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US-China deal seen benefiting soybean exports; barriers remain for others

Chinese consumers could be buying more U.S.-produced soy, beef and other agricultural products in the wake of a new deal that promises to boost U.S. exports, but industry groups warn that key nontariff issues stand in the way.

China agreed to increase purchases of agriculture and energy as part of an agreement reached with the U.S. on May 19 that helped avert, at least in the short term, tariffs on tens of billions of dollars' worth of goods. Treasury Secretary Steven Mnuchin said the framework agreement would "immediately" boost U.S. agriculture exports to China by between 35% and 40% through the end of 2018.

While few details have been released on which U.S. agriculture products the Chinese might seek to boost spending, soybeans may represent the biggest opportunity for growth, according to some experts. But at least one industry group representing soybean producers is skeptical that China will step up its purchases significantly.

U.S. producers shipped about $12.4 billion worth of soybeans to China in 2017, according to the U.S. Agriculture Department. That figure dwarfs exports of cotton, the second-highest American agriculture export commodity by dollar value, which represented $1 billion worth of product over the same period.

Chris Rogers, research director for Panjiva Research, a division of S&P Global Market Intelligence, said in an interview that soybeans — currently the top U.S. agriculture export to China — stand to benefit the most from any increase in spending by the Chinese, primarily due to heavy demand for the legume in China.

"They [China] can import a whole lot more sorghum or milk, but the customer demand is not necessarily there," Rogers said.

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U.S. exports of soybeans to China fell 23.7% year over year during the first quarter of 2018, according to Panjiva data. Rogers said the decrease was due in part to China's threatened tariffs on U.S. soybean exports, which he said could have shifted sourcing to other top soybean producers such as Brazil and Argentina.

Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics, estimated that the deal, should it be implemented, could lead to a $10 billion to $20 billion purchase order of U.S. agriculture products by China in 2019, depending on the evolution of the trading relationship between now and then.

Since the Chinese government controls much of its commodity imports, he said the country could shift soybean purchases from Argentina, Brazil and other countries to U.S. exporters. American pork, beef and chicken could also stand to benefit, Hufbauer predicted.

"My guess is that the big impact will be on soybeans and sorghum, mainly to be used as animal feed," Hufbauer added. "I think if they made a big purchase it would be pork. Pork is a very big consumer item in China."

Soybean producers in limbo

The trading relationship between the U.S. and China deteriorated this spring, beginning with the U.S. levying 25% on Chinese steel and 10% on Chinese aluminum imports in March, to which China responded with additional 15% tariffs on 120 U.S. products, including fruits, as well as a 25% tariff on American pork.

The U.S. separately proposed an additional 25% tariff on $50 billion in Chinese imports that included televisions and motor vehicles, stemming from an intellectual property rights investigation. China threatened a reciprocal set of 25% tariffs on 106 U.S. imports valued at $50 billion, which was followed by a final threat by President Donald Trump on April 5 to impose additional tariffs on an unspecified $100 billion worth of Chinese imports.

The mere threat of the tariffs rattled markets, sparking fears of ballooning production and consumer prices across a number of sectors and leading numerous companies to consider the possibility of shifting long-standing supply chains.

Relying on Chinese demand means that U.S. soybean farmers, many of whom are just planting their crops now, face a "chicken and egg problem," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business. The sense of uncertainty from the threats of tariffs already has, and will continue, to impact the farmers, he noted.

"If you ended up planting more soybean and the tariff came back, you'd be in big trouble," Dhawan said. "If you didn’t plant the soybean and the tariff didn't come back, you'd lose out on the opportunity. That is the problem now."

Iowa Soybean Association CEO Kirk Leeds said in a statement that the group is "encouraged" by U.S. progress negotiating with China. But he said his organization would need harder evidence that China is willing to buy more.

"I am a bit skeptical of one of the claims that we're going to see a 30% to 40% increase in exports of products to China," Leeds said. "At the end of the day, products will get exported to China based on price, quality and availability."

From beef to wheat, barriers remain

Other commodity producers are cautiously eyeing new market-opening opportunities, although existing nontariff barriers could offset any gains in increased purchasing.

Industry trade groups representing wheat, a major U.S. export to China, and beef, a product that is just getting its footing in the market, told S&P Global Market Intelligence that officials from both countries will need to bring down other barriers before they can take advantage of China's commitment to buy more U.S. products.

For U.S. beef producers, China is an appealing market, according to Kent Bacus, director of international trade and market access at the National Cattlemen's Beef Association.

Consumers in the country have been adding more protein to their diets in recent years, Bacus said, creating a ready market for U.S.-grown beef. In 2016, the Chinese government said it would lift a ban on U.S.-cultivated beef, and shipments began in 2017.

But Chinese restrictions on imports of beef raised using hormones and metabolism-raising feed have limited the U.S. products that can enter the country, leaving a relatively small portion of U.S. beef production eligible for export.

"Until we can get around those barriers," he said, "it's going to continue to be a smaller market for us."

Ben Conner, vice president of policy for U.S. Wheat Associates, said in an interview that the trade group is "basically glad" to see talks with China move in a more positive direction. But Conner said Chinese demand for the crop will continue to be stifled by Chinese government subsidies for domestic wheat producers.

Wheat buyers have never been able to fill the annual tariff rate quota of 9.64 million metric tons for wheat that China agreed to when it joined the World Trade Organization, Conner said, adding that China holds 47% of the world's wheat stock. A WTO case investigating China's wheat quota compliance is ongoing, but even if the quota is filled, China would still be 90% self-sufficient in wheat production, he said.

"The potential demand is there," Conner said. "But China needs to comply with its WTO commitments if we're going to see larger and more consistent U.S. wheat exports to China."

For pork and pork products, the fifth-largest U.S. agriculture export to China in 2017, the 25% tariff imposed by China remains in place.

Dave Warner, a spokesman for the National Pork Producers Council, said in an email that the group is hopeful that the ongoing talks between the two countries will "yield a return to more favorable access to an important market for U.S. pig farmers."