Economics

USA/China - Extended negotiation deadline: reading the future in soybeans

March 11 2019

On February 24, 2019, China and the United States completed their latest round of trade negotiations. Considering the “substantial progress" that was made during the talks, President Trump tweeted about extending the tariff increase deadline initially set to March 1st. 

This decision partially eased the market’s anxiety about the approaching deadline. And with the upcoming Florida meeting between the two leaders, it is likely they’ll strike a deal in the near future. According to Trump’s remarks when meeting the Chinese delegation, the summit should take place in late March. 

The extended deadline contributes to a decrease in ocean freight rates on certain routes connecting China and United States. For example, and as showed by Captain Upply, the freight rate on the Shanghai/Long beach route is lower than before the announcement (link). The extended deadline, along with the growing possibility of a deal being reached, reduces the demand for rush export.  

Meantime, as China slowly resumes purchasing American soybean, it is likely we’ll see a short-term increase of bulk freight rates from the Pacific Northwest to China. The Pacific Northwest coast is the main point for soybean export to Asia. The freight rate data shows a gradual increase in freight rates from Tacoma to North China since early February (Figure 1). The January figure for China’s import of American soybeans was almost double the amount of last December (Figure 2). Furthermore, during the last round of negotiations, China vowed to purchase 10 million-tons of American soybeans, as posted by U.S. Agriculture Secretary Sonny Perdue on Twitter. China will continue to purchase American agricultural products to secure a smooth negotiation process. With the possibility of opening up purchases of other agricultural products, a similar impact can be anticipated on these products' shipping traffic. 

Capture d’écran 2019-03-11 à 08.22.22Capture d’écran 2019-03-11 à 08.24.00
Source: 
China General Administration of Customs 

A second-degree consequence of this import will be the increased volume of U.S domestic road shipping of soybeans. Soybeans are usually shipped domestically on trucks, trains or on barges to the elevators, which transfer the soybeans to ports for international shipping. Barges are used mainly for shipping along the Mississippi River to the Mississippi Gulf, which is another major port for soybean export. Considering these existing routes, we may expect increased road, and railway traffic connecting the soybean production areas in the north and west of the country (Nebraska, Minnesota, and the Dakotas) to the elevators and ports located in the PNW 

Of course, the future remains uncertain, since the trade negotiations touch upon some fundamental issues in the Chinese economy: the so-called "structural issues", which include technology transfers, intellectual property rights, etc. Chinese official media Xinhua also suggested that “the further the negotiation goes, the more difficult the negotiation gets, as there can be new uncertainties coming along”. Still, we are getting more and more positive signs from both sides. In a recent news report, the Chinese media pointed the compatibility between the United States’ desire for “structural change” and “China’s effort to deepen the Reform". The ups and downs of soybean trade can be an excellent indicator of the progress of the China-U.S trade negotiations. Following the extended deadline, let’s be cautiously optimistic.  

Photo credit: Dreamstime

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PhD in Political Science, Ganyi gives a sharp look at the evolutions of the global Supply Chain industry through the prism of the political and economic context.