China halting US soy imports is unlikely to hurt anyone soon

If you’re haggling over the price of goods at a market, there often comes a point when the buyer threatens to walk away. It’s up to the seller to decide whether that’s a bluff.

That’s the right way to consider the news that Chinese state-owned agricultural companies have been ordered to pause purchases of US farm goods, including soybeans. The halt has been ordered while Beijing weighs escalating tensions over Hong Kong, people familiar with the matter told Bloomberg News on Monday.

Threats to limit China’s voracious appetite for commodities are a tried-and-tested way for the country’s leadership to turn the diplomatic thumbscrews. Still, American farmers should take a deep breath before deciding that all is lost.

For one thing, any embargo on American soy would be barely perceptible for the next few months. Typically, no more than 5% to 10% of China’s US soybean imports arrive between May and September, with the vast bulk shipping during the balance of the year, when Brazil’s soybean exports slump. By the time China’s buying activity starts to make a difference to the US farm belt again, the next presidential election and a possible diplomatic re-set will be just weeks away.

As we’ve argued previously, this pattern has been repeated with multiple products, whether it’s Australian coal or Canadian pork. So many individual shipments are involved in any large trading relationship that Beijing can get a remarkable amount of diplomatic leverage from threats to hold up or cancel a few purchases, even if it doesn’t follow through.

State-owned agricultural traders aren’t in the business of doing anything that would upset their political masters, and it’s notable that one of the people familiar told Bloomberg News the restrictions don’t apply to private companies. The attempt to gain leverage is real enough, and Beijing is counting on the American farm lobby complaining to Washington about the situation. Ultimately, though, it’s up to the US government to decide whether that’s reason to reverse course on other aspects of foreign policy.

The two-year target of $200bn in increased Chinese imports from the US in the phase one trade deal signed in January was already looking challenging. A near-doubling of inbound trade was always going to be a stretch, and that was before the damage the coronavirus has done to demand in China and supply chains in the US.

The current diplomatic tensions will surely put the figure still further out of reach — but if you were counting on that at this point, you haven't been reading the news.

A diplomatic shift

It’s also worth considering that commodities are traded on a global market. While America has undoubtedly lost soybean market share in China to Brazil in recent years, that’s probably a welcome shift for a business that was looking over-exposed to a single country. Despite a 4.7-million tonne drop in US soy exports to China between 2015 and 2019, total exports are up by about 4.2-million tonnes as Egypt, the EU, and other Asian countries, such as Indonesia, Taiwan, Thailand and Pakistan, soaked up the shortfall.

America is now less dependent on a single, unreliable buyer than it was a few years ago — and while export prices have indeed fallen, the price drop is a phenomenon that has quite as much to do with worldwide supply, demand and inventories as it has to do with China. Despite a 42% increase in Brazil’s exports to China over the same period, average export prices in 2019 were lower than those earned by the US.

There’s plenty to worry about in the sharper tone between Beijing and Washington these days — but the concern should be a diplomatic one. After a difficult few years, farm incomes in the US are running at long-term average levels. Selling produce has almost always been a loss-maker for the median American farm anyway, with work done away from the fields normally the main earner.

While China is slowly diversifying parts of its food supply chain away from its rival across the Pacific, nothing’s going to change overnight. Its threats should be taken seriously, not literally.

Bloomberg