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Soybeans – the first casualty of the trade war

Diverging markets

The US has imposed tariffs on $34bn of Chinese imports on July 6 and China has retaliated by imposing a similar 25% tariff on 545 US products, also worth a total of $34bn.

While China is targeting numerous American commodities in this round of taxes, soybeans stands out as the top agricultural import from the US.

Used to make cooking oil and animal feed, soybeans account for about 60% of the US’s $20bn of agricultural exports to China and is mainly produced in President Trump’s electoral heartland. In dollar terms, only aeroplanes are a more significant American export to China.

As China formalised its plans to take action against US agricultural products, soybean prices in the US and Brazil (which account for roughly 80% of global exports) have taken drastically different paths.

In the US, prices fell to about $8 a bushel, the lowest in almost a decade. Factors adding to the price weakness include Brazil harvesting a bumper crop earlier this year, US farmers planting one of the highest soybean areas on record, and good growing weather so far boosting harvest expectations.

Meanwhile in Brazil, soybeans to be loaded at the nation’s Paranagua port fetched $2.21 a bushel more than Chicago futures, the widest gap in three years. Since May, the premium has more than tripled (Figure 1), which demonstrates the strong demand for Brazilian soybeans that the Chinese tariffs have created.

The gap between US and Brazil soybean prices has widened

Are there enough Brazil exports?

To what extent can Brazilian exports substitute US supply? Brazil has been the world’s top soybean exporter since the 2012/13 season.

Its lead has widened against the US in recent seasons (Figure 2), and China’s tariffs may serve to accelerate demand. Brazil has posted swift gains in soybean production, spurring the export rivalry.

Brazil is the worlds top soybean exporter

A boom in global soy prices in the mid–1970s encouraged the government to invest in technology to adapt the crop to the country’s weather and soil.

That created successful seeds that allowed planting in the Cerrado region, including what is today the top producer state, Mato Grosso. Nevertheless Brazil doesn’t export enough soybeans to meet China’s demand alone, and there are few other major exporters besides the US, which will begin harvesting its next crop in September.

Thus China will struggle to replace the US beans, forcing processors to pay the extra duty or find substitutes, like canola or rapeseed meal.

Looking ahead

While it is too late for US farmers to adjust their 2018 plantings for the decreased soybean demand, it is likely that for 2019 farmers will make a significant adjustment, with them looking to plant more corn at the expense of soybeans.

Therefore assuming normal weather conditions and yields over 2019, the market could expect to see significantly more US corn supply than it was initially anticipating.

However, the underlying fundamentals for the corn market remain constructive, and it is thus very likely that the market can absorb this additional supply in order to meet demand moving forward. The decreased supply of soybeans on the other hand will help balance the market and support prices next year.

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