Potential 'soy wars' draw industry attention

by Michael King
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Global Grain Asia
Nearly 300 delegates attended the Global Grain Asia Conference March 12-14 in Singapore. Photos by Michael King.
 
President Trump’s twitter account wasn’t the elephant in the room at this year’s Global Grain Asia. It was the room itself. Speakers and delegates found it near impossible to avoid conjecturing on what a trade war between the United States and China would mean for international agricultural trade as just under 300 delegates met March 12-14 at the Novotel Clarke Quay Hotel in Singapore for Global Grain Asia to discuss, in theory at least, all manner of global grain issues. In reality, a string of trade policy pronouncements and tariff threats from the U.S. president before and during the event hijacked large chunks of the agenda.

After imposing U.S. import tariffs on solar panels and washing machines at the start of 2018, in early March the United States announced 25% tariffs on steel imports and 10% tariffs on aluminum imports. Threats to slap new taxes on everything from European cars to Chinese consumer electronics have since been issued by Trump and, as World Grain went to press, global markets were further rattled when he signed a presidential memorandum that could impose tariffs on up to $60 billion of imports from China.

Threats of retaliation against U.S. protectionism have not been confined to China, but at Global Grain Asia the focus was on how President Xi Jinping would respond, not least because the world’s second largest economy is the key global buyer in many grains markets as well as a critical market for U.S. agricultural exports.

New rules of the game

In the year since the last iteration of the event, identifying the “winners” and “losers” in any social, political or economic debate or negotiation has, of course, become the norm as the “Trumpian” zero-sum worldview has transformed global discourse. Yet, if “win-win” outcomes have been consigned to history, it would seem “lose-lose” scenarios have not. The consensus view of Global Grain Asia speakers and delegates on Trump’s policies was clear: a trade war between China and the United States — indeed, any rise in global protectionism — will damage the global economy and international trade, and the institutions on which both are built. But as the three-day conference unfolded it also became clear that some grain stakeholders stand to “lose” or “win” more than others. As Emily French, managing director of Consiliagra, said in a shrewd aside, for U.S. business this is “not a trade war you pick if you are on the food side of the ledger.”

Michael Every, head of financial market research for APAC at Rabobank, got straight to the point. In the short term for agricultural buyers, a China bent on retaliation will have U.S. agriculture firmly in its crosshairs in what he dubbed “Soy Wars.” According to the U.S. Census Bureau, the United States sold just over $12 billion of soybeans to China last year, making it the second most valuable export to China after aircraft and parts.

Every also noted that half of U.S. sorghum output was exported, with China accounting for “80% to 90%” of sales. China is also the largest export market for U.S. farmers across a range of other segments, including peanuts, whey and distillers’ grains. Illustrating how much is at stake for U.S. farmers, French noted that in 2017 their sales of hay to China were worth $340 million, but it was still only the 10th most valuable agricultural export from the United States to China.

“In February, China launched an anti-dumping/anti-subsidy investigation into U.S. sorghum imports, so you can see where the wind is blowing,” Every said. “Farmers will also note that remaining export customers — Mexico, Japan and Sudan — have shown very little growth.”

soybeans
 

Soy Wars?

There was some debate between speakers about to what extent China could divert its purchases of soybeans to alternative suppliers. Reinforcing Every’s point about the importance of farm exports to the U.S. balance of trade with China, JY Chow, senior vice-president for Food & Agri coverage at Mizuho Bank, said Chinese exports to the United States in 2016 totaled $386 billion, while the United States exported just $116 billion, of which 12% were exports of soybeans.

“If a trade war really breaks out, U.S. soybeans will be too important for China to avoid so there could be a swing to Brazil and Argentina and possibly more plantings in the Black Sea,” he added.

Every also noted that where soybeans were concerned, both countries had much at stake. He said that China imports some 90% of its annual soybean consumption and the United States supplied almost half of the total, so China pulling out of the market entirely — at least this year — was unlikely.

“South America is unable to fully meet China’s import appetite in the short run,” he said.

Every also noted that any Chinese policies that risked food price inflation might not go down well with consumers. French, however, argued that Chinese food price inflation had been exceptionally low in recent years, meaning there was room for price increases if a trade war escalated.

“There is room for Chinese consumers to absorb higher prices,” she added.

In agriculture, then, the first “losers” from an escalating trade war are likely to be U.S. farmers and, as, French pointed out, many U.S. farming states voted Republican in the last presidential election.

“It will be interesting to see how this plays in those states,” she added. “Farm lobbies in the U.S. are very concerned about tariffs. China is regularly the largest importer of U.S. agricultural products. The U.S. can ill afford less export trade demand, especially from China.”

Despite the potential domestic political fallout, however, as World Grain went to press this was exactly the scenario playing out.

Brazil China
 

China looking to Brazil

China’s soybean imports from the United States dropped 14% year on year to 5.8 million tonnes in January, while imports from Brazil surged 720% to 2.1 million tonnes. In its Feb. 22 outlook report, the USDA was forced to make a number of downgrades on its previous export forecasts, most notably due to declines in soybean exports.

“Oilseed exports are forecast down $2 billion to $31.1 billion as a result of a slow soybean export pace, mostly to China, and strong competition from Brazil,” the report said. “A record Brazil harvest in 2017 resulted in larger exportable supplies being still available during the U.S. primary shipping season.”

Do not be surprised if the final 2018 figures reveal bigger declines than predicted by the USDA — as March progressed State media outlets shed more light on China’s strategy.

“The Trump administration has repeatedly accused China of violating international trade rules and threatened to impose higher tariffs on Chinese products,” one outlet noted. “But the U.S. is actually the breaker of WTO rules, which can be seen clearly by how subsidized U.S. soybeans are dumped on China.

“Strong restrictive measures need to be taken against the massive subsidies and dumping of soybeans by some countries on China. This can reduce the adverse effects of imported soybeans on the Chinese market.”

French said that China procuring more soy products from Brazil and Argentina was not a new trend.

“These pokers are already in the fire,” she said, adding that Brazilian exports had been coming on earlier and lasting longer each season, enabling sellers to effectively eat into U.S. market share toward the end of each calendar year.

“Chinese ‘ownership’ of U.S. soybeans is down already,” French said. “Brazil will export 10 million tonnes in March and there is a window of six months where China could use soy to do something against the U.S. in retaliation — that is, by not buying U.S. soy.”

The ‘winners’

In the coming months all eyes will be watching how much China is able to divert its soy procurement from the United States to South America, given that the USDA expects China’s soybean imports to hit a record 100 million tonnes in 2018-19, up 3 million tonnes from this season’s 97 million tonnes.

Brazil, of course, will be the biggest “winner.” Exporters could see prices soar in the coming months if there is a wild swing to Brazil away from the United States, given the dominance of the two countries in the global soybean trade — together they are projected to account for 84% of world trade in soybeans in 2017-18.

Drought in Argentina is expected to limit its exports in 2018-19. Moreover, Brazil has 15 million tonnes of soybeans in stocks, and longer term, French noted that Brazil still has 37 million acres of land that could readily and legally be converted to farmland.

However, as World Grain reported last year, Brazil continues to face huge logistics challenges getting soybeans to market. On the sidelines of Global Grain Asia, David Ross, general manager of Alphamar Agencia Maritima, told World Grain that new roads, terminals and railways were desperately needed.

“New ports in the north are helping but ports are still big bottlenecks,” he said. “The system still depends on trucks being silos on wheels during the peak season.

“Ports are not the bad guys, most of the time issue is not the elevator, it’s the unreliability of cargo arriving at the facility. With more reliable cargo flow, there would be less delays and less demurrage.”

China’s own trading house, COFCO, will play a big part in securing supplies. JY Chow said Chinese investment in South American infrastructure was an extension of its One Belt, One Road strategy linking Asia to Europe — in effect the means to control the key supply chains on which China’s economy relies. He noted that COFCO was already in control of large swathes of the Brazilian soybean crop, accounting for 10.4% of 2017’s exports, making it Brazil’s third largest exporter.

This was a point picked up on by Gavin Maguire, a commodities and energy analyst for Thomson Reuters, who said China decided “decades ago” to outsource its soybean production and use COFCO to secure its delivery.

“They are building silos, ports and railways to support this,” he said.

Expect other likely “winners” from the “soy wars” this year to include traders with adequate port capacity in Brazil and shipowners with open bulkers in the southern Atlantic.

“A complete absence of China sales during the U.S. soybean season could be interesting,” Maguire said.

The long view

Rabobank’s Every also took a sobering look at the long-term macroeconomic and political implications of a trade war between the United States and China. He painted a bleak picture.

As China rails against U.S. hegemony and the United States pushes back, Every believes a new Cold War is inevitable.

“China’s economic policy was always going to cause tensions when combined with a political outlook that says we’re better than you — that a president for life is better than democracy,” he said. “A clash is inevitable.”

In the short term, he argued the threat was to trade via an escalation of tariffs. In the long term U.S. protectionism — or a “shift to Chinese-style protectionism” as Every put it — would reduce U.S. trade deficits, especially with China. This would see a run on the dollar, which would likely see the currency strengthen and liquidity diminish, a trend that would have “huge importance to grain traders” because it could quickly “lead to a shortage of dollars, in Asia especially.”

The Remnimi as an alternative international trading currency was, he claimed, “irrelevant” because China’s huge surpluses with almost all its trading partners and extensive capital controls meant it was simply not available.

“No one holds the Remnimbi; the U.S. dollar is the only global reserve currency,” he added.

Depressingly for U.S. agriculture, Every argued that if the Trump administration was playing a long game aimed at maintaining the United States’ lead over China economically and militarily, short-term economic sacrifices designed to dent China’s trade surplus were entirely logical: “If you’re in the Pentagon and taking a long-term view, then you’ll screw the farmers to make America great again.”

 

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