“Trust but Verify”: China’s New Soybean Deal

This Week In Ag #140

“Our farmers will be very happy! Farmers should immediately go out and buy more tractors and land.” That was the advice given by our President last week. Not sure how quick I’d be to heed that advice. Nor do I suspect too many ag lenders are encouraging their borrowers to do so. But there’s no denying, last week brought much-needed optimism to the folks in farm country.

News broke that a deal was struck with China to purchase significant quantities of US soybeans, sorghum and other ag products. The world’s largest consumer of soybeans has decided to purchase 12 million metric tons this year and a minimum of 25 million tons for the next three years.

25 million tons is a lotta legume. That’s about the total combined annual output of Iowa and Minnesota, the USA’s second and third-largest soybean-producing states. It would basically bring us back to normal. Since 2014, China has purchased over 25 million tons of US soybeans nine times. In 2017, China bought 36M tons and in 2020, it imported 35.5M tons. Still, last week’s agreement was welcome news. The market responded accordingly, jumping 60 cents and topping $11 for the first time in 15 months.

Trade talks with other Southeast Asian countries led to agreements to purchase an additional 19 million tons of soybeans. And the Fed cut interest rates another quarter point. Some feel that another rate cut could occur before the year’s end.

As the world’s most populous country – encompassing 20% of the world’s population with just 7% of the planet’s arable land – all roads to ag export excellence run through Beijing. Prior to recent tariffs, China accounted for 90% of all US sorghum exports and over half of all US soybean exports.

American farmers do have a reason to be happy. But any agreement with Beijing must be tempered. China honored only 80% of its ag products commitment during the 2019 Phase 1 trade deal. That may be considered good, since their overall follow-through on all US products under that agreement was under 60% of what they pledged. So when it comes to Chinese promises, it may be better to follow the famous words of another US President, Ronald Reagan: “trust, but verify.”