The commodity markets are not all China all the time. It just seems that way sometimes because of the news flow. For those who are old enough to remember, Russia used to have that role. They were big and erratic buyers of U.S. grain, particularly wheat. The in-and-out nature of their purchases — and occasional embargoes due to events like the Afghan invasion — kept them on the front pages of the commodity market news.
These days, little ag trade is flowing between the U.S. and Russia. China is, in effect, the new Russia — the potentially large but erratic customer with the size to disrupt markets.
Most of the focus on China is on the import side. What can they buy more of, and when? This is a logical emphasis given the ongoing trade war. We know they need pork … lots of pork. The ongoing African swine fever outbreak in China has caused them to liquidate or slaughter more than 40% of the world’s largest hog herd. Logically, all countries with pork to export should be getting more Chinese business as they try to fill in the hole. The Chinese are trying to act like they don’t need it, while simultaneously removing inspection barriers and ramping up purchases of not only pork, but also beef and poultry.
On the grain side, things are a little more complicated. China’s need for soybeans and corn is smaller than it was, due to the shrinkage of the hog herd. They need to import fewer soybeans to crush, and they aren’t drawing down corn stocks as quickly because the hogs aren’t eating as much. USDA currently projects Chinese crush of 84.5 million metric tons (mmt) in 2019-20, down from 90 mmt in 2017-18 (some estimates had been 94-plus mmt at the beginning of that marketing year).
Where do they get those beans? They either grow them or import them. In the 2016-17 and 2017-18 marketing years, China imported 93.5 mmt and 94.1 mmt from all sources, more than they were crushing for meal. Pre-trade war, more than 30 mmt per year was coming from the U.S., with the balance from South America and a few minor imports from other countries. With punitive tariffs in place, the U.S. share plunged in the last half of 2017-18, and also last year.
U.S. negotiating efforts have tried to expand the market share past where it was in 2016-17, as a way of addressing the overall trade deficit. China has been unwilling to tie their hands in that way. They have a good thing going, playing U.S. producers against South American producers. With phase one of a trade deal reaching a presumed deadline on Dec. 15, we’ll perhaps know more about future purchase intentions in a few days.
The other side of the equation is growing their own beans. China has historically emphasized rice and wheat self-sufficiency to feed their population. Because of the negotiating leverage in beans, and the value concentration, it has historically made sense for them to grow the bulkier corn and import the soybeans. There is also another reason: they aren’t that good at growing soybeans.
The five-year average world yield for beans, including the December World Agricultural Supply and Demand Estimates (WASDE) for 2019-20, is 41.3 bushels per acre (bpa). The U.S. average for that time period is 49.35 bpa, with Brazil close behind at 48.6 bpa. China has averaged only 27.64 bpa during that time frame.
|Implied Yield – Bushels Per Acre|
That said, the Chinese have been boosting subsidies and incentives for soybean production in order to be less dependent on imports. On Tuesday, USDA reported Chinese production of 18.1 mmt, the largest since records began in 1970. The last time they were close to that figure was 2004-05 at 17.4 mmt.
China grows corn as well. Probably the most bearish number in the Dec. 10 USDA reports was the 6.77 mmt (266 million bushels) upward revision in the Chinese corn crop estimate versus November. The 260.77 mmt figure put the crop above last year (257.33 mmt) and was more than 20 mmt above what the ag attache’s office projected back in the spring (never adopted by the World Outlook Board).
China is actually pretty good at growing corn, with the five-year average yield of 6.08 metric tons per hectare (mt/ha) above the world average of 5.68 (mt/ha) and also consistently above Brazil. Their average yield has been above the world average yield each year since 2009-10. Planted acreage has been down four years in a row. They are clearly switching some of the poorer ground away from corn and boosting average yields in the process.
The point of this exercise is that trade is only part of the picture with China. It gets all the headlines, but if prices are “above market,” they are capable of increasing production and/or diversifying suppliers. It is almost always a risky business practice to have 60% of your income or sales tied to a single customer. We should continue to work to restore or expand ag sales to China and to remove barriers to such sales.
This painful trade war should also point out the need to build shock tolerance into our farm financial systems, in terms of what we grow, who we sell it to and how we manage price risk.
Alan Brugler may be contacted at email@example.com
Source: Alan Brugler, DTN
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