U.S. Farmers Get Little Cheer From China Trade Truce for Now

(Bloomberg) -- For a soybean farmer in Iowa or Illinois, it may be premature to celebrate the ceasefire in the trade war between the U.S. and China.

After all, there’s still no sign of any easing in the 25 percent retaliatory tariff that China levies on imports of American soybeans. And while the U.S. said top buyer China agreed at the summit in Buenos Aires to restart purchases of agricultural products immediately, that wasn’t mentioned in the statement issued by the Chinese after the meeting.

Plus, market moves in reaction to news of the truce have so far only worsened crushing margins in China. Futures for soymeal, which is produced from crushing soy and is used for animal feed in China, extended losses on the Dalian Commodity Exchange. Crushing margins in China have worsened after benchmark soybean futures in Chicago rose on Monday while soybean meal and soybean oil prices dropped in Dalian trading.

U.S. Farmers Get Little Cheer From China Trade Truce for Now

An indicative calculation based simply on futures, exchange rates and prevailing taxes, shows a profit of less than $10 a metric ton for processing U.S. beans in China as of Tuesday. But that doesn’t include freight, insurance or other fees. So, the market doubts there can be any commercial purchases without a cut in tariffs, said Monica Tu, an analyst at researcher Shanghai JC Intelligence Co.

Little Incentive

“I see little incentive for Chinese commercial crushers to buy U.S. soybeans right now unless the 25 percent tariff is lifted, or U.S. farmers cut prices even more,” Tu said by text message. Any purchases made in the current conditions would probably be to supply state inventories, she said. China has indicated it could reimburse the cost of the 25 percent tariff if the cargoes are imported for state reserves, according to people familiar with the matter.

The different statements issued by the U.S. and China on the outcome of the meeting between President Donald Trump and his counterpart Xi Jinping at the weekend highlight how much needs to be achieved in the next three months if the U.S. soybean farmer is to find any kind of solace from rising stockpiles.

Also, the U.S. crop is becoming less competitive in the Chinese market as the harvest season approaches in South America. America has probably already missed its best chance to sell soybeans to China, according to Cargill Inc., one of the world’s biggest agriculture commodity traders. U.S. soybeans incur tariffs totaling 28 percent, while Brazilian beans have an import duty of just 3 percent when entering China.

Quote date at
Chinese ports
Cost of U.S. soybeans
including taxes,
freight, insurance (yuan/ton)
Cost of Brazil soybeans
including taxes,
freight, insurance (yuan/ton)
Dec. 3Jan.3,9163,285
Oct. 31Nov.3,6583,514
Sept. 27Nov.3,5753,425

*Source: China National Grain and Oils Information Center

U.S. farmers are pleased with the trade truce, but they’re not rejoicing until they see ships full of their crops headed to China. The sentiment matters for Trump, who’s risked the support of Midwest growers by igniting a trade war that sent U.S. soybean prices to the lowest in more than a decade while stockpiles pile up.

“The soybean inventory in the U.S. will keep climbing if Chinese companies continue to not buy them,” the China National Grain and Oils Information Center said Tuesday in an emailed report. Total imports for the 2018-19 crop season starting October may fall by more than 10 million tons to 84 million tons as the spread of African swine fever in China reduces the appetite for the oilseed used in pig feed, the state researcher said.

Weather conditions in South American soybean producing areas are generally good at present, and the production prospects are optimistic, CNGOIC said in its monthly note. Global soybean production is expected to increase by about 30 million tons in the 2018-19 crop year, and soybean supply is abundant, it said.

©2018 Bloomberg L.P.