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Despite Tariffs, U.S. Soy Is Still Headed to China. Here’s Why

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August 9, 2018

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By Shruti Date Singh and Tatiana Freitas (Bloomberg) –It looks like China can’t completely shun U.S. soybeans as at least a few cargoes of American supplies head to its shores.

The crop has been thrust into the center of trade war between the two nations. China slapped retaliatory tariffs of 25 percent on American shipments, sending buyers from the Asian country rushing to Brazil for supplies. But even though the South American country is the world’s largest exporter, it’s still unlikely to meet China’s voracious appetite alone.

Brazil’s supplies will start to tighten by October, after months of record shipments. That’s also just about the time that U.S. crop gathering is under full swing. With no other growers really exporting enough to satisfy China’s demand, the nation will likely either buy from the U.S. or suffer through a shortage.

“We will start to see more business being done” between the U.S. and China, said Mark Schultz, chief market analyst for Northstar Commodity in Minneapolis. “It may never get to levels we enjoyed, but it’s going to be better than none.”

China is the world’s biggest soybean buyer and crushes the oilseed into meal, used in livestock feed, and cooking oil.

As the trade war changed buying patterns, prices for the oilseed surged in Brazil, while futures in the U.S. tumbled. Even with these moves, the tariffs mean that Brazil soybeans are still cheaper for Chinese buyers than American supplies, Paulo Sousa, Cargill Inc.’s grain director for Latin America, said at an industry event this week.

It’s hard to overestimate just how huge China is when it comes to the soybean trade. The U.S. Department of Agriculture has predicted that China’s soybean imports will fall to 95 million metric tons in the 2018-2019 season, the first decline in 15 years. Even with the drop, that’s still about 60 percent of total global shipments.

Brazil’s exports for the season are estimated at 75 million tons. Even if China sucks up all that on its own, the country is still facing a gap of 20 million tons it needs to buy from somewhere.

It may be almost impossible to meet that import need without buying from the U.S., which is expected to ship 55.5 million tons. Argentina, forecast as the next-biggest exporter, is only projected to supply 8 million tons, USDA data show.

There’s already evidence that China is still doing some buying from the U.S. The bulk carrier Betis departed Gavilon Group LLC’s export terminal in Kalama, Washington, for Shanghai on July 29, carrying the first cargo of American soybeans destined for China in three weeks, according to a report published by the U.S. Department of Agriculture.

To meet its demand, China will likely need to import at least 10 million tons of U.S. soybeans, Jiang Boheng, analyst with Luzheng Futures Co. Ltd., said in a telephone interview from Shandong.

Other analysts peg the number even higher. Pedro Dejneka, a partner at Chicago-based MD Commodities, said that unless China reduces its demand for soybean crushing aggressively, the country may import at least 15 million tons from the U.S. by the end of 2018.

Soy Alternatives

Still, there are some signs that China is looking for alternatives to U.S. supplies, such as reducing its soybean use. The country could lower its imports by more than 10 million tons in 2018 through measures including using low-protein diet formula in animal feed, the official Xinhua News Agency reported on Aug. 5. The nation could also boost purchases of palm kernel, sunflower and rapeseed meals in place of soy, Xinhua said.

China could also draw from its “significant” soybean stockpiles instead of importing from the U.S., according to Soren Schroder, the chief executive officer of agriculture giant Bunge Ltd.

Unless the U.S. and China come to a trade resolution, the Asian country “will continue to buy those beans in Brazil,” Schroder said in a telephone interview. “China in a normal year would take over 20 million tons of U.S. soybeans in the fourth and first quarter. That will be a hole in U.S. exports that will be difficult to fill with other business.”

But supplies from inventory can only last for so long. High stockpiles, coupled with ample imports from Brazil between July and September, should keep supplies sufficient through October, according to a report by the China National Grain and Oils Information Center. Chinese buyers have only purchased 30 percent of their needs for October loading and half for September, according to CNGOIC, which said the country runs the risk of a shortage in the fourth quarter.

“China will buy at least some soybeans from the U.S.,” Karl Setzer, a market analyst for MaxYield Cooperative in West Bend, Iowa, said by email. “It is very difficult to say when this will happen. But if they do, it will likely be once the U.S. harvest is taking place as that is usually when soybeans are the cheapest.”

© 2018 Bloomberg L.P

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