US Sorghum Bending in the Gale: The Impact of Potential Chinese Anti-Dumping Duties
To stimulate demand for domestic feed grains, China has already significantly lowered the imports of corn and corn by-products over the last years, but, so far, imports of barley and sorghum are still relatively strong. China’s Ministry of Commerce recently launched anti-dumping and anti-subsidy investigations into sorghum imports from the US. Although a decision based on the investigation might not happen quickly, sorghum imports are expected to drop further. The application of duties on sorghum would be bearish for US grain prices, including corn, as US sorghum will compete against corn in US feed and/or US sorghum acreage will be reduced.
On 4 February 2018, the Ministry of Commerce (MOFCOM) of China launched an anti-dumping and anti-subsidy investigation into US sorghum imports. The move can be considered as a trade retaliation against the US, given that it has been less than two weeks since US president Trump announced to impose high tariffs on imported solar panels and washing machines, most of which come from China. However, it is also fitting with China’s ongoing attempt to reduce imports of feed grains to support the consumption of the large domestic corn supplies.
Sorghum: Not the first victim of trade wars
Anti-dumping and anti-subsidy investigations are commonly used by the US and China to protect domestic industries. Even within agricultural products, sorghum is not the first victim of such trade disputes between the world's two largest economies.
For distillers’ dried grains (DDGS), which can replace corn and soymeal in animal feed, MOFCOM twice lauched anti-dumping and anti-subsidy investigations on the US. In June 2012, MOFCOM terminated the first investigation, which was initiated in 2010, but the second investigation began in January 2016, and one year later, MOFCOM imposed an anti-dumping tax of 42.3%-53.7% and an anti-subsidy tax of 11.2%-12%, for a period of five years.
Now, it may be the turn of US sorghum to make a sacrifice.
US sorghum in China
It was not until late 2013 that China started to import sorghum for feed usage and in 2014 and 2015, China’s imported sorghum volume, mostly from the US, experienced explosive growth. At that time, China still had the state stockpiling programme in north-eastern provinces which kept domestic corn prices at a high level. The big price gap called for more and more imports of alternative feed grains, such as sorghum and barley, to substitute corn in the feed ration. In addition, unlike overseas corn, imports of these feed grains are not subject to tariff-rate quota (TRQ) limits and genetical modification (GMO) risks, which also incentivised imports.
However, in 2016, China’s sorghum imports declined steeply, by 40% YOY, partly due to the ongoing corn policy reforms, which resulted in plummeting corn prices. The dip in the Chinese corn price narrowed the price gaps and reduced demands for imported feed grains. On the other hand, to spur domestic corn consumption and absorb inventory overhang, the Chinese government managed to control the pace and quantity of imports through non-tariff barriers, such as delays in licence approvals and stricter phytosanitary inspections.
China’s sorghum imports declined to 5.1m tonnes in 2017, 4.8m tonnes of which came from the US. Coming into 2018, although there are no immediate tariffs and the investigation might last for at least one year, sorghum imports are expected to further drop.
China’s corn price saw a strong rally from the beginning of 2018. Due to acreage cuts and robust demand, the previous 'supply-exceeding-demand' situation has been reversed. A deficit of 20m tonnes is expected for this crop year. Low feed grain imports will further support the domestic corn price, although the upside potential will be limited by the massive state inventory.
US farmers lack alternatives and have to pay the bill
Currently, exports absorb half of the US sorghum output and China takes up 80%-90% of the exported volumes. In light of the projected slowing of Chinese imports and declining US sorghum prices, US sorghum acres are expected to decline further. The 2017 US sorghum acreage was the third lowest on record, and, for the future, US sorghum will need to find new demand which will be challenging. The remaining export customers, Mexico, Japan, and Sudan have shown very little growth over the years. Long-term US demand for sorghum has been declining. With cheap corn prices, competition for inclusion in the feed ration has been fierce. US sorghum prices will need to be at a discount to corn to incentivise substitituion in feed, which will most likely result in further cuts in the US sorghum area. However, in many areas where sorghum is planted, farmers have limited alternative row crop options.