AgriCensus Report

OPINION: Will China purchase more US ag goods?

14 Feb 2020 | Jonathan Kingsman

It is still too early to tell how badly – and for how long – the Coronavirus outbreak will affect the Chinese economy. But even before the virus hit, many grain traders were questioning whether China would, or could, honour the obligations made under the recently negotiated Phase One trade deal to increase purchases of American agricultural products. 

The conventional wisdom is that the trade wars will have a lasting negative effect on the US agricultural sector.  Observers compare the current situation to the two successive US grain export embargoes imposed by the Carter and Nixon administrations. As a result of those embargoes, the Japanese – at that time the biggest buyers of US soybeans – realised that they could not rely on the US and invested in South America to develop soybean production there. 

There is a strong argument to be made that history will repeat itself, and that China will reduce, rather than increase, its agricultural purchases from the US as it seeks to diversify supply. However, there are two counter arguments.

The first is that China’s diversification options are limited, at least as far as soybeans are concerned. Although genetic modification has allowed soybeans to be grown in a wider geographical area, Brazil and the US still dominate global exports with 77 million and 49 million tonnes respectively in 2018/19. The remaining 25 million tonnes of global exports were divided among just five other countries. 

It will be difficult in the short to medium term for China to diversify away from Brazil and the US. China could take a strategic decision to import an even greater percentage of their needs from Brazil, but this would further increase their dependence on Brazil.

The second argument is that it was the Chinese who imposed tariffs on US agricultural imports; the US did not embargo, or tax, exports. This is an important distinction. The Chinese government imposed tariffs as a bargaining tool in the trade negotiations—one of the few bargaining tools that they had. 

If the Chinese were now to reduce US imports they would not only be seen as unreliable and untrustworthy, they would also reduce their bargaining power in future trade negotiations. There is a wider trade picture to consider outside of agriculture.

This is not to say that US farmers should necessarily expect a rapid increase in their exports to China. It may take a while before soybean exports get back to the record of nearly 59 million tonnes shipped in 2016/17. 

Just five years ago traders were expecting that China would by now be importing 100 million tonnes of soybeans per year. African Swine Fever and the Coronavirus knocked the wind out of those demand growth estimates. It will take a while before demand recovers. 

But recover it will.  There has been some fear expressed that Chinese soybean imports have peaked. However, the Chinese middle class will continue to grow in both size and wealth. Their appetite for meat will grow with it, as too will soybean imports. 

But what about other agricultural imports? 

Alarm bells were rung recently when it emerged that China had bought about one million tonnes of wheat under their tariff rate quota from Australia, Canada and France, rather than from the US. However, this may actually be good news if it is a sign that China intends to follow a recent WTO ruling to reallocate unused import quota tonnages.

Corn and ethanol may be harder nuts to crack. Although China has signalled its intention to increase ethanol use, the country is unlikely to import significant quantities to achieve that end. As for corn the US, along with Argentina and Brazil, face growing competition from the Black Sea region. Ukraine has expanded production and has the potential to grow further. This should not be underestimated.

Ultimately it will come down to a question of price. The extent to which the US will participate in renewed Chinese import demand growth will depend on the competitiveness of US farmers. Politics are important in the grain trade, but price is even more so.

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