US Sorghum "Armada" Turns Away From China After Tariffs

China's nearly 200% tariff on imports of US sorghum is already having a profound impact on the global grain trade. And in the latest evidence of how quickly the tariffs have been felt by US producers, Reuters is reporting that an "armada" of cargo ships carrying $216 million of sorghum from the US to China has changed course since Beijing imposed the tariff last week, as grain exporters are suddenly worried about taking a sizable loss on the loads. 

Since the tariff was imposed, the five shipments, which were all destined for China when they were loaded at Texas Gulf Coast export terminals owned by grain merchants Cargill Inc and Archer Daniels Midland Co, are now liable for a hefty deposit to be paid based on the value of the goods. The payment would likely make the shipments unprofitable, according to Reuters.

Sorghum

Beijing announced on Tuesday that it would impose the 178.6% tariff following a brief investigation. That followed the imposition of tariffs as high as 25% on range of products produced in America. In the world of US agricultural products, China has also imposed sanctions on US soybeans - a decision that is expected to create major disruptions for US farmers.

Cargill declined to tell Reuters where the ships that it loaded are heading now that they've been redirected away from China.

The Panamanian-flagged ship called the N Bonanza, was churning its way northeast across the Indian Ocean earlier this week, carrying more than 67,000 tonnes of sorghum from ADM’s elevator in Corpus Christi, Texas, according to Reuters shipping data.

Eleven hours after the anti-dumping deposits were announced, the ship stopped and then slowly tracked northwest.

The RB Eden, a vessel carrying 70,223 tonnes of sorghum loaded at the same ADM terminal, was headed east-northeast through the Indian Ocean off the coast of South Africa. It turned around.

Hours later, the Stamford Eagle - hauling sorghum from Cargill’s elevator in Houston - turned around off the western coast of Mexico.

At least two other vessels have also suddenly changed course: the Ocean Belt and Xing Xi Hai, both loaded at Cargill’s terminal.

It is unclear where the vessels are now heading.

But US exporters aren't the only ones feeling the pain from the tariffs: Suppliers of sorghum on the Pacific, Indian and Atlantic oceans are all hurting

Sorghum is a niche animal feed and a tiny slice of the billions of dollars in exports at stake in the trade dispute between the world’s two largest economies, which threatens to disrupt the flow of everything from steel to electronics.

As of now, the tariffs won't have a significant impact on Archer Daniels or Cargill - two of the world's largest grain merchants. But it is a warning that China won't hesitate to effectiv

"For their overall trade businesses, this is not that substantial. But it’s a warning. If China really does start slapping tariffs on everything, like soybeans and corn, things could get really ugly, really fast," said Bill Densmore, senior director of corporate ratings at Fitch Ratings.

But shipping companies may be forced to discount their cargoes to sell them.

"They’re not in a strong bargaining position considering they’ve got shipments from across the ocean that they have to sell and get the boats cleared out," said economist Daniel O’Brien of Kansas State University in the top U.S. sorghum-producing state.

And falling sorghum prices in Texas have already rattled farmers.

"This tit for tat has to stop, and talks to find reasonable and lasting solutions must begin, for the good of U.S. agriculture and the customers we have spent decades working to win as loyal buyers," said Tom Sleight, president and CEO of the US Grains Council.

But the real reason US producers should worry about an escalating trade war can be found in the backlash to the US's decision to ban sales of semiconductors to China's ZTE, a Chinese smartphone manufacturer.

Across China, citizens rallied in support of ZTE - and condemned the US measures as an attack on China. Restaurants offered ZTE employees free meals. They even "thanked" the US for helping force China to become more self-reliant.

Meanwhile in the US, Trump's aggressive rhetoric has been met with unease and criticism from the business community.

Given that, it's not difficult to imagine which side will be able to hold out longer while striking back with increasingly dramatic penalties.