U.S.-China Soybean Trade – Glass Half Full or Glass Half Empty?

Commentary by Aaron Putze, APR

As we near the one-year mark of the U.S.-China trade war, conversations about how and when it will be resolved and its lingering implications on Iowa agriculture are ripe with educated guesses and outright speculation.

What we know for sure is that the trade dispute’s reverberations impact nations far and wide.

No one better understands the stakes – or is monitoring the situation more closely – than Iowa’s soybean farmers. That’s because they have the most to lose – or gain – from U.S. trade relations with China.

U.S. soy exports to China have fallen dramatically, down more than 90 percent during the first quarter of the 2018-19 marketing year compared to the same time one year earlier. Subsequent real and intended purchases by China of an additional 10 million metric tons has drawn merely a yawn from the Chicago Board of Trade.

Now, nearly one year into the trade war and with planting season looming, domestic soybean supplies continue building while prices remain well below the cost of production for most farmers. Add foul weather into the mix and, well, let’s just say these aren’t fun times in U.S. farm country.

While nothing can be done about the weather, most believe something can be accomplished on trade. Yet the stalemate continues. What’s most disconcerting for soybean farmers and the industry is a complete lack of clarity or consensus about if, how and when a deal will be struck between the two countries.

I’ve visited with numerous farmers about the trade stalemate. Some are more positive than others about the situation and its short- and long-term impact on their farm and the industry. Using that approach, I organized key take-aways from time spent in China March 24-30 as a participant in an Iowa Soybean Association-led trade mission:

China: Glass half full

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  China’s increasingly urban population holds great potential for U.S. agriculture. Forty years ago, 18 percent of China’s population lived in cities. Today, its 58 percent – or around 840 million people. An additional 300 million Chinese residents are expected to transition from small, rural villages to urban centers by 2030. With city living comes increased income, with the average city dweller earning nearly triple of their rural neighbors.

• More income means higher per-capita meat and protein consumption. Those living in urban areas eat 12 kilograms more of fish, eggs, poultry, pork and vegetable oil annually than their urban neighbors. As urban population centers grow, it’s estimated that meat and protein consumption will, too.
• More chickens, pigs, poultry, dairy cows and fish will require more feed. Production of major animal proteins was up .4% in 2017 to almost 350 million metric tons. This trend is expected to continue
• Smaller, “backyard” farms are being displaced by large-scale facilities that produce meat, milk, eggs and fish more efficiently. Modern feed mills serving these farms manufacture feed using better ingredients. At the top of the list is soybean meal. Soybean meal’s share of all protein meal consumption is around 80 percent so the transition from inefficient farms to large-scale enterprises bodes well for increased soybean meal consumption.
• Since 1992, soybean oil and meal consumption in China have increased 1,500 and 2,000 percent respectively. The U.S. Soybean Export Council predicts that the country of 1.4 billion will consume around 123 million metric tons of soybeans by 2029, up from an estimated 88 mmt predicted for 2018-19.

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  There are only three places on the planet that grow significant amounts of soybeans: Brazil, Argentina and the U.S. While Argentina did get stung last year by a drought, overall production has steadily increased the past six years due in large part to favorable weather conditions. Meteorologists say it’s reasonable to assume that Mother Nature will have a change in attitude in one of these key growing regions sooner rather than later. When that happens, soybean prices will respond accordingly offering opportunities for farmers hungry to make sales.

China: Glass half empty

• A trade deal is elusive given the enormity of the issues at play. They include intellectual property rights, forced technology transfer by China for the privilege of doing business in the country of 1.4 billion people and timely approval of traits for importation. China also faces criticism for not complying with World Trade Organization provisions including massive subsidization of its domestic food system.
• An economy that grew routinely by double digits from 1975-2010 is softening dramatically. In 2015, China’s Gross Domestic Product grew 6.9 percent. In 2016, the growth was 6.7 percent. The forecast for 2018-19 is somewhere in that neighborhood, although some market analysts predict real growth may be less than five percent.
• Rapidly aging population in China resulting in its one-child policy that was imposed for decades. It was recently rescinded but the younger population will increasingly struggle to cover the social costs brought about by an inverted demographic. Productivity is also taking a hit as health care costs rise.
• The U.S. share of China’s total soybean imports has fallen from 36.2 million metric tons in 2016-17 (or 62 percent of U.S. soybean exports) to 27.7 mmt (49 percent) in 2017-18. Thus far in 2018-19, 5 mmt has been shipped to China, 7 mmt have been ordered; China has also signaled an interest in purchasing an 10-12 additional mmt. Best-case scenario for 2018-19 U.S. soybean exports to China is 23 mmt (a decline of 37 percent in two years).
• The U.S. administration’s approach to China has relegated U.S. soybean farmers to residual suppliers. With or without the tariffs, China will continue to make significant investments in South America’s infrastructure, ensuring soybeans grown there can arrive in Chinese ports more quickly and economically.
• China will continue incentivizing more domestic soybean production by increasing soybean yields and acreage.

Some speculate that a resolution to the trade war is imminent and soybean prices will respond positively and quickly. Some believe an agreement will take years. Still others contend that even if an agreement is announced tomorrow via Twitter, the U.S. will struggle to reclaim only two-thirds of sales once made to China.

Only time will tell.

In the interim, it’s game on to find new markets, confirm new sales and make the case to the administration about swiftly resolving the trade war.