Shifting trade order casts doubt on how quickly China can ramp up purchases of US soybeans

Just over a week after the U.S. and China signed a critical “phase one” trade agreement, it’s still unclear how a key aspect will play out.

China agreed to buy at least $200 billion more in U.S. goods and services relative to the 2017 level over the next two years. The projected purchases include at least $32 billion more in agricultural products, with an unspecified amount of soybeans.

So far, doubts remain about how quickly such a ramp-up can occur, especially given seasonality and the fact that Chinese tariffs of 30% on U.S. soybeans officially remain in place. China is the world’s largest consumer of soybeans, which are used in animal feed and cooking oil.

U.S. farmers also face competition with Brazil, whose soybean exports to the Asian giant increased by more than a third amid U.S.-China trade tensions. 

Brazilian sales will likely be hit by the requirement to buy more from the U.S., although it’s still not clear to what extent, Sergio Amaral, honorary president of the China-Brazil Business Council and former Brazilian ambassador to the U.S., said in a phone interview.

“The business (community) now is trying to react, to adjust to the declarations,” he said. “But … how can you make a forecast, if you don’t have details on how it’s going to operate?”

“Right now, the U.S. soybeans sales window is very small,” Xiaoping Zhang, regional director of greater China for the U.S. Soybean Export Council, said according to a CNBC translation of his Mandarin-language remarks.

Zhang pointed out it typically takes at least a month for imports to be processed, which leaves little time for new orders before the current U.S. sales season ends in April.

Meanwhile, as the southern hemisphere enters fall and winter, Brazilian soybeans are about to come onto the market.

As a result, Zhang does not expect Chinese purchases of U.S. soybeans will significantly increase until at least the second half of the year. He noted that as of Jan. 9, China has made new purchases of U.S. soybeans, but the volume is small.

China kicked off a week-long Lunar New Year holiday on Friday, but is canceling many public festivities in an effort to limit the spread of a new virus that has killed 25 people.

Some analysts doubt whether the U.S. will even be able to grow enough soybeans for China to buy.

“This is quite an ambitious timeline for both sides, not just in terms of China ramping up its domestic purchases, but (the) U.S. stepping up its production,” said Nick Marro, global trade lead at The Economist Intelligence Unit. “Long term, if you’re creating this artificial demand, (it) could put U.S. farmers in a difficult situation.”

U.S. soybean exports to China dropped sharply in the second half of 2018, and U.S. government data shows American farmland for soybeans dropped by about 15% in 2019 to about 76 million acres. On the other hand, Brazil increased its soybean acreage by 3% in the current marketing year to a record 36.9 million hectares (91.2 million acres), the U.S. Department of Agriculture Foreign Agricultural Service said in a January report.

If the weather cooperates, the report said Brazil is expected to overtake the U.S. as the world’s largest producer of soybeans.

Chinese oil plants are also more willing to buy South American soybeans due to their slightly higher protein content, according to He Lin, director of the agricultural products research and development center at Hangzhou-based Nanhua Futures.

The South American country’s share of Chinese soybean imports has increased from about half to three-quarters in the last three years, according to China Customs data accessed through Wind Information.

The Chinese government has emphasized that any purchases will be made based on market conditions, leaving open the option for maintaining trade levels with Brazil and other countries, while having the flexibility to meet the U.S. agreements at a later date.

Without a clear timeline for when Chinese tariffs on soybeans will be removed, U.S. sales of the oilseed to China are still going through unofficial channels to bypass the duties, U.S. Soybean Export Council’s Zhang said. “Tariff exemption is an uncertainty,” he said, noting a host of questions around timing and which companies can enjoy the privilege.

Soybean futures are down about 5% for the month so far. The next U.S. export sales report is set for release Friday evening Beijing time.

“By the end of the two-year timeframe, (I’m) not sure whether this relationship (with the U.S.) will continue,” EIU’s Marro said. “Still nothing really that suggests China will be bound to its commitments. A lot of this will have to rely on good faith from both sides.”