Trade War, Sick Hogs Make China Soy Purchases Hard to Predict

(NASDAQ) – China’s December soybean imports dipped to the lowest levels for the month since 2011, unsurprising since the United States has shipped an uncharacteristically low volume to the Asian country ever since the trade dispute escalated mid-last year.

Data from China’sGeneral Administration of Customs shows that the country’s soybean imports in the final two months of 2018 plunged by 39 percent from the previous year, including no U.S. imports at all in November.

China imports enormous quantities of soybeans each year to crush into protein-rich meal for its hog herd, the world’s largest. The pigs are struggling this year, though, as nearly 100 cases of African Swine Fever (ASF) have been reported around the country since August, and 916,000 animals had been culled as of Tuesday.

This is a fraction of a percent of China’s estimated herd size, but still, local analysts are worried about the impact ASF is having on soymeal demand. China’s most actively traded soymeal futures fell nearly 3 percent on Monday to the lowest level in almost a year.

This could be an indication that the severity of ASF is either greater than reported or that traders expect it to trend that way.

The depressed meal prices have not been favorable for Chinese crush margins, which does not encourage soybean processors to work overtime. Margins are up significantly since the beginning of the year, but they remain negative.

Stockpiles at Chinese ports have sharply decreased since peaking at 9 million tonnes in mid-October. The present level of 6.7 million reported by industry portal Cofeed is still record-high for the time of year, but it is only good for roughly three weeks of use at current consumption estimates

As the global soybean situation navigates uncharted waters, traders are left to figure out exactly how the world’s largest soybean consumer will drive demand in the coming months.

CLUES IN BRAZIL

When the U.S.-China trade war first began, every market participant automatically assumed that Brazil would wildly benefit from situation, which it certainly has.

Brazil exported 14.7 million tonnes of soybeans in the last three months of 2018, which is typically U.S. shippers’ time to shine. That was more than double the previous year’s record for that period.

Lately, however, the demand is perhaps not as heavy as might have been expected given China’s minimal recent participation in the U.S. market. Soybean export prices at the major Brazilian port of Paranagua are at the lowest levels in nearly three years and down 20 percent since mid-October

The lower prices have U.S. exporters frustrated that their product has lost the drastic competitive advantage they enjoyed during the second half of last year.

Brazil’s shipping lineups are not necessarily jam-packed. According to Williams Shipping Agency, some 2.1 million tonnes of soybeans were on the schedule as of Jan. 11, including those cargoes that had already sailed this month.

This is perhaps best compared with the same week in 2017, which had 2.7 million tonnes of soybeans in Brazil’s shipping lineup and more cargoes explicitly destined for China than what the current schedule shows. Harvest is well ahead of normal schedule in many parts of the country, much like it was in 2017.

Early harvest pace for soybeans was not as quick in 2018, which may be a reason why the year-ago lineups were much lighter at 1.4 million tonnes.

Farmers in the top-growing state of Mato Grosso, which is usually among the first to harvest, have not aggressively marketed new-crop beans. According to a Jan. 14 report from state agency IMEA, Mato Grosso farmers are 46.6 percent sold on their 2018-19 crop, up from 42.4 percent last year, but below the five-year average of 50 percent.

One hindrance to the sales is the strengthening currency, which means farmers get a less favorable price for their goods that are sold internationally in U.S. dollars. The real is about 12 percent stronger than when farmers first started planting soybeans back in September.

Brazil’s soybean crop has recently been subjected to drought, which has caused industry estimates of the national crop size to fall. But the volume is generally expected to be equal to or greater than 2017’s harvest of 114.1 million tonnes.

E*TRADE RESTORATION?

Soybean traders were generally optimistic early last week when U.S. and Chinese officials met in Beijing to continue trade talks.

But despite those talks originally being hailed a success by U.S. representatives, U.S. Senator Chuck Grassley said on Tuesday that United States Trade Representative Robert Lighthizer did not see that the talks had led to any needed progress on structural changes in the trade relationship.

Higher-level discussions are planned between the two countries on Jan. 30 and 31, but this brings the stalemate dangerously close to the March 2 deadline, exactly 90 days from the truce struck by Presidents Donald Trump and Xi Jinping in Argentina.

Further complicating issues is the beginning of Chinese New Year on Feb. 5, which is generally followed by a week-long official holiday, though the celebrations can carry on even longer. If Chinese officials were ready to get back to matters at hand on Monday, Feb. 11, that would leave just three weeks for a U.S.-China deal to be made.

China has purchased up to 5 million tonnes of U.S. soybeans thus far from the 2018 harvest, most of them within the past month, but that total is down almost 80 percent from year-ago levels.