U.S. – China trade uncertainty weighs on grain volumes

The uncertainty over whether and when the U.S. and China will reach a trade agreement this year is creating a cloudy outlook for grain volumes this fall.

“We expect uncertainty to persist in the grain market due to the foreign tariffs,” said Kenny Rocker, Union Pacific (NYSE: UNP) executive vice president for marketing and sales, on his company’s first quarter earnings call on April 18. Rocker said UNP’s grain carloads were down by 7 percent in the first quarter, driven by reduced exports to China.

So far this year, U.S. grain shipments via rail are lower than the same period in 2018. Year-to-date U.S. carloads carrying grain are down 4.5 percent to 370,786 carloads for the week ended April 27, according to the Association of American Railroads. Grain traffic represented 8.8 percent of total U.S. carloads.

Grain producers, especially soybean farmers, have been concerned about the lack of progress in trade negotiations between China and the U.S., including the 25 percent tariff that China levied on imported soybeans from the U.S., according to the American Soybean Association.

U.S. soybean exports are expected to fall this year. Projected soybean exports for the 2018-2019 marketing year, which runs from September 1, 2018 to August 31, 2019, total 1.88 million bushels, according to the U.S. Department of Agriculture. In contrast, the U.S. exported an estimated 2.13 million bushels of soybeans in 2017-2018 and 2.17 million bushels in 2016-2017.

For the railroads, this drop in exports translated into diminished traffic to the Pacific Northwest last fall. What stings for soybean farmers is that both the railroads and landlocked soybean farmers in the upper Midwest have invested in equipment to enable greater soybean volumes to the Pacific Northwest, according to Soy Transportation Coalition executive director Mike Steenhoek. Steenhoek said the U.S. normally exports $14 billion of soybeans to China. At second place is Mexico, at $1.4 billion in U.S. soybean exports.

According to U.S. Census export data, U.S. soybean exports were worth $18.2 billion in 2018, $22.2 billion in 2017 and $23.6 billion in 2016.

“All of this money has been spent based on this long-term forecast, that has changed. It really hurts industries like agriculture when you don’t have the predictability,” Steenhoek said.

Despite the uncertainty, some grain producers think a trade resolution is in sight, confirming market observations. Should the U.S. and China reach some trade agreement, the move could benefit grain producers, especially those that export wheat and corn, depending on the agreement’s timing.

“We see encouraging signs regarding resolution of the U.S,-China trade dispute and we are optimistic for a resolution by mid-year, importantly, well before the U.S. harvest,” said Archer Daniels Midland (NYSE: ADM) president and chief executive Juan Luciano during his company’s first quarter earnings call on April 26. Luciano described those signs as the language used by President Trump and Chinese President Xi Jingping characterizing trade relations between the two countries, as well as ADM’s Chinese counterparts preparing to receive grain imports.

“Our team has shown great agility and flexibility to minimize the impact of the dispute to ADM thus far. Nevertheless, a resolution will benefit several of our businesses.”

But even though U.S.-China trade uncertainties could affect how much grain gets moved via rail this fall during harvest season, other factors come into play.

While severe flooding in the Midwest damaged some crops in storage, the damage was limited and not expected to have a big impact on the overall grain supply, said agricultural economist Jay O’Neil.

But U.S. exports will still need to compete with other grain-producing regions of the world, including South America and the Black Sea region of Russia.

“We still have grain surpluses and need more export demand,” O’Neil said.