China Watchers: No Pause in Purchases of U.S. Farm Products

Posted on 06/05/2020 5:42 AM

Sources see robust purchases of new-crop U.S. soybeans ahead


Confusion continues regarding Phase 1 of the U.S./China trade agreement. As the items below illustrate, there certainly are very different opinions regarding the eventual fate of the existing Phase 1 timeline for China's commitment to purchase $36.5 billion of U.S. farm products during the first year of the accord. But questions have surfaced as to what the specific timeline is and on what basis (FOB or CIF), among other issues, and whether or not China will ask for and receive any extension to the purchase timeline and if they do, for how long.

  • The following is what one veteran analyst said regarding the situation, including reports earlier this week that China put a “pause” on some state purchases of some U.S. farm products:

    “I never trust China to say or do anything that is trustworthy. After this past week, one can easily say the Chinese threw several news organizations a curve ball on delaying purchases. And other news services all jumped at that. It appeared to be ‘news’ for 15 minutes. Then brokers sent me notes that China just bid for three cargoes of beans. The bean market broke 10 cents in the morning of the pause report, and that was the low for the day. Then prices rallied back. China is light years from the pace of ag commodities they need to buy each month to reach the $36.5 billion commitment for 2020. Will they reach it? I seriously doubt it. They would need to buy at such a high pace for August-Dec. 2020 shipment that they displace other ‘normal buyers' of U.S. commodities. The U.S. does not have the export capacity to export $25-30 billion in ag trade to China during August-Dec 2020, on top of normal business. So I expect China will renege on the 2020 Phase 1 commitment. Today that is a forecast. By early August it will be clear to all.”
  • But U.S. Trade Representative Bob Lighthizer says he feels “very good” about the Phase 1 trade agreement with China, which he said is doing a good job of honoring the pact amid the coronavirus pandemic. China this week bought more than $100 million of U.S. soybeans, Lighthizer said during a virtual event held by the Economic Club of New York, refuting a report that Beijing wasn’t living up to its commitments on the commodity purchases. Separately, Lighthizer said he is not in favor of the U.S. pulling out of the World Trade Organization (WTO).
  • China watcher Bill Bishop says the Phase 1 trade deal is “still hanging on by a thread, even if China is way behind on hitting the purchase commitments.”

    China's purchases of farm products have likely been impacted by Covid-19 cutting meat demand and African Swine Fever doing the same.

  • Vilsack: Trump needs to be clear on China plans. Former USDA Secretary and currently U.S. Dairy Export Council President and CEO Tom Vilsack says President Donald Trump needs to stop sending mixed signals about the future of the Phase 1 trade deal with China. “Recent statements by the president suggest that perhaps he is growing tired of the phase one agreement, certainly creates uncertainty about the future of that agreement,” Vilsack said Thursday on a call organized by Focus on Rural America, a Democratic advocacy group. Chinese ag purchases are critical to U.S. farmers, he said.
  • China watchers polled by Pro Farmer signal some significant developments, if they are correct. Key items based on those conversations and emails:

    • There is no confirmation that China has told state entities to pause purchases of some U.S. farm products. And, U.S. merchandisers confirm that assessment.

    • China may either ask for an extension of the Phase 1 timeline purchase commitments or have them based on an April/March timeframe (April 2020 through March 2021 for the first year). The Phase 1 agreement was signed Jan. 15, 2020 and took effect Feb. 14, 2020. March 2, 2020 is the date China announced the tariff exemptions. The March 2 date could be important because the first trade data based on the March 2 China action began in April for tracking purposes.

    • Some China sources think the $36.5 billion total of Chinese purchases of U.S. farm products during year one of the accord will include insurance and freight, so they have reduced their U.S. target export volume by 15% or so, to $31 billion in the first-year commitments, whatever the year they are based on.

    CIF and FOB

    • U.S. soybean sales to China in the months ahead, into the first quarter of 2021, should be and very likely will be robust.

    • U.S. sales and shipments of soybeans to China will clearly favor new-crop supplies for several reasons, the most important being China sources have signaled they await new-crop U.S. beans due to protein and other reasons.

    • Recent U.S. export sales of soybeans to China favor new-crop shipments.

    • China continued to purchase Brazilian soybeans, but some recent buys have been for Brazilian new-crop. Some reports signal Brazilian farmers have sold as much as 25% of their new-crop production.

    • China appears short-bought for near-term needs while old-crop Brazilian supplies are or close to being exhausted to such a degree that some wonder if Brazil may need to import some soybeans.

    • China's purchase pattern has surprised many seasoned China analysts as most thought China would have bought more U.S. soybeans due to price considerations, supply, etc. But they acknowledge China has a decided interest in protein levels of soybeans.

    • China's soybean, corn and soymeal needs ahead are more robust than most think because China has officially banned the use of garbage (swill) in the feeding of hogs. That means the need for more meal and the need for higher than usual stocks of those commodities ahead.

    • A lower U.S. dollar is making U.S. soybeans more attractive to China buyers.

    • With the potential of hefty China buys of U.S. soybeans ahead, U.S. weather could be very significant regarding getting those soybeans shipped. The amount of soybean tonnage that could go to China means not only hefty shipments via the Gulf, but also the PNW. While some are surprised more soybeans have not been sold to China via the PNW, contacts advise farmers serving the export outlet have been very tight holders of supplies and this, too, appears to favor new-crop supplies ahead.

    • As to the eventual fate of the Phase 1 agreement relative to ongoing tensions between the U.S. and China (Hong Kong, etc.), one China watcher said: “Both countries have a lot of time and effort invested in the Phase 1 agreement. They want to see it enacted in full and given the time to work.”

  • The Trump administration should “pressure China” to live up to its energy purchase commitments in the Phase 1 trade deal and buy more U.S. oil, House lawmakers wrote in a letter to U.S. Trade Representative Bob Lighthizer (link). Trade data from early 2020 “reveal that China has purchased a very small amount of U.S. crude oil in 2020, while simultaneously increasing its imports from Saudi Arabia and Russia,” 40 lawmakers led by Jodey Arrington (R-Texas) wrote. The administration “should urge China to buy U.S. crude oil rather than purchasing more crude from countries known for distorting the global oil market.”
  • Significantly larger pork sales to China boosted U.S. pork exports during first-quarter 2020 to a record-high volume of over 2 million pounds, USDA's Economic Research Service noted in a recent article. Sales to China (including Hong Kong) were a record 597,000 pounds, up nearly fivefold, and more than 50% above earlier quarterly highs in 2008 and 2011. China/Hong Kong sales outpaced growth in pork exports to other top markets, which include Mexico, Japan, and Canada. China/Hong Kong was the top export market, accounting for almost 30% of first-quarter U.S. pork exports.

    The export boom is driven by a shortfall in China’s pork output, following an African swine fever (ASF) epidemic that shrank China’s swine herds by 40% or more during 2018-19.

    China’s Covid-19 lockdown, from January through March 2020, further constrained supplies. According to official Chinese data, the country’s first-quarter 2020 pork output was down almost 30% from a year earlier — a 9.3-billion-pound decline — and consumer prices for pork were up more than 122%.

    Robust sales to China are expected to continue, says the report. According to official statistics for March 2020, China’s swine herd was still more than 29 percent smaller than before the epidemic. “Even if China avoids new ASF outbreaks and succeeds in rebuilding production capacity, biological lags in sow gestation and growth of finished hogs will delay China’s restoration of domestic pork supplies until 2021 or later,” the analysis noted.

    Exemptions to punitive tariffs imposed on U.S. pork were granted beginning in March 2020, giving a further boost to Chinese purchases.

    Pork to China



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