China’s Season of the Flu: Impacts on Soy Demand
It’s the year of the pig in China, the customary zodiac symbol related to the Chinese calendar. In an ironic twist of fate, the Chinese hog industry has been suffering through disastrous effects of the African Swine Flu (ASF) during the trade war period. We're discussing several reasons to expect that even if China returns to the fold of buying U.S. beans, they are a crippled demander and it will take time to see hog numbers move higher.
Also this week, we saw China Customs release their December import numbers, which showed another month of less-than-stellar soybean imports of only 5.7 MMT — a far cry from Dec 2017, when imports were 9.5 MMT. In total since the trade war started in August to December, China soybean imports are off 5 MMT from the previous 5-month period in 2017. The distributional effects of the trade war have seen Brazil capture market share with the U.S. effectively out of the market, and Argentina crippled by drought. The other major benefactor was Canada, which captured 3 MMT of deals with business in August to December of 2018.
So, is the trade war the reason for the drop in soybean imports? Perhaps, but we can’t rule out softening demand.
It’s the year of the pig in China, the customary zodiac symbol related to the Chinese calendar. In an ironic twist of fate, the Chinese hog industry has been suffering through disastrous effects of the African Swine Flu (ASF) during the trade war period. While ASF is not a threat to humans, it is highly contagious for pigs and has no cure. So far, the number of animals killed from the ASF is infinitesimally small, but the market impacts are starting to reverberate.
Soymeal prices are off 22% since October, and hog prices are down 11% in the last 3 months — all signs of fairly intense liquidation of a hog herd, especially by small farmers determined to cash in before the flu threat hits their farm. If you’re China, you couldn’t have a better time to be in a soybean trade war with one of your top suppliers—they just don’t need beans right now.
With this as a backdrop, there are several reasons to expect that even if China returns to the fold of buying U.S. beans, they are a crippled demander and it will take time to see hog numbers move higher.
If you are still holding old-crop soybeans, we think there are a number of negatives that weigh on the market:
- Sure, a trade resolution with China is important, but they may not have the appetite they did just a few months ago to stock up on U.S. soybeans.
- As a pure economic play, the U.S. has no competitive advantage in the world market anymore. That bubble has burst. In mid-October, Brazil prices had spiked to a $2.50 per bushel premium to U.S. values; they enjoyed their monopoly position as China’s chief soy source. But today, Brazil’s prices are on-par with U.S. values. The U.S. price cannot increase and get any real deals with China based simply on trade economics. That’s not to say that China wouldn’t buy a big pile of soybeans as a goodwill gesture, but that’s a political action, not driven by economics.
- The typical U.S. season for supplying China is November to March. The rest of the year, South America has the ball to drive down the court. That window is about to close, and we risk losing a season of exports (roughly 500 MB) to China that we won’t get back.
- Furthermore, USDA’s balance sheet is overstated on exports. Although we are now a month on to the USDA shutdown without export sales data, at last glance (in December) soybean export sales were on pace to do about 1,500 MB for the year, a far cry from the 1,900 MB target. And again, with U.S values on-par with Brazil and Argentina, the second half of the marketing year could be worse than the first half.
- South America as a whole will be restocked this year thanks to the recovery in Argentine production. Yes, Brazil’s top soy state of Mato Grosso is dry, but much of the rest of Brazil has adequate-to-above-normal moisture. Banking on a crop problem there to move the market seems like an ill-placed bet.
What does this mean for farmers?
Volatility is the exception, not the rule. If you are not caught up on your old-crop soybean sales, we would encourage you to get there. The “rallies” on U.S.-China trade news are becoming less potent and more short-lived. Use 10-to-20 cent rallies to pull the trigger. This is not a market likely to rally a $1 on a trade resolution. That Chinese pig won’t fly. . . plus, it has the flu.
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