One surprising aspect of the agreement is touted changes to China’s domestic food safety policies. The deal, which should be very beneficial to the food trade, will streamline product registration, licensing and inspections in animal protein, seafood, dairy and infant formula.
Such rules are viewed by the US as non-tariff barriers, although all countries have them to some extent.
President Trump claims the trade deal will be positive for US farmers, many of which have struggled with lower prices due to heightened tariffs. However, there is healthy skepticism across the sector regarding the impact, given many tariffs remain in place and farmers have suffered through two very lean seasons.
Moreover, the volatile environment has caused major agri-food companies to defer investments lest sudden tariff impositions impact market fundamentals.
These numbers in the above chart represent a quantum leap in the current share of US imports to China. The US currently represents 9.7 per cent of China’s imports by value.
Depending on growth estimates that would rise to between 22.7 per cent and 26.2 per cent over the next two years. From an overarching perspective such numbers look overly ambitious given domestic supply constraints and the potential impact on China’s domestic industry.
While the agreement should be net positive for US-China agri-food trade, increases will be capped with relative price differentials and tariffs also continuing to frustrate trade matters.
However, there is potential for trade redistribution which could increase short-term volatility, although historically high-ending stock ratios should provide somewhat of a mitigant.
Ton top of the already disruptive coronavirus, the impact of both African swine fever and potential impact of avian influenza will have global implications given the supply situation in China.
The year 2020 is shaping up to be a record one for China’s pork imports. China produced 42.6 million metric tonnes (MT) of pork in 2019, a drop of 21.8 per cent on 2019 according to China’s National Bureau of Statistics. This is in line with a 26 per cent decrease in hog feed across Asia Pacific (where China dominates) during the same period.
This decline has global ramifications given China has historically produced and consumed half of the world’s supply of pork.
Tariff decreases on US pork imports (from 72 per cent to 68 per cent) are not likely to make a dent in the 260,000 MT of pork which remains frozen in warehouses across the US (approximately 17 per cent above normal seasonal levels).
Demand for beef is expected to be substantially higher given recued availability of port in China and subsequent higher prices.
The United States Department of Agriculture is predicting a conservative 3 per cent increase in beef consumption in China in 2020, which could generate a 21 per cent increase in beef imports.
With supply increasing at a much lower rate, it is clear demand will outpace supply and prices will rise, particularly once the market starts to normalise.
What’s obvious is protein demand will be a recurrent theme throughout 2020 and demand from China should create a structural floor for protein prices.
The post-war march towards a more globalised world has stuttered under a Trump-led US. While this reached a crescendo in mid-2019, upcoming elections in the US seem to have precipitated a more accommodative stance from the White House.
China has been a key advocate for (and beneficiary of) free trade and is keen to ensure food security as higher incomes and aspirational diets drive demand.
In December 2019 China lowered import tariffs for various products including certain pork products, seafood, dairy, processed fruit, nuts, and pet food across the board. It has also liberalised import protocols from other countries such as Russia.
China halved some ‘retaliatory tariffs’ on a number of US including from oil and soybeans, however, many still remain in place.
In a landmark February decision, China’s Ministry of Agriculture and Rural Affairs has approved the import poultry and related products from the US.
This move allows for the import of live birds and comes on the back of domestic culls in order to manage the risk of both the coronavirus and a recent localized outbreak of avian influenza.
While global trade policy still has the potential to change based on a single tweet, demand for China should trump (no pun intended) US protectionist sentiments.
Patrick Vizzone is Head of Coverage, Hong Kong & Head of Food, Beverage and Agribusiness, International at ANZ