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DAVID KRUSE

By Staff | Aug 27, 2018

I had the opportunity to ask a lot of questions of a small group representing a commercial Chinese soy buyer who were touring the corn-belt looking at crops and livestock operations and they made a stop here in Royal, Iowa. They represent a company that buys and imports 7-8 mmts of soybeans annually into China. As China imports 100 mmts (or used to) that is 7-8 percent of their total being imported by this company. They had been buying 4 mmts of U.S. soybeans and the rest from South America.

The Chinese are scouring the globe for soy or soy-alternative supply. Even Russia is now growing soybeans exporting 1 mmts. Chinese government officials (not this company) have been spreading the manure (both sides spread manure on trade claims) that they would reduce Chinese import demand to 76 mmts. That is an exaggerated made-up number. The Chinese company says that 90 mmts is more realistic, a reduction of 10 mmts.

I asked them if there was currently any government restriction on their buying and importing U.S. soybeans into China and they said “No.”

They claimed that they were not restricted by their government from buying U.S. soybeans other than having to pay the tariff. They claimed that there were three small cargos that had been imported (only one reportedly off-loaded) despite the tariff. These may have been in transit and it was too costly to divert them. The soybean market has priced the Chinese tariff into U.S. prices relative to those in Brazil but there has been no sign of any new significant Chinese purchases in the U.S. yet. The market now has to price in a 785 mln bushel soybean carryover from a record crop.

Chinese crushers had procured an enormous supply of soybeans ahead of the tariff implementation and crush margins there are currently quite negative. They have an oversupply of meal. Their hog herd is in liquidation. They say they will work this soy supply off by October when this company expected that there would again be interest in U.S. soybeans by Chinese importers if the price was right. They believed that China would need to buy some U.S. soybeans. They were ready when they had domestic demand and could buy soy that worked. The right price would be something that compensated for the tariff that they could crush profitably in China. What they buy would be limited by that.

I am not bearish soybeans beyond what it takes to compensate for the tariff but it is hard to be bullish too as a rally would price U.S. soybeans out of the market again quickly. The only real solution is a resolution of the trade war and end of the tariff. How many U.S. soybeans they buy will eventually be determined by the market and the next South American soy crops. Argentine production should recover next year from the end of the 2018 drought and they will at least expand soy acreage in Brazil 3-5 percent again with weather determining final production.

They asked me how long the trade war would last and I asked them the same thing. I asked them if their government was willing to make concessions on intellectual property and they were quiet. I don’t think that either side is near ready to back down and we all expressed the fear that the trade war could be long lasting. They noted the $12 bln tariff relief program announced by Trump/Perdue asking for details that we do not yet have. All acknowledged that the payments are political. China was smart to direct retaliatory tariffs on Trump’s ag constituency which forced Trump to provide this aid to keep his promise of “having farmer’s backs”. They will have great interest in the election impact this fall.

I asked the Chinese visitors about their visas. I had read where Beijing had cancelled passports to the U.S. and reissued short term passports in China which had hindered interaction and understanding of Chinese officials visiting the U.S. causing them to miscalculate Trump’s resolve. These visitors were commercial officials and had green cards. They did not think that the passports were an issue. I believe that there has been miscalculation of resolve on both sides. The fear was that this meant a protracted impasse. They told me that they had not yet made the calculation to make long term financial commitments to invest in transportation logistics in Brazil but if the trade war protracted that would eventually change. They want to buy U.S. soybeans. I know that we in the ag sector would like to sell them some.

I asked them to respond to Trump’s challenge that anyone buying oil from Iran by November had to get a waiver from us to do business here. As China buys more oil from Iran than anyone, this is a direct challenge of China. They frankly were incredulous. I think that they find it hard to believe that Trump would force compliance from China but they should not underestimate him. This is a bullet directed at Iran but if others do not get out of the way it will go right through Iran and hit them. While the Iranian mullahs are big on blusterous threats, their currency is plummeting, their economy is contracting and their military is third class. They do not have broad public support for a war with the U.S. in Iran.

The U.S. no longer needs oil from the mid-east, another of our new strategic advantages. China still has to import 40 percent of its oil and much comes from Iran through the Strait of Hormuz. Trump’s embargo on Iranian oil would cut their oil exports by two-thirds forcing them to use Turkey as a conduit. Turkish relations with the U.S. are deteriorating. I asked the Chinese soy company officials if the Chinese Navy would protect their oil supply in the Persian Gulf and got a shocked look of disbelief. That is the way a lot of the world is right now. They are adjusting to the changes taking place.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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