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China brushes tensions aside to buy US agricultural commodities

Grain Brokers Australia, July 21, 2020

Feedmills in China are chewing through large amounts of US corn and soybeans. Photo: Ibberson

CHINA has embarked on a buying spree of farm products from the United States this month, but the market
reaction has been relatively subdued as global demand uncertainty continues and beneficial rains across the US
Midwest support prospects of large corn and soybean harvests this season.

Last Tuesday the United States Department of Agriculture reported that China had purchased 1.762 million
tonnes (Mt) of corn from US exporters for shipment in the 2020-21 marketing year. This is the biggest
ever Chinese purchase of US corn, surpassing the 1.45Mt acquisition made way back in December 1994.

The transaction is also the fourth-highest spot trade for corn ever reported by the USDA, and comes hot on the
heels of a 1.365Mt old and new-crop corn sale to China in the previous week. And the USDA’s weekly export
sales update for the week ended 9 July shows sales of 981,000t of old-crop corn and 655,000t of new-crop
corn, with China the lead buyer.

This brings Chinese purchases of US corn for the 2020-21 season to almost 4Mt and is already the second-
largest annual export volume on record behind the 5.15Mt purchased in the 2011-12 marketing year.

Corn ended the week slightly lower on futures markets, despite the run of large purchases by China. It is quite a
bearish market gauge when such good sales news fails to push the market significantly higher. The story is not
bad; rather, the market feels the demand losses due to the COVID-19 pandemic and production increases
due to improved weather more than compensate for the increased exports.

China pork, poultry booming

It seems the livestock sector in the Middle Kingdom is booming as the country recovers from African Swine Fever,
and food consumption returns to normal after the COVID-19 shutdown. The government sold all of the 4.026Mt
of corn put up for auction last week at an average price of 1950 yuan, the highest price in the eight weeks of
auctions.

Data released by China’s agriculture ministry in June indicated China’ sow inventory had increased for eight
consecutive months, and there had been four successive months of growth in the hog herd. Domestic pork
production is forecast to recover 70 per cent of African Swine Fever losses by year’s end.

The other big mover is poultry consumption. Rising imports will meet a lot of that demand, but local production is
also growing quickly. China consumed 19Mt of poultry in 2018, but that jumped to 23Mt last year, and the
Chinese are expected to eat roughly 25Mt this year.

The expansion in poultry production, together with a recovering swine sector, is boosting China’s demand for
soybeans. According to customs data, China imported a record 11.16Mt of soybeans in June, up from
6.51Mt a year ago, and up 19pc from 9.38Mt in May. China’s first-half 2020 imports totalled an
impressive 45.05Mt, up 18pc year on year.

Big on beans

Although most of the recent imports have been from Brazil, China has increased purchases of US soybeans this
month. On Friday the USDA confirmed sales of 126,000t of US soybeans to unknown destinations
– read China. That trade brought the total sales for the week to 1.5Mt, including around 1Mt to China.

The recent flurry of Chinese contracts is a very positive sign for the 2020-21 marketing year, and purchases are
tipped to increase as the record pace of South American exports abate due to dwindling supplies. China needs to
fill the gap from August until new-crop Brazilian soybeans are available next year, and the US shop door is wide
open.

China has already bought 4.2Mt of US soybeans for new-crop delivery. That is the highest level of new-crop
purchases for early July since the 2014-15 season, and is well ahead of the 126,000t on the books at
the same time last year.

Soybean futures firmed in trade on Thursday and Friday to close the week higher, buoyed by the prospect of
Chinese crushers ramping up their purchases of US beans, and a tighter US balance sheet.

Wheat looks solid

While US wheat trades to China in July have not been as spectacular as the row crops, there have been some
robust sales. Early in the month, the USDA reported China had booked 130,000t of Hard Red Winter
wheat and 190,000t of Hard Red Spring wheat.

Last Wednesday, wheat futures exploded to the upside as funds flipped their positions from net short to net long. Rumours that China had purchased at least two cargoes of Soft Red Winter wheat proved to be just that, and the market gave back most of the gains in the last two trading sessions of the week.

Unconfirmed trade talk on Friday suggested that China had instead turned its attention south of the equator and
purchased eight cargoes of new-crop Australian Standard White wheat for December delivery. Aussie export wheat
values closed the week unchanged, with the prospect of increased demand offset by good rains in Western
Australia.

Motive unclear

The spate of US purchases this month has raised conjecture around China’s motives. Is this an attempt by
Beijing to meet its 2020 obligations under the Phase 1 trade deal in which it pledged to buy US$36.5 billion worth
of US agricultural commodities, or is this merely opportunistic buying when prices are relatively low?

Have the relations between presidents Xi Jinping and Donald Trump soured to such a degree that
doubt is now cast over the durability of the trade pact? China continues to insist it will meet its obligations,
but it has a lot of work to do in the last five months of the year amid a hostile political environment.

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