China demands lower dockage on top-quality U.S. soybeans

CHICAGO, Ill. (Reuters) — China is lowering the amount of foreign material it will accept in soybean shipments to one percent from two, creating an issue for American exporters.

Half of U.S. soybeans exported to China in 2017 would not have met the new rules, according to shipping data reviewed by Reuters, signalling new hurdles in the $14 billion a year business.

China’s desire to lower the dockage standard to one percent on Canadian canola became a major issue in 2016. The issue was related to China’s concern about potentially importing t blackleg.

The two countries resolved the dispute with an agreement to study over the next two years the risk that dockage may pose.

As for U.S. soybeans, the more stringent quality rules, which take effect Jan. 1, could require additional cleaning of the U.S. oilseeds at Chinese ports to remove impurities such as weed seeds and soil. This could raise costs and reduce sales to the world’s largest soybean importer, according to U.S. farmers and traders.

Half of the 473 vessel shipments in 2017 and half the total 27.5 million tonnes of U.S. soybeans exported to China contained more than one percent of foreign material, exceeding a new standard for speedy delivery, according to U.S. Department of Agriculture data compiled by grain broker McDonald Pelz Global Commodities LLC.

“It’s going to raise the costs of sending the soybeans to China,” said Richard Wilkins, a Delaware farmer and former chair of the American Soybean Association.

Growers often receive a higher price for selling soybeans with one percent or less foreign material, known as No. 1 grade, because importers pay more for better quality.

Wilkins said the change would deliver higher-grade soybeans to Chinese buyers without requiring a premium price.

“They basically want to pay us for No. 2 grade but they want it to be No. 1 grade,” he said.

Osama El-Lissy, a deputy administrator at the USDA, said farmers should not face additional burdens under the new standards.

“Nothing in the agreement we have with China would lead anyone to believe that there would be a change in whatever price arrangement (is) currently being agreed to,” El-Lissy said.

He said Chinese buyers already may subject some shipments to additional processing.

“Whatever time it’s taking now … is likely to be the same amount of time that would apply post Jan. 1,” he said.

China will routinely accept U.S. soybean shipments with one percent or less foreign material, according to the USDA. Existing specifications for No. 2 soybeans, the type most common in U.S. export contracts, have allowed for up to two percent of dirt or weed seeds.

The new agreement by the USDA to label cargoes with more than one percent foreign material came after China raised concerns about weed seeds in September.

China accounts for roughly two-thirds of global soy imports, totalling about 86 million tonnes in 2017 to November, primarily from Brazil, the United States and Argentina. Brazil and Argentina are not covered by the same agreement as the United States.

U.S. soybean farmers and export traders fear the deal will hurt incomes already strained by low crop prices brought on by four years of bumper crops. Reducing the impurities to one percent or less could increase U.S. exporters’ costs by 15 cents per bushel, an ED&F Man Capital Markets analyst said.

Top agricultural traders already have policies to encourage farmers to deliver soybeans with less than one percent of foreign matter.

However, the penalty for falling short is relatively minor. At elevators operated by each of the companies, they deduct the weight of foreign material in excess of one percent from weighings.

The USDA plans to advise U.S. soybean farmers how to adjust 2018 production and harvesting techniques to reduce seed contamination. Some weeds have thrived in soybean fields after developing resistance to glyphosate.

Archer Daniels Midland said it supported efforts by the North American Export Grain Association, a trade group that worked with the USDA on the agreement, “to achieve an outcome that is beneficial for American agriculture.”

Cargill Inc. said it was evaluating the new policy and the potential impact on its business.

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