Ignoring the impact of the U.S.-China trade war on the grains industry this year is all but impossible. Particularly in the United States, where the loss of Chinese markets is hitting farmers where it hurts most — in the pocket. The knock-on effects of tariffs and the changes in trade flows that have followed have, of course, been felt along supply chains by those that ship, handle and manage grain. One analyst told World Grain the disruptive impact on international transport networks and planning was comparable to the introduction of genetically modified crops, except such is the uncertainty around tariffs that forward planning “is next to impossible even in the short term.”
As World Grain went to press in December, the two sides had agreed to a 90-day suspension of the next escalation of U.S. tariffs on Chinese products, which were scheduled for implementation by Jan. 1. China, meanwhile, made non-specific promises to buy substantial amounts of U.S. energy, industrial and American agricultural products. In essence, the trade war truce stayed the escalation of tariffs already in place and slowed the implementation of new tariff and non-tariff obstacles to trade. But it singularly failed to remove the uncertainty of what happens next.
As things stand, should no new trade agreement be signed, and that seems the most likely outcome at this stage, then the truce provides a potential trading window for the grains industry before a further escalation of the trade dispute during 2019. Adding to the short-term murkiness, some analysts believe the truce might be broken before 90 days are up should one or both sides conclude a deal will not be agreed. However, just as easily the 90-day truce could be extended.
“Nobody, not even the opposing sides in this evolving economic conflict, seems to know what is going to happen next,” said Patrik Berglund, chief executive officer of Xeneta. “At the beginning of December, we had Presidents Trump and Xi hailing an apparent ceasefire at the G-20 meeting in Argentina, only for the Huawei case to quickly illustrate that hostilities are far from over.
“The 90-day breathing space the U.S. has given China with regards to the next round of tariff hikes may or may not last that long, and in the meantime that will lead to a rush to fulfill shipments and avoid the looming taxes. Which, in turn, has an obvious impact on shipping rates.”
Mayhem in transport markets
How the trade war has already played out in U.S. grain and shipping markets thus far provides the best — the only — guide to what is at stake for the grains industry while the talks continue. And what was most apparent last year was that the escalating trade war between the United States and China was damaging for U.S. farmers and most supply chain stakeholders. And the opening weeks of the 2018-19 marketing year revealed the extent of that damage. U.S. soybean exports collapsed from 21 million tonnes of accumulated exports by Nov. 23, 2017, to 11.9 million tonnes by Nov. 22, 2018, according to figures compiled by shipping organization Bimco.
Ken Eriksen, senior vice-president at IEG Vantage, explained that the outbreak of trading hostility saw Chinese buyers switch purchases to Brazil and caused mayhem in grain and transport markets.
“When the tariffs came in at first in July, you saw the price of U.S. beans collapse, Brazilian prices went up, and what happened was the U.S. was locked out of China,” he explained. “And even if the U.S. price was competitive to China with tariffs in place, no one wanted to risk shipping soybeans to China because China basically didn’t want to allow U.S. beans in.”
Eriksen notes that for the U.S. farmer it was not possible to find alternative buyers in sufficient quantities or at viable prices.
“It wasn’t a 1-to-1 gain someplace else when China stopped buying,” he said. “If you lost a million tonnes to China, a million tonnes didn’t go to some other country. Maybe half, or maybe two-thirds went to other countries. So, there was a fire sale of U.S. soybeans to Europe, the Black Sea countries, the Mediterranean countries, the Caribbean countries and other Asian countries but the export volumes still fell.”
For the bulk shipping sector, Peter Sand, chief shipping analyst for Bimco, estimated U.S. soybean export volume losses by late November translated into around 122 Panamax or 183 Supramax loads. Moreover, the estimated loss of those loads in the period probably downplayed the impact the change in U.S. soybean exporting patterns had on the dry bulk shipping industry. By Nov. 23, 2017, 71.3% of U.S. soybean exports were sent to China, equal to 200 Panamax loads on one of the longest trades in the world. In early December, Sand said China has taken just 2.8% of U.S. soybean exports so far this marketing year.
“Ton-mile demand is further hurt as not only are the volumes of U.S. soybean exports lower than last year, the distances sailed are also much shorter as the new destinations are closer to the U.S. than China is,” he said. “The weaknesses in Panamax and Supramax earnings is likely to be linked to the lower demand for seaborne transportation of U.S. soybean exports as compared to previous seasons.”
The bulk carrier market is not alone in feeling the impact. According to analysis by Drewry, while Shanghai to Los Angeles 40-foot container rates in early December were almost double a year earlier, in the opposite direction they were paralyzed at a lowly $573 per 40-foot container on Dec. 6.
Inland trade flows impacted
Christian Pedersen, vice-president of Maersk North America, told World Grain the tariff war between the United States and China was having a huge effect on U.S. exports of many products, including containerized soybeans.
“We have seen a much faster impact on exports (due to the trade war) than on imports, especially on some of the green segment, particularly soybeans, a lot of the recyclables, paper, plastics and metals,” he said.
This has a knock-on impact for U.S. consumers and importers, he added.
“If we have less contribution from export commodities to pay for getting the equipment back to Asia, that increases the burden on the import container to pay for the full round trip. Right now, everybody’s focusing on the imports, but we actually see a bigger volume impact on exports and a sharp decline in soybean exports is part of that. That puts pressure on import prices.”
The reduction in soybean exports and more sales to markets other than China also has affected grain flows within North America.
“Basically, no soybeans went to the Pacific Northwest, which is where a high share of soybeans destined for the Chinese market were exported through,” Eriksen said. “The terminals handled some wheat and corn exports, but not enough to replace the beans. We saw more soybeans on the Mississippi River by barge to the Gulf for export. Then there has been some that has gone out of the Great Lakes because now all of a sudden you’ve got Europe in play.”
Sand said he was hopeful that the tariff truce could lead to “something positive,” but putting more detail on forecasts was impossible at this stage.
“We expect soybean exports from the U.S. to China to start slowly again from an absolutely low level,” he said, adding that this was unlikely to help U.S. farmers clear high stock levels because China was unlikely to fully reverse its policy of sourcing elsewhere until a deal was struck.
More positively, he said there was no need for China to formally remove import taxes, at least until it was time to discharge the cargo at port, while in early December Supramax and Panamax vessels were plentiful off the United States with “a few” also available in the Pacific Northwest.
Eriksen said the forward picture remained murky at best, but U.S. exporters could find some relief during the truce period.
“Two things need to happen,” he said. “Either China says to Sinograin, the Chinese grain company, that you can bring in U.S. soybeans tariff free and run it through the state reserve program, or they say we’re going to suspend the 25% tariff on beans, which is what they look like they will do.”
But, as of the first week of December, he said there had been no Chinese purchases of U.S. soybeans.
“We’ve seen some estimates that are out there floating around in some of the Chinese chat rooms, but nothing has been consummated yet and until we see the tariffs go away, we don’t see anything flowing,” he said.
And where does this leave U.S. agriculture moving forward as farmers chart their planting season? Not in a great place was the forthright answer of Eriksen.
“For the time being, the U.S. farmer has been mostly supportive of the president,” he said. “They’ve got a bailout program so the farmers have got some relief. But the more this goes on, the more trouble it could be.
“Now if the tariffs go away, farmers have decisions to make. What are you going to plant for next spring?”
If the trade war resumes and/or escalates the picture changes again.
“We think in the long run the U.S. farmer would suffer,” he said. “You’re going to see more bankruptcies, you’re going to see consolidation out there — some of the better financed, better run farms will get larger. Maybe some marginal land will go out of production. We’ve already seen the U.S. farm bill put more land into conservation reserve programs. It’s going to be pretty tough, because if it just goes on indefinitely there are only so many bailout programs the U.S. government can run for farmers.”