ANALYSIS: Trade deal or not, Chinese demand for US beans this year nearly finished

11 Dec 2019 | Andy Allan

Additional Chinese demand for US soybeans for the rest of the marketing year is unlikely to meet the tariff-free quota the government issued this week, as crushers that can wait for the Brazilian harvest in February will be rewarded with 10% higher profits in the form of better crush margins, Agricensus data shows.

On Monday, the Chinese agriculture ministry issued tariff-free quotas for up to 1.3 million mt, according to market sources, taking the total issued so far in the past year to 28 million mt.

The move has been widely interpreted as giving President Trump the political breathing space to stall on his pledge to hike import tariffs on $165 billion of Chinese goods this Sunday while trade talks progress slowly.

The quota issuance triggered a flurry of purchases on Monday and Tuesday, with crushers buying 12-13 cargoes, or around 900,000 mt, out of that quota, leaving about 400,000 mt of that quota left to buy.

However, with open demand expected to be just 3-5 cargoes left for January shipment, market sources say that demand for US soybeans until September next year is almost finished, regardless of any trade deal with China.

And that’s down to the fact that Brazil is now expected to pull up a record 121.1 million mt starting in February next year, which means Brazilian prices are far cheaper and crush margins much higher for February shipment.

Higher margins

Looking at the data, gross margins for Brazilian beans shipped in February stand at $24/mt.

That is around $2.50/mt, or 10%, higher than crushing US beans shipped in January.

With margins that big and stocks at ports and crushers in China relatively healthy, it would be fair to wonder why crushers would buy US beans at all from a profit perspective.

The first is politics and the second is the harvest.

“Crushers need to complete the political mission for US soybeans first... We will keep buying when the prices are good,” said one source at an international crusher in China, explaining that there is some political pressure to ensure that when quotas are given, the soybeans are bought.

Last month, China reallocated quotas previously given to big international companies to smaller crushers as the former was not acting quick enough.

Secondly, delaying purchases for the Brazilian crop carries a huge amount of weather risk.

Estimates of the size of the crop from December last year to the final size of the crop in Brazil ranged from 110 to 122 million mt and that was in a year when weather volatility was seen as relatively normal.

The final number was 115 million mt.

Farmer selling is already starting to slow for the new crop, with around 40-50% estimated to have already been sold at this point.

“It makes sense that farmer selling is super slow. They had already sold quite a decent percentage of the new crop and until they have a clearer picture on the crop next year, I don’t think they will sell very aggressively,” a source from a major international trading house said.

US needs buyers

US soybean export sales so far this year stand at 26 million mt, up 2 million mt on the same point last year.

However, deducting Chinese sales, that figure stands at 16.3 million mt this year versus 23.5 million mt at this point last year.

Meaning that if the US is to export 48 million mt – more or less the same level as last year – US sales to non-Chinese destinations will have to accelerate for the rest of the year.

And looking at the Brazilian price curve for February through June shipments, with the exception of February Brazil remains consistently cheaper.