STAY CALM AND FARM ON: Dissecting the Implications of a Trade War

Grain Marketing FBN Analytics
The trade war between the U.S. and China hit new heights last week as the White House announced it would seek an additional $200 billion of tariffs on Chinese goods, and the grain markets have appeared to respond. At one point, soybeans were off 65 cents on the day, and $2/bushel in the last two weeks as tariff-related anxiety took hold.

Should farmers be fearful? Are significantly lower prices still to come?

On the surface, a 25 percent tariff on U.S. soybeans into China would suggest that, at $10, U.S. beans would need to trade for $7.50, but is that how this grownup game of Risk will end up between these two superpowers?

Let’s take a look at some of the key elements around trade, pricing and tariff implications.

Trade is a Two-Way Street (So No Trade Leads to Two Losers)

  • U.S. farmers are certainly wary of the implications of a trade war over soybeans. But let’s not forget that Chinese consumers have skin in this game, too. Our pain will likely be their pain.
  • China will need more than 100 MMT of soybeans in 2018 to satisfy their appetite. Cutting off U.S. sources won’t be easy, nor will it be cheap. Chinese consumers will likely bear significant costs, which may lead to political problems for China’s government that it would prefer  not to face.

Jumbling the Trade Matrix

  • With China’s 2018 projected needs of 100 MMT, and the entire exportable supplies in the world expected to be only 150 MMT, then cutting out the U.S. (which is a 60 MMT export market) won’t be an easy option to solve.
  • At the same time, other countries in the world import about 50 MMT of soybeansStay-Calm-and-Farm-On-06-18
  • A two-tier market system will evolve with Brazil being the premiere supplier to China and the U.S. trading at a steep discount to attract alternative markets that are not China.
  • Today, that price schism is happening as Brazil prices trade at a $1 premium to U.S. prices when looking at the spread between FOB export prices from the two countries. A $1 price differential seems reasonable to shift the trade matrix to garner U.S. business from other countries. Lower prices from here seem unlikely and unwarranted with full trade distortions fully baked into the market.
Brazil US FOB Soy Price Spread

Long Term Implications of Disruption Trade Partnerships

  • China plays the long game probably better than anyone. They are masters of crafting long-term national plans with tendencies to prefer a closed economy—buy only what you absolutely cannot produce. Even if this immediate trade war comes to an acceptable short-term conclusion, the Chinese will likely be thinking longer term about the perils of relying on the U.S. as a sound trading partner.
  • There have been hints of late that China may start to subsidize soybean production. One can also imagine other commodities favored, or policies enacted, by the Chinese government, which could ease the sting of U.S. soybeans. It won’t happen overnight, but again, the Chinese are well established at making big bets that have long-term payouts.
  • A long-term paradigm shift by the Chinese to move away from U.S. soybeans would be the biggest loss and the most threatening to U.S. agriculture.

  

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