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Rocky beginning to recovery of U.S.-China relations

Article cover photo
Trade relations between China and the United States are improving according to Jane Li. China is dealing with the impact of COVID-19 and Li believes the psychological impact may continue to hold sway over consumption among consumers. (Photo: Joseph L. Mu

By Jane Li, AFC Consulting 
Special to the Iowa Soybean Association

The year is off to a rocky start with the outbreak of the novel coronavirus bringing economies to a standstill. During Chinese New Year — one of China’s economic high points — the world’s second-largest economy was hit by stagnant production, disrupted supply chains and trade, and weakened demand and consumer confidence. 

Like many other industries, the agricultural and food industries were significantly disrupted by reduced demand, logistics interruptions, absent labor, travel restrictions, and imposed- and self-quarantines.

Examples of the economic impact include:

  • Farmers’ incomes took a hit, as costs of inputs increased due to a continuous shortage of raw material and import products, along with depressed demand for produce and commodities.  The impact could last until next season and may suppress continued demand for farm inputs.
  • Feed mills, slaughterhouses, processing plants, and distribution centers operated below capacity. Roadblocks impeded feed transportation in many regions. Livestock farms delayed production or suspended replenishment to deal with the situation. Despite the decreasing impact of African swine fever, spread of the virus put a drag on hog herd rebuilding.
  • Feed consumption is expected to undergo a sizeable drop during the first quarter of 2020, lowering demand for feed grains and soymeal.
  • With 75% of mainland foodservice companies having suspended operations for nearly two months, China’s consumption of edible oil and meat in the sector were greatly affected. Retail sales of these food products continue to remain strong as consumers stock up food at home. China’s fast-growing e-commerce and food delivery service helped mitigate some of the losses from the food service sector.
  • Pork demand was affected to a lesser extent, despite sales declines in food service. Pork has been the primary meat of China’s at-home cooking, while beef, lamb and seafood are mostly consumed when dining out. On the supply side, pork production is significantly lower due to the slowdown in restocking.  Pork prices set a new record high in February. The supply deficit in pork in 2020 could be greater than that of 2019.
  • The quarantine measures around Hubei Province, the center of the epidemic, has caused prolonged delays in aquaculture and hog production, and impacted supply nationwide. Hubei is the largest aquaculture and the fifthlargest hog production province in China.

With the spread of the virus gradually coming under control, production is recovering quickly in some regions. 

China has taken numerous measures in recent weeks to prop up its economy and will likely announce more stimulus packages. But the psychological impact may continue to hold sway over consumption among consumers. It’s hard to predict when consumers will be ready to flock to the supermarket or dine out together. 

The good news is, after two years of losses by Iowa soybean growers, the picture is improving. Trade relations between the United States and China have improved since the phase 1 trade agreement was signed in January.

Implementation of the agreement has been complicated by the spread of COVID-19, with impediments to China’s procurement. China has lowered tariffs on a range of U.S. agricultural products, including soybeans (-2.5%). Starting March 2, Chinese crushers can apply for tariff exclusions for cumulative retaliatory 301-tariffs levied by China. Many companies have applied for the exemptions and received approval. The process seems to be quite straightforward. Despite the improving trade environment, China will continue to purchase U.S. soybeans based on “market conditions.”

What is needed now is patience as we wait for the market to recover. China’s foodservice accounts for 40% of edible oil consumption, while retail represents 30%. The remainder goes to processing and other industry usages. Falling demand for soy oil may continue into early spring, then rebound as foodservice recovers. Soybean meal usage will likely decline until mid-spring as a result of stagnant feed demand. Then, demand for soymeal is expected to rebound, due to high meat prices, expanding production, hog restocking, and foodservice recovery. 

Brazil is currently harvesting, and prices for Brazilian soybeans delivered to China are still lower than those out of the U.S. Gulf. Chinese crushers have little incentive to make large purchases from the United States. Imports from the United States will likely increase in the autumn when Chinese feed consumption rebounds and new U.S. crops become available.

For questions about this story, please email communications@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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