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.

This document is from the Investments division at Barclays Private Bank & Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates are given as of the date hereof and are subject to change.

No representation is made as to the accuracy of the assumptions made within, or completeness of, any modelling, scenario analysis or back-testing. Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services. Barclays is not offering to sell or seeking offers to buy any product or enter into any transaction.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modelling or scenario analysis contained herein is no indication as to future performance.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.

The value of any investment may also fluctuate as a result of market changes. Barclays is not obliged to inform the recipients of this communication of any change to such opinions or estimates. THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.

This document is not directed to, nor intended for distribution or use by, any person or entity in any jurisdiction or country where the publication or availability of this document or such distribution or use would be contrary to local law or regulation. It may not be reproduced or disclosed (in whole or in part) to any other person without prior written permission. You should not take notice of this document if you know that your access would contravene applicable local, national or international laws. The contents of this publication have not been reviewed or approved by any regulatory authority.

This document was drafted by and the views presented are those of Barclays Bank (Suisse) SA as of the date of the brochure and may be subject to change in the future. The information contained in this document is intended for general circulation only. This document shall not constitute advice or an offer by Barclays Bank (Suisse) SA to subscribe to any service or product or enter into any transaction.

All legal terms and conditions are to be found in the general account terms and conditions of Barclays Bank (Suisse) SA together with the legal terms and conditions of the product or service offered. Barclays Bank (Suisse) SA has made every effort to ensure that the information contained in this document is reliable, exhaustive and accurate.

This document is general in nature and does not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person. The products and services presented in this publication may not be appropriate or suitable for all investors. Advice should be sought from a financial adviser regarding the appropriateness and suitability of the investment products and services mentioned herein, taking into account your specific objectives, financial situation, knowledge, experience and particular needs before you make any commitment to purchase any such investment services or related products.

Neither Barclays Bank (Suisse) SA nor any of their respective officers, partners or employees accepts any liability whatsoever for any direct or consequential loss arising for any use of or reliance upon this publication or its contents, or for any omission.