Over the past several months, global markets have been roiled by a series of uncertainties in the form of geopolitical instabilities, sanctions, worsening trade friction and several ‘event’ risks. The ongoing trade war between two of world’s largest economies — the US and China — with tariffs and retaliatory tariffs hurled at each other, is threatening to spiral out of control by sucking in more countries.

Global supply chains have been disturbed and are undergoing changes. It is very likely that the tariff war between the US and China will bring about structural changes in global commodity trade flows.

With tariffs and counter-measures making imports expensive and commercially unviable, the US has started moving goods meant for China to other countries, while China has begun sourcing raw materials from non-US origins to meet its ravenous appetite for growth.

Two major agricultural commodities in which the US has a large stake as an exporter, and China as an importer, are cotton and soybean.

Following the outbreak of the trade friction, China has gradually reduced its purchase of US origin cotton and soybean. This has pressured US domestic prices down, and it is desperately looking to enter new markets or explore newer ways of liquidating its huge inventory.

Cotton in a bright spot

India could very well benefit from this evolving situation. As the world’s largest producer of cotton, India is well-positioned to meet China’s fibre needs. In recent years, China has been absent from the world market as a large buyer as it had to liquidate its burdensome stocks.

Now, it is keen to rebuild inventory and this is, therefore, an excellent opportunity for India. Large enquiries for Indian cotton have been flowing in from the Asian major in recent months. In a fortuitous development for cotton exporters, the rupee has been rapidly depreciating of late, lending exports a competitive edge. However, it may not all be smooth sailing.

While tightening demand-supply fundamentals should favour India in terms of higher export prices, our domestic output has fallen short of expectations.

Although widely believed to be somewhat understated, the Agriculture Ministry’s first estimate of a 2018-19 crop of 32.5 million bales is less than the year’s target of 35.5 million bales and below last year’s 34.9 million bales. This could tighten domestic availability and result in higher prices, which is good for growers but not for consuming industries.

Soybean in favour

Indian soybean is another crop that can benefit from large-scale purchases from China. The country’s harvest for 2018-19 is estimated at a five-year high of 13.6 million tonnes (mt), up from 11.0 mt last year.

However, given the minimum support price of ₹3,400 a quintal, Indian soybean is decidedly out-priced in the export market. India can potentially target China for supply of, say, 1.5-2 mt of the legume, which is less than 10 days’ consumption for China; but will be a real big deal for India.

Any attempt to woo China for soybean supplies will, however, involve a heavy subsidy of about $ 100 a tonne.

The next option is, of course, export of soybean extractions or soymeal to China. Most likely, this will not involve any special subsidy; however, together with Indian rapeseed meal, soymeal exports to China have been mired in quality issues. China looks at Indian-origin rapeseed meal and soymeal with disfavour. This is where the Centre must step in and engage with China to solve the legacy issue.

So, while Indian cotton enjoys a natural advantage and is more likely to satisfy the Chinese market, Indian soybean and soymeal export to China appears to be a tough proposition at this time, unless there is a game-changing development in the marketplace.

The author is a policy commentator and global agribusiness specialist

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