China’s agreement to live up to its World Trade Organization tariff rate quota obligations could increase demand
Much ink has been spilled about China agreeing to radically increase the dollar value of its agricultural purchases from the United States in phase one of a new trade pact between the two nations.
China agreed to purchase an additional US$32 billion of American agricultural products over 2017 levels during the next two years.
But precious little has been written about another important part of the pact, one in which China agreed to live up to its World Trade Organization tariff rate quota (TRQ) obligations.
The agreement stipulates that starting on Dec. 31, 2019, China will start ensuring its TRQ measures for wheat, rice and corn are in conformity with its WTO commitments.
The wheat commitment is to allow 9.6 million tonnes of the commodity into the country at a one percent duty.
That clause could create a new market for millions of tonnes of wheat, and not just U.S. wheat.
DTN lead analyst Todd Hultman said it could result in a “modest price benefit” for North American wheat growers.
The U.S. Department of Agriculture forecasts 940 million bushels of U.S. wheat ending stocks in 2019-20. Hultman believes it could be much smaller than that if China reforms its TRQ program.
If China completely fills its 9.6 million tonne wheat TRQ and the U.S. captures one-half to two-thirds of that business, he thinks ending stocks would drop to about 700 million bushels, the lowest level since 2014.
China is not obliged to fill the entire quota every year. It has only been using about 25 percent of the TRQ in recent years.
That is because 90 percent of China’s wheat TRQ has been allocated to the country’s state trading enterprises, which do not fill their share. The 10 percent allocated to China’s private sector importers is usually filled.
U.S. Wheat Associates believes that if China followed the WTO rules and allowed the private trade better access to the TRQ, it would be utilized because the landed cost of wheat from the U.S. Pacific Northwest and elsewhere is far cheaper than Chinese wheat.
“If the changes are in fact implemented, and Chinese millers can respond to market signals, most of the TRQ should be used,” USW stated in a recent news release.
There is a complicating factor. China seriously bolstered its wheat stocks in 2019, buying an enormous amount of the grain from its growers to support prices.
Wheat stocks are at record levels, according to Dim Sums, a web blog on rural China’s economics and policy.
“With warehouses already bulging, it will be challenging for China to buy more American grain this year to meet its phase one purchase commitment,” Dim Sums stated in a recent blog post.
China had been trying to shift to more of a market-oriented economy for grains by reducing government reserves of the crops.
But that backfired in 2019 when the government stepped in and bought huge quantities of wheat and rice from its farmers due to a big harvest, weak demand and slumping prices.
The government bought 22.7 million tonnes of wheat at minimum prices from Chinese growers in 2019. Its wheat and rice purchases were 41 percent larger than 2018, according to Dim Sums.
By contrast, the government only sold 2.6 million tonnes of its wheat reserves in 2019, which means stocks increased by 19.7 million tonnes during the year.
Dim Sums said one report out of China estimates wheat reserves reached a record high of 93 million tonnes in 2019. The stockpile has doubled since 2015.
Hultman doesn’t put much faith in stock estimates coming out of China. He prefers to focus on the country’s import statistics and he hopes to see those rising in the coming months as China reforms its TRQ program.