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Crouching bull, hidden bear

29 March 20216 min reading

Elena Neroba Business Development Manager Maxigrain

History teaches us that China is good at trading and fighting. The trade agreement, ASF (African Swine Fever) and coronavirus have launched a rally in the raw materials market. And it is not going to stop yet.

January 15, 2020 the United States and China signed a 9-page document that called the Phase One of the Trade Agreement. And the topic of the trade war between the United States and China disappeared from sight, but the war is not over. In fact, in the agreement have not been resolved many of the issues, the tariffs of Section 301 of the US is still covered approximately $335 billion, or 66% of China's imports and counter fees Beijing applied for $90 billion, or 58% of its imports from the United States, noted in their study by The Peterson Institute for International Economics (PIIE). Although China has pledged to purchase $200 billion worth of additional US goods and services during 2020 and 2021. On February 17, 2020, China's Ministry of Finance established a separate process through which Chinese companies can apply for exemptions from the significant counter-tariffs that remained on many different goods and began to provide incentives for Chinese companies to purchase soybeans, for example. But the Chinese administration did not give any specific comments on this issue. The result - in which the Trump administration signed a system in which the Chinese government would have the final say on potential imports from the United States - also contradicted broader US government fears that China's economy was too state-controlled.

But throughout the pre-election year, China lagged behind in the pace of purchases. The USTR and the USDA have released their own, much more rosy assessment by the Trump administration on China's alleged purchases of a select few agricultural products. It should be noted that according to the already mentioned study by The Peterson Institute for International Economics, two factors independently influenced the implementation of the Trade Agreement: ASF, which destroyed up to 40% of the Chinese pig population, and the coronavirus epidemic.

It is said that due to the pandemic, the US GDP fell by 3.5%. China's economy grew 2.3 % in 2020, much lower than forecast before the pandemic of about 6 %. The pandemic has also impacted trade flows. In June alone, China's imports reached pre-pandemic levels. However, China's imports of agricultural products from the United States were higher in 2020 than in 2019. China's growth in imports of the same products from the rest of the world remained unchanged during this period. To assess compliance with the legal conditions of the first phase of the agreement, it was necessary to compare 2020 with 2017, but not with 2019.

In 2020, China increased its purchases of agricultural products, however, its exports of agricultural products from the United States turned out to be 18% less than the liabilities in 2020, and well below the aspirations of the USA administration. Soybeans accounted for nearly 60 % of US agricultural exports to China before the trade war and were among the first commodities on which China imposed 25% retaliatory tariffs. US exports fell from $12 billion in 2017 to $3 billion a year later as China shifted purchases towards Brazil ( infographics - FAS USDA ). Despite repeated assurances from President Trump since late 2018 that China will soon "return to market" soybeans that American farmers have been forced to stockpile in record quantities, sales in 2019 remained more than a third lower than in 2017. The declining demand for animal feed in 2019 was because of the devastating outbreak of African swine fever.

China began importing more pork from the United States in 2019 to address local pork shortages, even before the signing of the first phase agreement. The deficit was so severe that pork imports to China from the rest of the world in 2020 were more than five times higher than in 2017. Until the moment when China announced that it had overcome ASF and was ready to invest millions in new pig farms, meat prices rose very quickly on the domestic market. But even after these complexes are built and launched, the pigs take time to grow up. And to rely that all feed can be bought in the United States is to sign yourself a verdict with a rising price. Therefore, China's import from the rest of the world in 2020 increased by more than 340% compared to 2017 for corn and by 280% for wheat, mentioned in PIIЕ’s article Anatomy of a flop: Why Trump's US-China phase one trade deal fell short.

But in this story, another fact seems interesting to me - for some reason, the growth in corn imports is several times higher than the growth in purchases of other types of grain. According to various analytical agencies, China holds up to 65% of the world's reserves. Why should a country, which has so much corn, still buy it on foreign markets, with a growing price? Why, when producing more than 260MMT per year, to expand the sown area, to allow new varieties of GM?

Brian Lomar, China Director of the US Grains Council shares my questions. Lohmar spoke at the USDA Annual Agricultural Outlook Forum. He believes that it is also about the strengthening of the Chinese currency (which makes it cheaper to export corn and other agricultural products from the United States), growing concerns about the health of the soil in China and the fact that corn is part of an import regime that allows the state to build up domestic stocks. In 2018, Statistics Bureau of China published the results of a 10-year survey of the acreage of corn, which showed their increase to 50%, but, significantly, the yield estimates are not increased. I would add that the typhoons this season could not help but cause damage to production, and according to my estimates, up to 10% of the crop was affected. And if we take into account that many are convinced that Chinese corn stocks exist only on paper, and add Lomar's assumption that the modernized pig farms will operate at 75% corn, then we will see another series of Chinese corn purchases. And it will not end this season, but it may become somewhat calmer.

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