Better Call Soy
An Earn2Trade Analysis
- China plans to cease all Soy imports from the US in retaliation to the new tariffs.
- Soy futures at their lowest since 2008.
- The Chinese may turn their attention to Latin America.
On July 10 the US announced its list of Chinese products penalized by the new 10% tariff. The list contains 200 billion dollars worth of import goods and will go into effect on September 10. So far China’s response to such measures has been immediate, however, their current lack of action has left analysts and investors guessing as to how they will retaliate. Multiple Chinese sources suggest their government is planning to deal a major blow to US agriculture. Soybeans account for a significant portion of US produce exports, making it a potential target of retaliatory measures.
Much of the speculation concerning soy is based on recent news from a newspaper closely affiliated with the Chinese Communist Party. The People’s Daily reports that the China Grain Reserves Corporation (also known as Sinograin) has stopped purchasing US soybeans as of April. China has apparently been searching for an alternative source of soybeans since the very start of the trade war. If the final goal really is to completely cease all import of US soybeans, then China requires a supplier that can fill a large volume of orders over a long perod of time. That said, there is a solid possibility that they may have found one already.
The list of countries capable of meeting China’s demand is rather short. As seen on the chart, the US is the undisputed global leader of soybean production, with Brazil being a close second. These two countries together make up 71.8% of global production. China imported approximately 33 million tons of soybeans from the US in 2017, which is more than the combined exports of all soybean producing countries minus the largest four. With the US out of the picture, China’s only real choices are Brazil and Argentina and it already enjoys good relations with these countries, since 60% of China’s 2017 soybean imports came from South America.
In an interview with the People’s Daily, Xubo Yu, the president of COFCO (China’s largest food processing company) talked about the possibility of increasing soybean imports from South America as well as the Black Sea area’s potential to play a larger role in global soybean production.
China may have difficulties trying to fill the void left by a lack of US soybean imports, however, the US could find itself in a much more precarious situation. The chart above illustrates the US soybean market’s heavy dependance on Chinese purchases. In 2016, 73% of all domestic soybean production in the States was exported to China. The sudden standstill in Chinese imports will lead to an immediate increase in excess inventory. Global demand outside of China does not have the capacity to absorb the level of surplus that would be caused by the loss of the Chinese market. This could result in a 12.3 billion dollar loss for the US farming industry.
Using 2.5 tonnes per hectare as our benchmark, China’s 33 million tons of soybean import covers 13 million hectares (32 million acres) of arable land all across the United States. This constitutes 3.53% of all land used for agriculture and could drastically affect the income of approximately 78,000-80,000 farms.
According to a map by the US Department of Agriculture, soybean production is concentrated in 8-10 states. It’s crucial to note the correlation between this map and the political landscape of these states.1 The decline of the international soybean trade will harm Nebraska and the Dakotas, Trumps strongest supporters, as well as Iowa, Illinois, and Minnesota, three key swing states of the 2016 election, thus undermining Republican influence in the area.
China taking a firm stance against importing US soybeans could not only deal a major blow to US agriculture, but also carries the risk of a significant political defeat for the Republican party. President Trump has been on the offensive from the get-go, however, if he doesn’t pay enough attention to the heartland, he might end up losing his base.
Sources:
Sincerely,
Laszlo | Market Analyst
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