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Trade Deal Is a Real Buzz Kill for the U.S.’s Top Soy Rival

Tatiana Freitas
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Trade Deal Is a Real Buzz Kill for the U.S.’s Top Soy Rival

(Bloomberg) -- Donald Trump’s trade deal may have been short on details about Chinese agriculture purchases, but one thing seems clear: Brazil’s two-year, non-stop soybean bonanza will likely come to an end.

A word of advice to U.S. farmers: Don’t get out the party hats just yet. While China agreed to spend about $32 billion more in U.S. farm goods annually over the next two years, Brazil soy won’t be squeezed out of the equation entirely even in a worst-case scenario.

More likely, traders and analysts say, harvesting cycles and price differentials will push the market back to the old status quo. That means Brazilian supplies will be in high demand in the first half of the year, when the nation reaps its crop and therefore has the competitive edge. The U.S. will dominate in the second half, when its output gains steam and it can better compete on price.

Here’s a look at Brazil’s gains during the trade war and how the next few months could play out:

Big Spender, Big Winner

Brazil has consistently boosted its soy production since early this century to help meet China’s voracious demand for the oilseed used in everything from animal feed to cooking oil. Trade tensions accelerated that process.

During the trade spat that started in 2018, Brazil reigned in both halves of the year, and no doubt the period proved particularly good to the nation’s growers. Exports of the oilseed to China surged to a record 69 million metric tons in 2018, and plantings hit an all-time high the following season. Brazil is on track to surpass the U.S. as the world’s largest soybean producer this year.

The phase-one trade deal promises to start dialing back those gains, although a full switch in gears will take time for all three nations.

“China has already committed to buying a majority of first-half 2020 beans from South America,” said Terry Reilly, senior commodity analyst at Futures International LLC. With U.S. soybean stockpiles more than 50% below their 2018 record, the real boost in American sales probably won’t be seen until farmers start harvesting in September.

Business as Usual

Even with some protection built in through price advantages and the timing of harvests, Brazil’s annual exports will take a hit. The country is the world’s largest soybean shipper, with the crop taking up the biggest share of its trade balance. Revenue from those cargoes sent abroad totaled 26.1 billion reais ($6.24 billion) in 2019.

“Brazil got used to shipping at least 70 million tons of soybeans in each of the past two years,” said Pedro Dejneka, a partner at MD Commodities in Chicago. Brazil’s exports will probably perform well in the first half, “but starting around mid-year, China will return full swing to buying the U.S. crop, which hasn’t been the case in the past two years,” he said.

He expects shipments from Brazil to shrink as much as 10 million tons to as low as 64 million tons as the nation’s share of Chinese imports settles back at pre-trade war levels. Brazil exported 74 million tons last year.

Saving Grace

Brazil’s exports to China held up in the second half of 2018 and 2019, even with an unusually high premium over U.S. supplies. Early this year, export prices at Brazilian ports have the edge because of lower freight costs and a weaker local currency. That means shipments should stay strong, assuming there are no hard commitments from China in the trade deal.

U.S. trade adviser Tom Kehoe said last month that China will follow the market’s cues once U.S. purchases resume, meaning it’ll go with whoever sells cheapest. There’s also the question of those 30% retaliatory tariffs. China plans to keep the levies in place on American imports, matching a similar promise from Trump on Chinese goods. And although China issued waivers on U.S. soybeans in the run up to the signing, the Asian nation also kept buying from Brazil.

Buyers have good reason: Crushing U.S. soy delivered a profit of less than $60 a ton as of this week, according to Bloomberg calculations, about 10% less than beans from Brazil.

Soybean futures fell Wednesday in response to the deal announcement, reflecting the skepticism from both traders and growers. They slipped further Thursday in Chicago trading to a one-month low.

“China will open the door to U.S. soybeans, but it will buy from the supplier that’s most economically feasible,” said Vinicius Ito, derivatives vice president at R.J. O’Brien & Associates LLC in New York.

A Looming Question

The boom for Brazil soybean exporters fueled a massive expansion in planted area to a peak of 36.8 million hectares (91 million acres) this season. That allowed Brazil to retake the No. 1 spot as the world’s top producer. Whether farmers now will maintain those levels, switch to different crops or simply hand back leases on additional land remains to be seen.

(Updates with crushing profits in the 14th paragraph, soybean futures in the 15th.)

--With assistance from Michael Hirtzer and Fabiana Batista.

To contact the reporter on this story: Tatiana Freitas in São Paulo at tfreitas4@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Jessica Brice, Millie Munshi

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