All eyes on China’s upcoming Phase 1 purchases

Source: www.producer.com

China could meet its 2021 Phase 1 agreement target for agricultural imports from the United States, and that would do wonders for crop prices, says an analyst.

“If China does what it says, it will be quite bullish,” said Dan Basse, president of AgResource Company.

China has committed to import US$43.4 billion of U.S. agricultural products this year, a sharp increase from its 2020 target of $36.5 billion.

Reuters news agency reports that China fell well short of its 2020 objective, importing $28.7 billion of agricultural goods. The Peterson Institute for International Economics thinks the real number is even smaller at $23.6 billion.

Imports got off to a slow start in 2020 but picked up steam in the second half of the year with a wave of soybean and corn purchases.

Those purchases, which were also tied to the surprisingly rapid recovery of China’s hog herd from African swine fever, ignited grain and oilseed markets, driving prices well above their historical averages for many crops.

What China does under the second year of the two-year agreement will have enormous bearing on this year’s prices.

If China maintains the purchasing pace it established in the last half of 2020 then it is entirely feasible that it could meet its 2021 Phase 1 agreement obligation of $43.4 billion, said Basse.

He noted that China bought most of last year’s soybeans at a price of slightly more than $9 per bushel. Chinese importers will likely be spending another $2 to $2.50 per bu. when sourcing beans in 2021.

“The impact of that will be to make it much easier to reach their target because prices are going to be higher,” said Basse.

The agreement does not specify what happens if China falls short of its objectives, like it did in 2020.

Does the shortfall get added to the next year’s target? If that is the case then the 2021 target would be a whopping $51.15 billion based on the Reuters estimate of 2020 trade levels.

The Office of the U.S. Trade Representative was contacted to clarify what happens but did not respond.

Basse suspects the 2020 shortfall is water under the bridge and will not be added to the 2021 target.

He doesn’t think anybody in the former or current U.S. administration is too upset with China. In fact, quite the opposite.

“I think everybody in agriculture is quite happy in America. I think they’ll look to the Chinese and say, ‘well, that was a hell of a try in a year of pandemic,’” said Basse.

He believes a similar effort will be made in 2021, which bodes well for grain and oilseed prices in the year ahead.

“The Chinese want to make sure that they’re looking good on their pledges,” said Basse.

That is because the U.S. still has tariffs ranging from 7.5 percent to 25 percent on about $355 billion of Chinese imports. A number of other proposed tariffs were suspended when China agreed to the Phase 1 trade deal.

“That’s a big stick for the (U.S. president Joe) Biden administration to carry into the Phase 2 negotiations,” said Basse.

The upshot is that China has incentive to meet its 2021 Phase 1 commitments and has demonstrated the ability to do so.

If it is successful those purchases will keep grain and oilseed prices elevated for farmers in the U.S., Canada and elsewhere around the world.

Contact sean.pratt@producer.com

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