million tons, which was about half of the total volume that year, but that rate quickly dropped the following year as China imposed anti-dumping, anti-subsidy duties on U.S. DDGs.
But China’s disinterest in U.S. DDGs has had less severe consequences than those for sorghum or soybeans. Between January and September, exports were up 14 percent over the same period last year and on pace to contend for the annual record. Mexico has been the No. 1 destination.
If the ASF outbreak reduces overall demand for feed ingredients, it may be good news for U.S. pork producers. Last week, USDA reported that China had bought its largest weekly volume of U.S. pork since April 2017.
The sales took place in the week ended Nov. 22 and called for 3,348 tons of pork to be shipped this year, and 9,384 tons for next year. China has a 62 percent duty on U.S. pork, so the purchase may be a sign that the ASF situation is worse than reported. Chinese pork demand is typically heightened ahead of the New Year celebrations, which begin on Feb. 5.
Outside of the livestock arena, U.S. ethanol should be another hopeful to make China’s wish list. Beijing last year announced it planned to implement nationwide use of ethanol in gasoline by 2020. Just before the trade war began earlier this year, some analysts predicted U.S. ethanol exports to China in 2018 could comfortably surpass the previous high.
Although it has recently been revealed that China has much more corn than market participants believed, the country’s processing capacity is likely not robust enough to produce the ethanol volumes required, hence the need for imports.
And the potential there is huge. China is the world’s largest automobile market but produces only 5 percent as much ethanol as the United States each year.
Chinese buyers turning to U.S. rice and wheat, as Perdue suggested, is less probable. Desperation should not be on the horizon for these grains as China has built up both of their wheat and rice stocks to record levels in recent years.
China consumes about 30 percent of the world’s rice, but it does not have a history of trade with the United States in that commodity. U.S. rice production typically reaches about 6 million to 7 million tons a year, but the largest quantity ever shipped to China was 5,000 tons in 2010. Plus, top exporters India, Thailand and Vietnam are in much closer proximity.
Given that the United States has had trouble selling its wheat to anyone in recent months, it is hard to imagine that China would be the one to come in and give U.S. wheat a lift. But it is not all that far-fetched.
In 2017, China’s General Administration of Customs reported that the country had imported 4.3 million tons of wheat with the top supplier being Australia at 1.9 million and the United States second with 1.56 million.
China purchased about 900,000 tons of U.S. wheat for delivery in 2017-18, though there are no bookings for the current year. On average over the last decade, the East Asian country has accounted for 4 percent of annual U.S. wheat exports.
(The opinions expressed here are those of the author, a market analyst for Reuters.)
Writing by Karen Braun; Editing by Matthew Lewis