The Chinese Are Buying US Corn - And a Lot Of It | Blog
Teucrium | July 17, 2020
The Chinese Are Buying US Corn – And a Lot Of It
Will China Live up to Their Phase 1 Trade Commitments?
China continues to buy US agricultural goods and over the last few days has ramped up their purchases of corn. On Friday July 10th the USDA announced the largest single day sale of US to corn to China since 1994 of 1.365 million metric tons (mmt).
We believe China will continue to buy US agriculture notably corn and soybeans even as political tensions are building with the United States.
Recently President Trump shared that “Phase 2” negotiations are not a consideration at this point saying “I don’t think about it now.”
It’s likely that COVID-19, Hong Kong policy, and the Chinese presence in the South Asian Sea are top of mind for the Administration at this point. Still, China continues to buy US agricultural goods.
This should come as no surprise to anyone who has been following us on this topic.
Here are three reasons that China is likely to continue buying US soybeans and corn.
1. China needs the grains
2. Show good faith for the terms of Phase 1
3. Disaster Preparedness
China needs US agricultural products. The economics around soybeans are particularly clear cut. Simply put, China needs to purchase from all three of the major global soybean exporters (Brazil, US, Argentina) in order to meet its total domestic soybean demand.
It is becoming increasingly clear that China may need to step up its purchases of US corn as well. Internal Chinese corn demand appears to be robust, with domestic Chinese corn prices trading at 5 year price highs. The Chinese have been aggressively auctioning off domestic corn inventories this year, to both alleviate price inflation and maintain freshness of state reserves. Presumably, China is now looking to restock their reserves and will be buying more US corn as a result.
Every dollar the Chinese spend on US Agriculture counts toward compliance with the Phase 1 trade deal. By continuing to buy from the US, the Chinese can secure soybeans and corn they need, while showing “good faith” toward upholding their Phase 1 trade commitments. Even so, market participants are skeptical that China will meet their US trade dollar targets.
Our recent Twitter poll posed the following question:
Do you think China will live up to their Phase 1 agricultural trade commitments? 1,634 people responded with 31% voting YES and 69% voting no.
We agree with the majority that at current prices it is very unlikely that China can meet its dollar purchase commitment volumes under Phase 1. The fact remains however, Trade deal or not, that the Chinese need corn and soybeans. There are few places for them to turn outside the US. Again, the only way they can fulfill their total estimated soybean demand is to buy US beans.
The increase in velocity of Chinese ag purchases may also signal that China is beefing up their disaster preparedness. So far in 2020 China has been confronted with a flu pandemic, massive flooding, a return of the bubonic plague, army worm, and is now facing the potential threat of locust swarms. India is currently dealing with a locust infestation that, according to the New York Times[1], might end up destroying 200 million acres of farmland. Add to the mix rising geopolitical tensions and one may reasonably conclude that China is stockpiling grains today in anticipation of higher prices in 2021.
It is possible to be right for the wrong reasons. Whatever the reason, China has significantly stepped up its purchases of US grains over the last few weeks. We believe China is likely to continue purchasing US ag products through the end of the year.
[1] https://www.nytimes.com/2020/06/29/world/asia/india-new-delhi-locusts.html