China has been making strides in living up to the promises it made in the “phase one” trade deal that went into effect February, but imports of U.S. ag commodities are still far below the levels many were hoping for, and the outlook is bleak as many tariffs remain in place and the coronavirus spreads.
Chinese imports of corn and wheat spiked recently and the country even boosted imports of old crop soybeans as Brazil dealt with weather and transportation issues, but hoped-for purchases of ethanol and distillers grains seem less likely while the pandemic continues.
“In order for us to see significant sales, the U.S. needs to be able to make those sales and we need the Chinese to be able to purchase them,” said American Farm Bureau Federation economist Veronica Nigh. “It’s very basic stuff, but with the coronavirus hitting both economies at nearly the same time, they both are being hampered significantly from being able to move the amount of product that we’re looking at.”
When the “phase one” deal was sealed, ethanol and DDGs were seen as holding great potential for boosting the U.S. ag trade surplus and helping China reach the promised $36.5 billion in purchases in the 2020 calendar year.
The U.S. exported about $1.6 billion worth of DDGs to China in 2015, before American exporters were hit with anti-dumping and countervailing duties. Hopes were high some of that trade could resume flowing as a result of “phase one.”
Chinese imports of U.S. DDGs “was a requirement in the purchases agreed upon in the ‘phase one’ deal,” U.S. Grains Council President and CEO Ryan LeGrand said last week. “It was key in those negotiations and we expect to see exemptions in duties that have been levied on our distillers grains.”
Industry officials also hoped to see China lift the 70% punitive tariffs on U.S. ethanol, allowing trade worth as much as $1.5 billion.
But now U.S. ethanol plants are going offline, unable to compete as gasoline prices sink in a world economy that is consuming less and less.
“If you look back, historically, ethanol is consistently priced below that of gasoline, priced below aromatics, below MTBE, which is an oxygenate still used outside of the United States,” said LeGrand. “That relationship has reversed recently and we’re seeing cheap, cheap gasoline prices and it’s making it pretty difficult for ethanol to compete.”
POET just announced Tuesday that it will “idle production” at two plants in Iowa and one in South Dakota, as well as postpone the opening of a new plant in Indiana.
“Biofuel producers and our farm partners are confronting an economic crisis beyond anything rural America has seen before,” said Growth Energy CEO Emily Skor. “Fuel demand has cratered, foreign nations have flooded the market with crude oil, and U.S. ethanol producers are bleeding cash after one of the toughest years in memory.”
And with ethanol production declining, it’s going to be much harder to export DDGs to China, even if the country took down its steep tariffs.
China, U.S. government and industry sources tell Agri-Pulse, was expected to buy both ethanol and DDGs in big quantities. China even laid the foundation for making large purchases of DDGs by announcing that it had approved U.S. companies to ship the popular animal feed. Last month, China’s General Administration of Customs published a list of 88 ethanol producers that could begin shipping DDGs.
Even if China did exempt importers from anti-dumping and countervailing duties that run as high as 96%, prices for the feed are rising in the U.S. and there might not be enough to ship to China, which not so long ago was the number-one foreign market, said Nigh.
“With (billions of gallons) of ethanol being sidelined and not being produced, that’s a lot of DDGs that aren’t being produced,” the Farm Bureau economist said. “There’s a lot of demand for those DDGs, both domestically and internationally, which would push the price of those distillers grains up. There’s going to be a lot of competition for those available DDGs. Lack of supply is going to cause some headwinds.”
So far U.S. exports to China in fiscal year 2020 (which runs through September) are lagging sharply behind USDA predictions, according to Farm Bureau Federation Chief Economist John Newton. While the forecast is for a meager $14.5 billion, U.S. ag exports are only about halfway there, at about $7.2 billion through February, he said. “Our current pace would put us between ($10 billion and $11 billion), which is well below USDA’s $14.5 billion. It needs to start to accelerate.”
Of course, trade levels are not set for the rest of 2020 and the fourth quarter is historically a major time of the year for purchases. China has already signaled it will be buying a lot of U.S. soybeans. Furthermore, China is ramping up its chicken imports and laying the groundwork for drastically increasing the amount of U.S. beef it buys.
A little more than two weeks ago, USDA listed hundreds of new beef packers and storage facilities that are now eligible to export to China. And now trade is expected to grow soon, thanks to the country’s decision to lift its ban on beef from cattle treated with growth hormones as well as accept beef from cattle older than 30 months at slaughter.
Government sources say U.S. beef exports to China are ticking up already this year (the total was only about $60 million last year), but the new lowering of restrictions has not yet been finalized. USDA estimates that U.S. beef and beef product exports to China could reach $1 billion annually thanks to the China pact, but the U.S. Meat Export Federation estimated it could be double that in 2020.
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But those estimates were made before the coronavirus pandemic.
“At some point we will have lots of product to be able to sell, but in this scary interim period, there’s some very real, practical constraints that are getting in the way of any potential demand expansion in the Chinese market,” Nigh said. “I’m glad that USDA and USTR are following up on implementation of the promises in the (phase one) agreement to get all of the new rules put into place while we’re dealing with the disruptions from this virus, so that when the disruptions are over, trade can come roaring back.”
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