China courts the French at the expense of US farmers

Grain Brokers Australia, February 11, 2020

RUMOURS emerged on Thursday last week that China had purchased French wheat, and by Friday the wires seemed to confirm that the French had sold between six and 12 panamax cargoes for first- half 2020 delivery.

This fresh round of purchases is purported to be under China’s 2020 tariff-rate quota system. However, some traders have cautioned this number may include cargoes already sold last year under China’s 2019 tariff-rate quota, which has been extended to the end of this month.

A tariff-rate quota is a two-tiered import tariff system endorsed by the World Trade Organisation (WTO). The first tier has a lower tariff rate that applies up to a specified quantity of in-quota imports; the second tier has a higher tariff rate that applies to imports that are in excess of the quota quantity.

Tariff-rate quotas are designed to allow some market access for commodities where the second-tier tariff provides high protection. Some 40 countries worldwide have a total of 1128 WTO tariff-rate quotas on agricultural commodities.

In acceding to the WTO in 2001, China agreed to allow global access for imports of specific quantities of corn, rice, and wheat at a low one-per-cent  in-quota tariff.  Maximum annual first-tier tariff rate quota imports by China from all sources are 9.64 million tonnes (Mt) of wheat, 7.2Mt of corn and 5.32Mt of rice.

French wheat well priced

The latest French sales come after more than 640,000t of French wheat has been already shipped to China in the current marketing year which started in July.

A wheat field in France. Photo: Andrew Dalgleish

Total European Union shipments to China in the first half of the marketing year total 950,000Mt, which compares with a total of just 130,000t in the full 2018/19 marketing year.

French wheat is currently the cheapest in the world, and China’s tariff-rate quota commitments are dependent neither on origin nor on the Phase 1 deal with America. The competitiveness of French wheat was reflected in the results of the latest Egyptian tender, won solely by French exporters.

Surprisingly, French transport strikes, which have been running for more than two months, have not slowed the pace of wheat shipments. France exported 1.2Mt of soft wheat to countries outside the EU in December, the highest monthly volume since the start of the 2019/20 year.

Russian inroads

However, in a potential blow to French export demand, Algeria has given preliminary approval to imports of Russian wheat. Algeria has traditionally been a very loyal French customer. Russia is also sending wheat samples to Iraq in an attempt to gain access to some of the higher-quality Middle Eastern demand.

That said, Russia is struggling to meet current demand, and it seems the remaining exportable surplus is far less than previously suggested. The latest 2019/20 wheat export estimate from IKAR, Russia’s leading agricultural consultancy, is less than 32Mt, compared with 33.5Mt in January.

Russian agricultural infrastructure operator Rusagrotrans forecasts total wheat exports at just 30Mt. With 22Mt already shipped in the current marketing year, that implies just 8Mt remains available for the rest of the season, a meagre number, especially when countries such as Algeria, Morocco, Tunisia and Egypt still have old-crop requirements to cover.

China buys Australian

Australian exporters also scored an invitation to the recent wheat soiree, with substantial Chinese purchases in late December and again in January. Three cargoes were booked in December, all of which have now arrived in China, and as much as 350,000t was booked last month for first-half 2020 shipment.

China has now purchased more than 1Mt of Australian, Canadian and French wheat in the past two months as Beijing looks to fill the import quotas set by the WTO and plug a shortage of high-quality wheat used to make bread, cakes and cookies.

The move may be a signal that China is attempting to make good on its promise to better administer its tariff-rate quotas for wheat, rice and corn after losing a WTO dispute instigated by Washington last year. China has never fulfilled its tariff-rate quotas, and has used non-tariff trade barriers to protect its farmers.

China’s dalliance with the French comes as a blow to US exporters, who were expecting to ramp up wheat sales on the back of the recently signed trade agreement.

Trade deal to start

At the same time, the US appears to be making assuaging nuances in the event of delayed Chinese purchases under the Phase 1 agreement due to the coronavirus. President Xi Jinping has responded, assuring President Trump that China will meet its trade-deal commitments despite any delays connected to the virus.

Nevertheless, Beijing has continuously stressed that imports from the US will be based on market prices, and US wheat is expensive at the moment relative to European values. Recent export sales have been lagging the pace required to meet the full-season USDA projections. This could quickly pressure prices toward a more competitive stance, and no doubt China is set to pounce at the first sign of price weakness.

The US-China trade deal takes effect on Saturday, which falls on a holiday weekend in the US with futures markets closed on Monday for President’s Day. Three days is a long time in grain markets, and anything can happen over a long weekend.



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