ANALYSIS: Covid-19, trade war reshapes China’s soybean buying pattern in 2020

17 Apr 2020 | Johnny Huang, Andy Allan

A huge dip in economic growth, coupled with the prospects of months of uncertainty, in normal times would result in a risk averse approach to trading commodities, with trading houses seeking to close open positions.

But that doesn’t apply in the agricultural market, particularly when your goal is to feed the world’s most populous nation.

And the early signs are that this could spell bad news for President Trump’s Phase One trade deal, which is highly dependent on exports of soybeans to China.

According to trade data gathered by Agricensus, Chinese crushers have already fully booked their soybean shipments in May this year with the large majority of the 9.5 million mt sourced from Brazil.

With May just two weeks away, there is nothing unusual about that.

But with June and July covered 90% and 60% and crushers actively looking to trade August and September, market sources say this year the trading pattern is abnormal as crushers would not typically cover Q3 shipments until May.

“This year, the pattern is different. This point last year, people were buying mostly spot and very slowly… Margins at the time last year weren’t as good as this year,” a soybean trader at a crusher said.

Some major players have even started booking shipments for unplanted 2021 new crops with about 5-6 million mt already contracted, whereas there was barely any volume bought for 2020 new crop back in April 2019.

“In my impression, this is the first year that crushers are strongly pushing for forward shipments. Usually they book very spot and would only do spot plus one or one and a half month at most,” a second soybean trader told Agricensus.

And news that China has bought large volumes forward could mean bad news for US exporters.

Post-lockdown buying spree

China’s soybean buying was virtually halted for three weeks during February when lockdown measures were widely in place across the whole country and the Chinese government extended the Lunar New Year holiday that kept businesses shut.

This delayed severely Chinese purchases of March and April soybean shipments and many crushers ran out of soybeans, forcing them to cut operations and slamming the weekly crush 18% from 1.7 million mt per week in early March to about 1.4 million mt in early April.

It also left soymeal and soybean stocks at their record lows in March this year.

When the spread of Covid-19 started to slow in late February, the Chinese government gradually eased lockdown measures across several regions of the country and encouraged businesses to resume their operations.

Stunned by the epidemic control measures and needing beans badly, crushers snapped up 30-40 cargoes per week for shipments between April and June this year, based on trade data gathered by Agricensus.

April and May shipments were rapidly filled up in the space of one to two weeks following the lift of lockdown as crushers were determined not to be caught short again.

And many major crushers had started contracting shipments for June onwards in early March.

What facilitated the change in behaviour was not just panic, it was slumping prices in Brazil making the forward crush highly profitable.

That was led by two things – a slumping US currency and the willingness of the Brazilian farmer to lower prices, both in fear of a competitive US market and the Brazilian harvest of beans which was revised upwards consistently throughout Q1.

US export hit?

With a record volume booked up in advance, unsold Brazilian volumes will now need to find a home, and that likely will be Europe for the next four months.

That spells bad news for the US exporter as it could potentially put a cap on US soybean exports for the remainder of the northern hemisphere marketing year, which ends in August.

It also raises questions about the US ability to meet a USDA export estimate of 48.3 million mt this marketing year, particularly given the fact that current export sales are at multi-year lows of 36.7 million mt.

With 20 weeks of the marketing year left, that works out at 580,000 mt a week needing to be sold to meet the USDA goal.

Compare that to the fact that last week just 244,000 mt was sold for export and the week before it was 523,000 mt.

But worse news for the US, and in particular for President Trump’s election campaign, is that Brazil is harvesting a record crop this year of up to 125 million mt.

It is a bumper harvest that could see Brazil’s export horizon extend well beyond the typical month of August when the US harvest means September beans are cheaper.

According to Agricensus data, at current cash prices, Brazil and the US are on par for soybeans loading in September and destined for China, raising the prospect that Brazil’s bumper harvest could scotch plans for a US soybean export bonanza.