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Forecast dims hope for China meeting phase 1 purchase commitments

Article cover photo
Marty Danzer, an ISA member from Carroll, and other Iowa soybean farmers continue to look for international markets to replace China as commodity sales to that country remain sluggish. (Photo: Joseph L. Murphy/Iowa Soybean Association)

By Bethany Baratta, ISA senior writer

Each passing day brings us closer to 2021. The closer we get, the fewer the opportunities for China to meet its year one, phase 1 purchase commitments set between the United States and China earlier this year.

In the agreement, China agreed to buy $36.5 billion in ag products in 2020 and $43.5 billion in 2021, more than the country has ever purchased from the United States annually. The most ag products China purchased from the United States was nearly $26 billion in 2012. The agreement doesn’t spell out what happens after 2021, nor does it specify how many tons of soybeans or other ag products it will buy.

Chinese purchased $913 million in ag products in February and $952 million in March, the lowest totals for those two months since 2007, according to U.S. Census Bureau data.

There was a pickup in soybean sales in recent months, however. As of May 7, China has purchased 13.8 million metric tons of U.S. soybeans, including shipped and outstanding sales.

Lin Tan, a Johnston, Iowa-based economist with Hopefull Group, a Chinese soybean importing and processing company, predicts a 20% to 30% chance that China will fulfill its purchase obligations by Jan. 1, 2021.

He doesn’t predict a surge in U.S. soybean sales to China until at least October due to lower cost opportunities in Brazil. Brazil has a $0.12 to $0.24 per bushel advantage over the United States shipping from the Gulf or the Pacific Northwest.

“Brazil’s infrastructure has gotten better, and a strong U.S. Dollar and weak Brazil Real has made Brazil’s soybeans more competitive,” says Grant Kimberley, director of market development for the Iowa Soybean Association (ISA).

Tan expects Brazil soybean supplies will dry up after September, which will shift China’s purchases of new-crop soybeans to the United States.

COVID-19 recovery

While there’s been news of Chinese employees returning to work after the country was essentially shutdown on Jan. 23 due to COVID-19, Tan said the country is far from recovered.

“The impact of coronavirus on the economy is huge,” Tan said. The country’s GDP shrank by 6.8% for the first three months of the year for the first time since record-keeping began.

Though most employees are back to work, Tan said the economy is slow to recover because overall demand is down, including from consumers in other COVID-19-affected countries.

“I am not optimistic of how the country will do even when the economy is back to normal,” Tan said. “People are back to work, but what can they do? There are no contracts because there is no demand.”

China is also recovering from African swine fever, which decimated its hog herd by 40%, and in turn, its need for soybean meal. Pork production decreased by 11.5 million metric tons in 2019 to 42.5 million metric tons. Expected production in 2020 is 39.7 million metric tons.

Pork consumption in China is estimated to decrease 5.6% year over year due to higher pork prices earlier this year and a decrease in demand due to COVID-19. Though some restaurants are open, consumers are hesitant due to the ongoing threat of COVID-19, Tan said.

Good for soybean demand, though, is an estimated 15% increase in poultry production.

“Crushing plants are still running at a normal speed,” Tan said. Hopefull Group has three crushing plants with a combined crushing capacity of 9 million metric tons and a processing capacity of 6 million metric tons of soybeans each year. Nearly half of Hopefull Group’s soybean needs were met by the United States. Currently, Brazil has the advantage.

“We would love to get back to buying from the United States because of the high-quality soybeans you produce,” Tan said.

Soy strategy

China was once the largest customer of U.S. soybeans. There’s still hope that those purchases come back, if only fractionally.

“There are definitely a lot of factors that aren’t ideal in trying to sell more soybeans there,” said ISA President Tim Bardole. “Time will tell how it ends up. Hopefully they live up to their end of the deal and hopefully a lot of those purchases are soybeans when they start buying.”

The purchasing of U.S. ag goods under the phase one agreement will continue to be an indicator of the relationship between the United States and China, Terry Branstad, U.S. Ambassador to China, told Sara Wyant of Agri Pulse. Branstad, former governor of Iowa, said he’s also keeping a close watch on China’s commitment to also reduce tariffs on ethanol.

“We're hopeful that as we get further into the year, we're going to see a significant increase in the purchases, especially with soybeans and with some of the other commodities,” Branstad told Wyant. “China has the capacity to do it. And a lot of the customers are state-owned enterprises. So, if the national government here wants to fulfill their commitment, I think they have the ability to do it.”

ISA member Marty Danzer said the industry must stay focused on expanding markets in other areas of the world.

“China wants cheap soybeans and Brazil has them, so we’re going to have to get creative,” said Danzer, ISA District 4 Director from Carroll. “We’re working with the Philippines and Indonesia and other smaller countries to help make up for what we’ve lost with China.”

Kimberley said the U.S. soybean industry remains committed to expanding markets for U.S. soybean growers.

“We have to try to maximize and grow our market share everywhere, and especially find markets that prefer U.S. soybeans and will pay a premium for the quality and consistency that U.S. soybeans provide.”

ISA is driven to deliver timely news and valuable programs to you. Don’t miss out — activate or validate your ISA membership today at iasoybeans.com/join.

Contact Bethany Baratta at bbaratta@iasoybeans.com.

For media inquiries, permission to republish articles or to request high-res photos, please contact Katie James, ISA Public Relations Manager at kjames@iasoybeans.com. © 2020 Iowa Soybean Association. All rights reserved.

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