07 Dec

From the Field: The US-China Trade War Rumbles On and China’s Traders Aren’t Panicking

Posted by Team Meros in Market Trends

When Meros first visited China in July to discuss the brewing trade war and its potential impact on US agricultural exports, Chinese ag traders were optimistic.

This may blow over in a few months, they assured us. But by September and October when we returned and discussed dairy, grains and soybeans, the mood was decidedly more resigned.

As of this first week in December 2018, where are we?

The trade situation changes weekly and certainly impacts different US agricultural products differently, but there were several common themes among our talks with Chinese ag trade experts.

  • There is both optimism and pessimism about the future of US agriculture trade: When talking to a range of people, from Beijing policy makers to Shanghai importers, it is the policymakers and academics who are far more pessimistic than traders and industry players.  Policymakers see the conflict through the lens of government-to-government conflict and this tension is likely to continue, even as one tariff is replaced by some other barrier.
  • Chinese traders are looking for other suppliers of agricultural and food products and there is no guarantee they will return to US supply even after the trade war abates.  While some Chinese buyers and their US suppliers initially tried to share the tariff burden or freeze prices at pre-tariff levels in the hope that the tariffs would soon be dropped, this is increasingly unsustainable as the war drags on.
  • The chance to diversify suppliers and develop new trade relationships is considered a good opportunity for China.  Both policy makers or traders saw a good chance for China to focus on both its own domestic agriculture industries and supply chain infrastructures. It is also a chance to deepen relationships with new suppliers around the world and support them in strengthening logistics, an area that the US would normally have an advantage.
  • Trade is flexible. If direct routes to the China market are stopped, products tend to find a way to be rerouted, processed or exchanged through third-countries. Reports of US soybeans heading to Argentina for storage until the trade war abates or products routed through Vietnam are already initial indications of global trade doing what it always does – readjusting.
  • It is a chance for Chinese companies to expand into new and growing markets, including Vietnam or Indonesia, where US agricultural commodities and ingredients are more easily available. “See you in Vietnam!” joked one Chinese feed trader, as she described their new operations in Hanoi where they expect to be able to continue their US feed grain imports.

The interest by China central government to strengthen global grain, oil seed and food supply options and build up trade logistics is clear from the effort put into its One Belt One Road initiative, an ambitious policy of trade development from China through central Asia as far as Europe, using a variety of investments and incentives.

While Chinese traders and importers scrambled to adjust their suppliers for many products, there was no sense of impending doom. Overwhelmingly, it was disappointment at how unpredictable agricultural trade with the US has become. Whether this confidence is well placed or overly optimistic will become clearer in the next months.

 

Meros Consulting is a Tokyo-based strategic business advisory. We work with companies and governments globally to advising on trade dynamics and support business development in the food and agriculture industries.

22 Nov

Meros in the Media: The Disappearing US-China Soybean Trade

Posted by Team Meros in News

Meros discusses how China was able to substitute US soybeans so quickly.

Meros’ Lucia Vancura recently chatted with Nathan VanderKlippe of Canada’s Globe and Mail newspaper about how China was able to so quickly and completely eliminate US soybean imports in the last few months since the 2018 marketing year started in September. Did they find alternative suppliers? Did they substitute for other feed ingredients?  How could US soybean exports to China, which are 25% of US production, really be substituted out so quickly, particularly since US soybeans are still price competitive with Brazil, Argentina and other sources, despite the 25% tariffs?

The Chinese government may not have explicitly forbidden Chinese traders from importing US soybeans, but as VanderKlippe reports from our conversation “in a country where political favour remains a key factor in corporate success, China’s reach extends deep into the private sector, too.” The Chinese government does not need to issue a ban on buying US soybeans. It just has to send a clear message that avoiding US soybeans, despite the favorable price, is the expected approach.

The full article is behind a paywall but available here:  https://www.theglobeandmail.com/business/article-soybean-trade-shows-resolve-of-china-as-it-pushes-back-on-us-demands/

In the short-term, since September, China has used a variety of tools to make up for the elimination of US soybeans. This has included increased soybeans from Brazil and other countries and increased use of soy protein substitutes, including rapeseed or canola meal, pea and domestic Chinese DDGS. The Chinese government also released new guidelines for a lower-protein swine feed ratio that decreases the amount of soy protein needed (the Chinese soy protein ratio in feed has been much higher than, for example, in the US swine feed ratio because the price of soy has been so reasonable but there is not necessarily a nutritional need for so much soy in China’s swine feed) and China’s major feed mills have agreed to these new standards. Other measures have included releasing soybeans from government stockpiles and using more of their domestic soybeans for feed (rather than food).

Looking at the longer term, China may import some US soybeans later this year to fill the remaining gaps, but their on-going efforts to find alternative suppliers, substitute products and a big-picture effort by China to invest and expand in agriculture supply channels world-wide are only opening more opportunities and risk diversification for Chinese traders. The longer the trade war goes on, the more chance Chinese traders will more permanently replace US soybeans in their trading portfolio.

 

Meros Consulting is a Tokyo-based strategic business advisory. We work with companies and governments globally to advising on trade dynamics and support business development in food and agriculture industries.