Winners and losers of soybean war

China is the world's largest importer of soybeans. Credit: U.S. Department of Agriculture
China is the world's largest importer of soybeans. Credit: U.S. Department of Agriculture
Santos is capitalising on increased soybean trade
Santos is capitalising on increased soybean trade

As the US ramps up agricultural tariffs, south American exporters are poised to fill a China-sized gap, explains Michael King

Grain port development and bulk handling companies with a strong presence in South America are likely to be among the ‘winners’ from the US’ budding trade war with China.

In response to the billions in tariffs placed on Chinese imports announced by the Trump regime, as Port Strategy went to press China had retaliated with its own range of swingeing, punitive tariffs on US products. Chief among its targets were US agricultural exports.

China is now the world’s leading importer of a range of grains and soybeans, while the US is one of the world’s leading exporters of agricultural produce, much of it barged down the Mississippi River to the US Gulf, but with sizeable volumes also exported out of the Great Lakes, Atlantic ports and the Pacific North West. Both countries have much to lose should a full-blown trade war break out.

According to Emily French, managing director of grains consultancy ConsiliAgra, in 2016, China, whose ballooning middle class is increasingly turning to grain-based foods, was the largest buyer of several US commodities including 62% of its soybean exports, 79% of its sorghum, 49% of its hides and skins, 23% of its distillers’ grains, 25% of its peanuts and 30% of its whey. Indeed, soybean exports from the US to China alone are worth more than $12bn annually, making the crop the second most valuable US export to China after aircraft parts.

If both countries follow through on their tariff threats, much of this trade will stop, or be vastly reduced. For the dry bulk trades, if the US is forced to seek alternative buyers to China for its agri-exports, for example in Europe, then US Gulf ports would likely benefit, possibly at the expense of Pacific North West alternatives.

Non-US winners

As China seeks out non-US sources of agricultural imports, likely impacts of relevance to port strategists will be more Chinese demand for Brazilian and Argentinian soybeans and soymeal.

Certainly, the soybean trade is set to be a key battleground in the putative trade war. In the 2016-17 (October 1-September 30) season China imported 96.7m tonnes of soybeans, a figure forecast to surpass 100m tonnes this season. While Brazil was the main supplier, the US was a close second – the two countries account for 83%-84% of global exports.

There is mounting evidence to suggest that China has for some years been taking steps to ensure it is not reliant on US farm imports, not least by building infrastructure and using state trading companies to ensure it is the lead buyer of Brazilian soybeans. Such is China’s gargantuan appetite for soybean imports, it is unlikely to be able to entirely pull away from buying from US farmers, this year at least. But in the first months of 2018 a procurement swing of soybeans from the US to Brazil by China was already apparent, even before the tit-for-tat tariffs were announced by the respective countries.

Brazil’s soybean exports are forecast to reach 75m tonnes this year, up from 67.5m tonnes in 2017, 51.1m tonnes in 2016 and just 23.7m tonnes in 2007. With ample land available for legal development and China seeking to source more soybeans from there in the future, Brazil’s soybean production is scheduled to continue its astonishing increases, but only if its export infrastructure can keep up.

Last year, port congestion at key load ports was evident through most of the peak soybean export season which typically runs through most of the second quarter of each year. If soybeans are still waiting to be loaded, congestion can also be a problem later in the summer when the corn export crop enters the system.

“Vessel-waiting times in Brazil depend on a number of factors and as long as the transport routes leading to the northern ports, namely the BR163 highway, remain in a poor condition, this will continue to put big pressure on the ports in the south and drive up logistics costs for soybeans,” says David Ross, national manager of Alphamar Agência Marítima, a Brazilian bulk cargo port and agency specialist.

He adds that all well-established trading houses as well as “new players” are currently seeking concessions in both the north and south of Brazil, as well as seeking to extend existing facilities to meet surging demand.

Investments justified

The value of the soybean crop certainly justifies port investments. Indeed, soybeans are now of vital importance to the Brazilian economy. Last year, for example, Brazil exported 379.7m tonnes of iron ore worth $19.2bn. Soybean exports of 67.5m tonnes delivered income of $25.7bn.

At present, most of Brazil’s grain exports are shipped via the Atlantic Ocean, passing by the Cape of Good Hope, to reach Asia. But Brazil’s northern ports increased shipments of grain volumes by 80% in 2017, or about 40% of total exports, according to government data, and that is where more facilities are most needed.

Mr Ross said the lack of space available for expansion in southern ports had, however, made it difficult to build new terminals, confining developments to the ports of Santos and Paranaguá. As with elsewhere in Brazil, the grain sector’s ‘ABCD’ players – Archer Daniels Midland Co (ADM), Bunge Ltd, Cargill Inc and Louis Dreyfus Corp – are to the fore.

ADM completed investments last year of $86m in the port of Santos, expanding its terminal capacity by 33%. A terminal at Santos’ Wharf 38 operated by LDC and Cargill is also due to have its existing shiploader replaced. At Wharf 37 developers are awaiting federal authorisation to install two to three new silos.

At Paranaguá, Cargill is seeking permission to build a new terminal, although Mr Ross said securing a green light would likely take a number of years as any construction project would negatively impact on operations at the already-congested port.

Northern stars

In northern Brazil, in a bid to reduce shipping costs from the producing state of Mato Grosso, ADM last year quadrupled capacity at its terminal, a joint venture with Glencore, in the northern port Barcarena. Mr Ross said further investments on the export route were also in the pipeline.

“Capacities in the north have increased heavily and are still expected to grow further with four more terminals either approved or under construction with a further two concessions for terminals due to be awarded,” he said.

The majority of this growth is expected in Barcarena where two terminals are planned – to be operated by LDC and Cargill – and a concession called VDC 29 is in the pipeline and is expected to handle cargoes received by barges loaded with grains transhipped at the port of Miritituba when it opens for business.

“New ports in the north are helping to reduce the pressure in the ports in the south, but ports are still seeing some bottlenecks,” said Mr Ross.

The industry is certainly setting up to export more out of the country’s northern ports. Brazilian farmers in top soya state Mato Grosso recently signed a memorandum of understanding with the Panama Canal Authority to evaluate ways to cut transport costs. However, a spokesperson for the Authority said a shift in shipping patterns would take some time.

“The main route for grain shipments through the Canal has traditionally been from the US Gulf to Asia destinations, considering the United States is a producer of soybeans, wheat and sorghum, which are typically loaded at Gulf Ports before shipping,” she tells Port Strategy. “As Brazil is working to improve its internal transportation infrastructure, most grain shipments from Brazil are loaded in the South and therefore ship via the Cape of Good Hope route. As Brazil’s internal transportation improves and makes northern-port loading more of an option for grains, shippers will likely have more flexibility to choose other routes, such as those through the Panama Canal.”

Equipment needed

Irrespective of the shipping route, port equipment companies are hopeful of winning more orders in Latin America. Indeed, some already are. Bedeschi, for example, was set to commission a new pipe conveyor during April for KRK Latinoamerica at a new terminal in Rosario, Argentina. It also reports that it has received multiple requests about the purchase of new equipment from South America.

A number of other handling companies also told Port Strategy they were receiving multiple enquiries from the region and had noted that Brazil was ramping up its soybean exports.

However, in terms of Brazilian grain and soybean logistics, Mr Ross says that although port investment to boost capacity and handling speeds is needed, kinks in the supply chain that cause shipping delays are just as frequently caused by problems outside the terminal.

“In almost all our export terminals the limitations around cargo reception means that loading rates are superior to reception rates,” he said. “This means that down time experienced due to bad weather, terminal maintenance and the time between vessels is vital for receiving cargo to prevent forced idle time of facilities due to a lack of cargo.

“With more reliable cargo flow, there would be fewer delays, less demurrage and lower prices.”

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