Ag Trade Watching China Talks

OMAHA (DTN) -- Following a rash of tariff rulings and announcements, U.S. agricultural leaders will be closely watching talks this week between Trump administration leadership and their Chinese counterparts.

Jim Sutter, CEO of the U.S. Soybean Export Council, said the threat of a 25% tariff increase has effectively put soybean exports to China on hold. Soybeans accounted for $14 billion in U.S. exports to China last year, making up roughly two-thirds of all the U.S. agricultural export value shipped there. That's come to a brief halt since early April when China announced the prospects of a tariff hike.

"We're not really making any new sales of soybeans" Sutter said. "Our exporters are not making any new sales of soybeans to China. The tariff situation has created a lot of uncertainty, both in the minds of U.S. sellers, but particularly in the minds of Chinese importers. They don't want to make a purchase, and you are sailing towards them and then have something happen and they arrive in China subject to a 25% import tariff."

As has been reported by Reuters, that's what has happened to a handful of ships loaded with sorghum. The ships had to find new ports to avoid a 178.6% tariff China slapped on sorghum from the U.S. It's causing Chinese buyers to be cautious on soybeans right now, Sutter said.

Talks begin in China on Wednesday with Secretary of Treasury Steven Mnuchin, Secretary of Commerce Wilbur Ross, U.S. Trade Representative Robert Lighthizer, economic advisers Robert Kudlow and Peter Navarro, and Ambassador to China Terry Branstad.

Sutter hopes the talks expected Wednesday and Thursday yield some results for the U.S. relationship with China.

"I'm optimistic with our really senior, good people going over there that hopefully some good discussions can take place, and some substantive changes," Sutter said. "We need to really focus on getting some things changed so we can have a better trading relationship."

For now, Chinese buyers have turned to Brazil and are continuing to buy from Brazil even though Brazilian soybean prices are higher than the price of U.S. soybeans. The spread was running about 40 cents a bushel, but the difference has narrowed to 26 cents a bushel. That should make U.S. soy an attractive opportunity for many buyers around the world, Sutter said. "The U.S. is 'on sale' at the moment!" he exclaimed in an email.

Brazil's prices are higher, but U.S. soybean exports are down. Actual shipments for the 2017-18 crop are down 13% since Sept. 1, 2017, compared to the 2016-17 marketing-year shipments. Total sales, which include shipments and outstanding orders, are 3% below the previous marketing year.

DTN Analyst Todd Hultman said the high Brazilian price is not normal, especially not with Brazil expecting a record harvest of 115 million metric tons (4.23 billion bushels).

"It's unusual for them to be this much above, and I attribute that to China's strong demand," Hultman said. "Given the tariff situation, they are still continuing to buy Brazilian origin versus U.S. origin for right now. That can't continue forever because they are going to run out of soybeans in Brazil. But for right now, that's the situation."

ADM Chairman and CEO Juan Luciano made a similar comment on an analyst call Tuesday morning reporting quarterly earnings. Luciano noted Brazil might be responsible for a high percentage of China's soybean imports, but Brazil can't handle the entire volume on its own.

Luciano was also asked by analysts about the impact on a joint-venture crushing operation in China under Wilmar International. ADM officials said Wilmar is a diverse operation, but it would be adversely affected if China increased tariffs on U.S. soybeans,

"If all of this U.S.-China trade dispute ends up not being resolved and in June we see a 25% duties on beans, I think you would probably see an impact on the volumes Wilmar is crushing because, basically, China will be buying more expensive beans and soybean meal will become a little bit more expensive and it will be some impact on demand," Luciano said.

Luciano cited a couple of other impacts on ADM's business and U.S. exports tied to China. ADM forecast 1.8 billion gallons in ethanol exports to China, but it's now looking more like 1.6 billion gallons, Luciano said.

ADM also could see a $30 million loss of revenue related to China's tariffs on U.S. sorghum, Dow Jones reported.

Luciano also said ADM closely watches the NAFTA talks and the U.S.-China trade situation and the way those situations lead to "developments that seem to evolve almost on a daily basis," he said.

Overall, though, Luciano was upbeat about ADM's soybean and oilseed returns through the next three quarters of the company's financial year. Luciano said ADM expects U.S. origination will improve throughout the year due to the smaller Argentina crop and reduced expectations from Brazil's corn crop. Argentina's drought has other importers looking for supplies.

In a separate interview with DTN, Sutter noted Argentina is contracting for fall shipments to keep their own crushing industry busy. The latest soy crop estimates from Argentina are as low as 38 million tons (1.4 billion bushels) compared to 57 million tons (2.1 billion bushels) last year.

"Argentina doesn't export very many soybeans," Sutter said. "They usually export meal and either oil or biodiesel. So I think in order to keep their processing capacity running, they need to source soybeans from another origin."

Both Luciano and Sutter pointed to continued strong demand for U.S. soybeans in emerging markets. Egypt has expanded crushing capacity by a couple of companies, which has led to 860,000 tons more in shipments to Egypt than a year ago. Egypt has large poultry and aquaculture industries and used to import more meal, but now has more crushing capacity as well. "They are just having more growth in demand. The economy seems to be doing better," Sutter said.

Pakistan also has shown more interest in U.S. soybeans because India has dialed back exports greatly in recent years due to higher domestic consumption, Sutter said. Pakistan and other neighboring countries have had to turn more to the world market. So U.S. soybean exports to Pakistan are 460,000 tons more than the prior marketing year as well.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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