With China, Two Steps Forward and One Step Back

January 09, 2020

With China, Two Steps Forward and One Step Back

Have you ever pushed something heavy uphill? It may take several starts and retreats to get the job done. The nearly two-year trade dispute between the U.S. and China is much the same.

Before President Trump started the trade war in April 2018, soybean prices were above $10 per bushel. China was buying $9-10 billion worth of U.S. soybeans a year, about a quarter of annual U.S. soybean production. With tariffs in place, soybean prices have fallen to as low as $8 per bushel. U.S. soybean exports to China fell by 53 percent, or 546 million bushels in 2018-19. Assuming an average price of $9 per bushel last year, farmers lost $4.9 billion in potential trade income.

The last several months have been filled with hopes for a deal, only to be dismissed or delayed. Now, the soybean market has witnessed a signing this month of a “Phase 1” deal between the two countries. Prices have responded favorably, but there may be good reason to remain skeptical of what the final first-round deal will mean for U.S. soybean farmers.

Consider that U.S. soybean exports to China grew dramatically during the last two decades, but so did exports from Brazil. Brazil's market share grew from 20 percent in 2000 to more than 50 percent in 2017.

Former USDA chief economist Joe Glauber last month noted that any large increase in U.S. soybean exports at this point would come at the expense of Brazil. And China’s demand for soy, which had been expanding 10 percent per year, is falling because African swine fever has dramatically reduced the Chinese swine herd and, with it, soybean meal consumption.

As a result, USDA forecasts China’s soybean imports for 2019-20 will be up from last year but still down 10 percent from 2017-18. The U.S. and Brazil will have to compete for market share.

Beyond Phase 1

If the Phase 1 deal gets signed soon, there is some optimism for even better 2020 sales prospects. However, purchase quantities are in debate.

U.S. Trade Representative Robert Lighthizer stated in December 2019 that China will buy at least $16 billion more agricultural goods in each of the next two years. President Trump says the Chinese will buy $50 billion in ag purchases “pretty soon.”

The Chinese have not confirmed those figures. Lighthizer claims the $16 billion in each of the next two years would bring total purchases to about $50 billion in 2020 and 2021.

Some economists do not expect much of that $16 billion projected boost is ag purchases from 2017 levels will come from soy. Cotton, meats, and dairy are more likely. The U.S. Soybean Export Council reports that based on the analysis of Chinese and U.S. data, Chinese imports of U.S. soybeans between September and November 2019 increased 13 times from the same period the previous year – all done through arrangements outside normal trade subject to retaliatory tariffs.

As we look to the next step in trade negotiations, Phase 2 and beyond, improvements in GMO approvals and resolution of other non-tariff issues may enhance future soybean sales. But expect the two steps forward, one step back process will likely continue well into 2020.

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