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Commentary: Decline in exports hurts agricultural producers and railroads

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FreightWaves features Market Voices – a forum for voices with unique knowledge of numerous transportation/logistics/supply chain sectors, as well as other critical expertise.

Earlier this week China hit the U.S. with a figurative bombshell when it announced that it would  not purchase any more agricultural products from the U.S. as of August 5th. This will definitely have a negative impact on those farmers and agricultural companies that have been exporting agricultural commodities and products to China. It will also have an impact on the intermodal carriers that haul their products.

China does not have enough grain- or soybean-growing capacity needed in order to feed its population of over 1.38 billion people. (The U.S. has a population of about 327 million on roughly the same amount of land.) The grain and soybeans grown by American farmers in large areas of the nation’s heartland have accounted for a major percentage of the trade between the two nations. The two main products that have been exported to China are soybeans for human consumption and sorghum for livestock feed, which together accounted for the bulk of the $9.1 billion in agricultural products sold to China last year. This figure sounds healthy until it is compared to the $19.5 billion that U.S. farmers sold to China the previous year. A drop that large will be noticed in the U.S. transportation industry.

Covered railcar hoppers.
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So far this year the numbers for trade with China do not look proportional to what has been billed as a knock-down, drag-out trade war between the world’s two largest economies. Though grain and soybean inspections were a little low last week they are not far off of 2017’s totals (though lower than 2018) and soybean shipments had been up for the last four months. Total outstanding export sales have been dropping slightly, which looks like it is putting an end to an anti-cyclical buying cycle that could have been caused by the anticipation of more tariffs later in the year. At this point, sales outstanding are still hovering above 2015 and 2018 numbers at over four million metric tons.

Furthermore, despite the doom and gloom about Chinese purchases of U.S. grains, total inspections year to date have not dropped significantly. Inspections refer to the USDA check and or weighing of agricultural products before export. Last year at this time, year-to-date inspections for grains and soybeans exported to China were around 11.4 million metric tons. This year, inspections are right at 11 million tons, equating to a year-over-year drop of about 8.8 percent. To date in 2019, soybeans make up about 10.3 million metric tons compared to only about 8.1 million metric tons at this time in 2018. This represents a 23 percent increase in the amount of soybeans over last year for China’s most-needed staple for human consumption. This past week 579,005 metric tons of soybeans destined for China were inspected, which is well above the weekly average of around 358,000 metric tons.

China is by far the largest purchaser of soybeans from the U.S., but when grains are factored in due to the similarity in growing area and transport, China is only the third-largest trading partner for the U.S. What could spell worse news is that the second-largest grain market for U.S. exports has dropped even more precipitously. Inspections for exports to Japan have dropped about 11 percent from last year’s totals – from about 12.6 million metric tons to around 11.2 million metric tons. This year’s largest purchaser of U.S. grains so far, Mexico, has remained steady at a little over 12.5 million metric tons year-over-year. The largest drop came from the fourth-largest purchaser of American grains, which is South Korea. Inspections for agricultural cargo to that country have dropped from around 6.5 million metric tons last year to around 3.2 metric tons this year – a tumble of about 50 percent. These drops can spell trouble for growers looking to switch to grains from soybeans and for railroads and barges looking to fill capacity.

The largest number of inspections for grains and soybeans usually occur at the end of the year. Starting around mid-September, inspection volumes begin to spike and usually peak out around mid- to late October before returning to a less volatile level at the end of the year. 

Chinese National Development and Reform Commission (NDRC) secretary general Cong Liang said that China will honor its purchases of two million tons of soybeans that will be shipped in August and another 300,000 tons to be shipped in September. After that it is anyone’s guess, but FreightWaves will be keeping a close watch on the issue.