 Hello, this is Fray Nolson, crop economist and marketing specialist with NDSU Extension. This is the second of a three-part series discussing adjustments in the North Dakota soybean markets due to the Chinese tariffs on U.S. soybeans. The second session will focus on alternative forecasts for how will China adapt to these tariffs and the alternative flow of grain. This first table shows U.S. export sales of soybeans by destination or by country. As you can see in the table, the number one customer historically has been China. Each one of these columns represents a marketing year. Just as a reminder, the marketing year for soybeans begins on September 1 and runs through the end of August. So the column on the far right hand side would be for 2017-18. That would be the crop that was planted and harvested in 2017 and then sold during 17 and 18 calendar years. So it's a 12-month period, but it begins on September 1. As you can see from 2012 through 2016, the exports of U.S. soybeans into Chinese markets increased at a fairly steady pace. And then 2017 came along and there was a drop-off. And that drop-off from 36 million metric ton down to 27.7 million metric ton is really due to the tariffs. The tariffs began on July 6, 2018, but export sales to China dropped off fairly dramatically beginning in late May and early June. The point of this table is to show, A, the growth that we've seen in U.S. export sales of soybeans into the Chinese market, but just to really show the dominance of that market. Our number two export market is Mexico. And again, export sales from the U.S. and the Mexico have been growing fairly steadily. Number three, third largest is Netherlands. That really represents the European Union. The ports of Netherlands, ports of Rotterdam and Amsterdam tend to be the inflow or the offloading point as it travels into the European Union. Just recently, Egypt has gone from a relatively small buyer into the fourth largest buyer in 2017-18. And again, a lot of that occurred very late in the season as export sales into China dropped off. U.S. was able to sell more soybeans into the Egyptian market. And then we move to Indonesia, Japan and Taiwan. So exactly how large is the Chinese soybean import levels? This particular table was prepared by USDA. It's part of the World Markets and Trade series. This specifically is for oil seeds. This particular table emphasizes soybeans. As you can see, China is by far the world's largest importer of soybeans. The columns 2014 through 2018 also represent marketing years. I'd like to focus in on those two far-right hand columns labeled 2018-19. Both of those columns represent the harvest that we're going through right now in the fall of 2018. Again, marketing year begins on September 1. So in June, before the tariffs were in place, USDA is forecasting total Chinese soybean imports at 103 million metric ton. A pretty large increase from the 2017-18 number of 94 million metric ton. The 25% import tariffs on US soybeans went in place on July 6, 2018. And so in the July forecast, USDA recognized that the tariffs were in place. They assumed that the tariffs would remain. They re-ran their forecasts, assuming the tariffs were going to be in place. And the new number from their models, from their forecasting, was 94 million metric ton. So essentially, based on USDA forecasts, the Chinese import levels would remain flat. Instead of growing or continuing to expand, they would flatten out given the tariffs. As you also notice that because of the tariffs and the rearranging of the flow of grain, some of the other countries also made some adjustments. For example, European Union, which historically has been the second largest importer of soybeans, went from a forecast of 14.2 million metric ton up to 15.8 million metric ton. Again, the assumption was there would be this round robin of who sold whom. The two major points from this table. Number one, China is by far the largest importer in the world. And number two, being European Union, is very small in comparison. So this really shows the dominance of the Chinese market specifically for soybean imports. The second is that the key number that everybody's kind of focusing in on right now is that 94 million metric ton. Is the USDA forecast and their assumptions going to hold? Is that their accurate number that we should be working with? Well, recently in the end of August, there was a large international meeting. The US Soy Global Trade Exchange meeting was held in Kansas City, Missouri. There was a gentleman, Mr. Mao Yang Kui, who represents the China National Association of Grain Economy, provided a six-point plan that the Chinese were going to put in place to compensate for the 25% import tariffs. And based on their forecast, again, this is coming from the Chinese government, based on their revised forecast, they were going to import 86 million metric ton, not the USDA forecast of 94 million metric ton. So I briefly want to talk a little bit about what are some of the adjustments that they have publicly said were going to take place as part of this six-point plan. First, were they were going to reduce soy-based protein, i.e., soybean meal, in the rations. So they're literally going to cut the level of soybean meal in the rations and use corn with supplemental amino acids as a substitute. So looking at substituting the amount of meal going into rations, in particular hog rations. Number two, they were going to use or crush substitute oil seeds. So rather than using soybeans as a base, they were going to increase their crushing of canola and or rape seed, sunflower, palm, palm kernel oil, cotton, and peanuts. And again, China has a very, very large and diverse crushing industry. So looking at these alternative oil seeds is really not a problem or an issue for them. Just as a sidebar, they can also use local DDGs, even though DDG supplies in China are much smaller than they are in the U.S., that is an alternative substitute for soybean meal, in particular in hog rations. Number three, was to draw down 2017 domestic soybean inventories. So before the tariffs were put in place, China began increasing their import levels to build up their internal reserves. Plus they had some government-owned reserves from previous harvest that they were going to be able to use. So they were stockpiling in anticipation of some particular possible trade problems occurring. The fourth point was to release other grain and oil seed reserves in particular corn, but also potentially wheat, soybean oil, and rape seed oil. Again, over time, the Chinese government has built up some pretty substantial government-owned reserves of both corn and wheat. Again, these reserves can be released, and corn in particular can be used as an alternative feed source. The fifth point was to use domestic 2018 soybean production, domestically grown production. This last spring, the Chinese government did increase the support price or the minimum price for soybeans produced domestically relative to corn and wheat. This was to provide an incentive for Chinese farmers to increase their soybean plantings. Again, their harvest will begin approximately the same time ours will, so soybean supplies domestically will become available in September. And the sixth point was to increase imports from South America. Brazil obviously is the largest exporter of soybeans in the world. Their exportable stocks are very large because their 2017 crop was also a record-large production. Argentina had a little bit of a problem last year with soybean production. They don't export as much raw soybean. They tend to process those beans into oil and meal and export the oil and meal instead of the raw soybeans. So again, there are exportable stocks, however, Argentina that can also be used. Just as a note, this is something that I added. China can also import soybean meal from Argentina. And again, Argentina is the largest exporter of soybean meal in the world. So they don't have to buy soybeans in the raw form. They can also buy processed product if they choose. So again, coming back, the big question right now is the USDA forecast of 94 million metric ton, correct? Private estimates are coming in much lower than that. Again, the formal Chinese government estimate is 86 million metric tons. So the level of total imports as well as the timing of those imports really become a critical component in trying to anticipate what are the implications for US soybean prices, for US soybean shipments, and where does the US soybeans go if we can't ship into the China market. So who can export soybeans? Again, I want to focus on those two far-right-hand columns, the June forecast, which was before the tariffs went on and then the October forecast after the tariffs went on. Again, Brazil being the largest exporter of soybeans in the world. Their export levels were forecast to increase. Most private estimates that I've seen is that 75 million metric ton is probably an upper limit. But again, it's open for debate and discussion. US is the number two largest exporter in the world. And again, notice that because of the tariffs, the US was not going to be able to export as much even based on USDA forecasts. Argentina, even though they're not a huge exporter of soybeans, they sell more oil and meal, do export some raw soybeans. Current USDA forecast is the same both before and after the tariff imposition. At about 8 million metric ton, Paraguay stayed relatively stable at 5.9. The Canadian export levels actually dropped just a little bit to 5.5. Now interestingly enough, if you add up all of the soybean exports out of Brazil at 75 million metric ton, 8 million metric ton of Argentina, 5.9 out of Paraguay, 5.5 out of Canada, the total of those become 94.4 million metric ton, which is just slightly above the USDA forecast of 90 million metric ton. So mathematically, it is possible even without some adjustments in internal usage for China to purchase soybeans from other countries and cut the US completely out of the picture. One of the biggest questions people are raising is how quickly can China adjust their internal use of soybean meal and thus their need for imported soybeans off the world market. So Reuters News Service did an independent calculation or a fact check to double check the values that were presented in the Kansas City soybean meeting. And the current estimate is that China has approximately a 20% inclusion rate or 20% of the hog ration is composed of soybean meal. Now the US 15% inclusion rate is a much more common value, much more adapted to the US feeding systems. Publicly, the Chinese government has said they'd like to move from a 20% inclusion rate down to a 12% inclusion rate. Again, as a reminder, increasing the level of corn as well as synthetic amino acid into the diet so that the growth rates of the hogs were not adjusted. Well, based on Reuters News calculations, if they were able to cut from a 20% down to a 12% inclusion rate for a full 12 month period, that would cut out the need for approximately 27 million metric ton of soybean needs or soybean imports. And again, just as a quick reminder, 27 million metric ton is the amount that we, as the US, shipped into China in the last marketing year. So again, the big debate that everybody's having right now is how quickly can China adjust in usage? Are they going to be able to source soybeans from alternative countries? Will they be able to cut the US out of the soybean purchasing totally? Just a few days after Reuters News Service did their fact check, they came out with an announcement that there were at least two cargos of US soybeans are headed for China as some buyers are willing to risk taking up historically cheap US beans, even amid worries that Beijing may take further steps to deter imports amid mounting trade tensions with Washington. Now, later on in that article, later on in the same article, there were two quotes from independent traders. One of them was from a state-owned company. That quote was, whoever's buying the cargos is really bold. We wouldn't dare buy from the US now. And a second importer said, who has the guts to import US soybeans? The political risk is too high. We would never dare to take the lead, said the same importer. So again, this is signaling that there's tremendous political pressure internally within the country of China not to buy US soybeans, to cut them totally out of their purchasing strategies. As of October 11th, there have been no sales of US soybeans into the China market. This particular graphic shows the amount of soybean exports into China. As you can see, the very seasonal pattern that we normally would see, this is China specifically, the red line on the very bottom. There were no export sales up until this October 11th report. But shortly after that, there was an announcement that those two export shipments had been canceled. So as we get more information, those export sales will be eliminated from this particular graphic. So as of, again, October 11th, US soybean export sales are behind what we typically see at this time of year. Again, we'll get more information as the export season continues. The concern right now in the soybean market is that our export sales again seasonally are going to be very, very low right now during the harvest months and potentially into the winter months. The open-ended question is, again, when will the tariffs come off and how long will it take for the US system to crank back up again and be able to really export large volumes of soybeans into the world market, but the Chinese market in particular? So if the US is completely cut out of the Chinese market, where else can we sell our soybeans? Again, this is open for debate whether we will or will not be able to sell soybeans into the Chinese market. But if we cannot, where do we sell our soybeans? Well, again, number two largest importer of beans in the world is the European Union. The third largest is Mexico. The fourth largest is Egypt. And we do have opportunities to be able to increase export sales into those countries. But my question would be, how do we get US soybeans from where they're grown in the middle of the US into the European market? And typically the most efficient way is to bring them down the Mississippi River by barge, put them onto an ocean-going vessel in New Orleans or one of the other Gulf ports, and then move them across the Atlantic Ocean into the European market. Soybean exports into Mexico are usually transferred by rail. Again, the soybeans of choice are typically from those southern growing regions, in particular from Eastern Kansas, Eastern Nebraska, Missouri, Iowa, possibly Southern Illinois. The Egyptian market, very much like the European market, the most efficient way to get US soybeans would be down the Mississippi River into the Gulf of Mexico and then onto an ocean-going vessel into the Egyptian ports. So it's not until we get to the number five and number six largest importers of soybeans, Japan and Thailand before those West Coast markets really become the export destination of choice. And again, so moving North Dakota soybeans into the European market or into the Mexico market is going to be very costly. The more likely case is the US soybeans will go into the Japanese or Thailand market. Again, those volumes, those export volumes are going to be much, much smaller than they would into the Chinese market. So even though we will be able to move some soybeans through the West Coast, those export sales are going to be much, much smaller volumes. And again, continue to cause some bottlenecks as we move into the harvest of 2018 here in North Dakota. So this concludes the second of the three-part series discussing the adjustments to the soybean markets due to the Chinese tariffs. I would encourage you to try and listen to the third, which really focuses on what can you as an individual producer do to adjust to these new conditions. Thank you very much.