THE CHINA TRADE WAR: BAD FOR U.S. FARMERS, BUT downside may be limited

Grain Marketing

Trade War Rhetoric Gets Real

Earlier this week, China announced a 25% tariff on US soybeans. The market initially reacted overnight by giving up 55 cents before finding some buyers in the day session.

Shoot first and confirm later is what traders did around this event. No doubt it is a big hit if realized but both the US & China have a lot to lose so how this settles out is very much in the air. It's important not to lose your head

Three Important Things to Know about This Trade War

1. Neither the US nor China has announced when the new trade tariffs become active, this opens the door for negotiation

For the US, a 30-day public comment period ends on April 4th, with USTR holding a public hearing on May 15th with a final vote on May 22nd. It will then take the Trump administration a few days or weeks to implement $50 billion of tariffs implying a considerable period for negotiation.

2. China will need US beans

Their 100 MMT appetite for soybeans cannot be satisfied by Brazil, and a drought-crippled Argentina. In the near-term under normal trade, China would be switching their buying to fresh South American supplies and with a bumper Brazilian crop to source from that will be the likely outcome. 

3. Even if these tariffs are implemented, US Beans will have a home

A longer-term view of these tariffs imply that Brazil/Argentina will be the preferred supplier to China (100 MMT market) while US beans will find their way to feed the Rest of the World (50 MMT markets).

It still suggests there would be an important wedge in the marketplace driving US prices down, but we’re unlikely to see a price decline on par with the advertised 25% tariff rate.  We think a likely longer-term view of a 25% Chinese tariff would push US prices down 5 to 15% as a result. The table below illustrates the normal pattern of world soybean trade with China garnering 100 of the 150 MMT of world soy trade. With a tariff on US beans, Brazil would clearly take a dominant position in supplying those beans to China, but in all likelihood the 23 MMT of exports Brazil supplies to the ROW markets would go to the US, helping buffer lost China trade.

  China Row
US 40 MMT 16 MMT
Brazil 47 MMT 23 MMT
Argentina 8 MMT 0 MMT

Normal Trade Patterns for Soybeans

We are starting to see the price implications already from the threat of a tariff as Brazilian soy prices have surged in recent weeks relative to US prices. Brazilian FOB prices are trading at a $0.45/bu premium to US  prices, that’s up about $0.35 cents in the last month. Usually at this time of year during Brazil’s harvest, Brazilian FOB prices are at a $0.35 a bushel discount to US prices. That’s an 80-cent swing already implying about an 8% “tariff-scare tax” baked into the market.

Screen Shot 2018-04-05 at 11.35.01 AMWhatever the outcome, the immediate consequence is risk and uncertainty. For the next 60 days the best we can hope for is positive negotiations, but a quick victory for US ag interests seems unlikely.

Instead we think it puts a black shroud around US soybeans and likely hampers our late-season export business for the next few months.  This seems to put a fairly hefty risk on US carryout getting larger at a time when the market was looking for a drop due to lower 2018 acreage.

DISCLAIMER: Futures, Forex and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance either actual or hypothetical is not necessarily indicative of future results.

HYPOTHETICALS Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.


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