In late May 2018, shortly after claiming his administration was making good progress in talks to avoid a trade war with China, US President Donald Trump confounded the market by saying he would, within a month, publish a list of Chinese goods that would be subject to fresh import taxes of 25%.
The reaction was instantaneous – US soybean futures tanked, Brazilian premiums rose and the flat price of soybeans at Brazilian farms would go on a four-month rally to record highs.
That dynamic was in anticipation that China would slap a tax on US soybean imports – which it duly did.
Crush margins in China tanked and food inflation started to occur in protein products, with Chinese crushers struggling as a result.
Fast forward 14 months and things look very different.
On Thursday President Trump said he would tax $300 billion worth of Chinese goods at 10%, starting in a month.
US soybean futures fell and Brazilian premiums rose.
But this time, they only rose enough to offset the futures fall and there are several reasons why Brazilian flat prices for soybeans may not experience the rally they saw last year.
Lower demand, greater supply
Firstly, African swine fever will cut demand for Chinese soymeal.
On Thursday, the chief executive of global agribusiness major Archer Daniels Midland (ADM) said that pig stocks would fall by 35% this year as a result of the disease.
That equates to about 150 million pigs and about 15-20% of soymeal demand.
Yet, as big as that is, ADM’s estimate is conservative compared with some forecasters who now think pig stocks could be slashed by as much as half by the end of the year.
Given China relies on soybean imports for as much as 90% of its soymeal demand, the disease itself is now estimated to cut imports of soybeans to their lowest since 2015 at 83 million mt in the next marketing year, starting in October.
As well as a fall-off in demand, on the supply side of the ledger a huge rise in non-US production will also stem any rally in Brazilian bean prices.
Argentine production this year will rise to more normal levels of 56 million mt compared with 37 million mt last year – a hike of 18 million mt.
And with a more punishing tax regime for Argentinian crushers that export soymeal this year compared to last, exports of beans are expected to soar from 2 million mt last year to at least 9 million mt and perhaps as high as 16 million mt as a smaller percentage of soybeans produced in Las Pampas will be crushed.
And with that more than offsetting a 14 million mt decline in Brazilian exports, it looks like China will be well-stocked, particularly given the fact that Chinese state-owned companies have already been stockpiling US beans this year.
Indeed, Chinese stocks at ports are at a five-month high, according to data from China’s National Grain and Oilseed Information Centre published Thursday.
“I don’t know how China will respond. It seems like the imports of US soybeans will stop again,” said one trader at a Chinese crusher following the tweet.
That being said, it won’t all go China’s way should the new trade tensions result in a prolonged boycott of US beans by China as there are some upside pressures for non-US production.
A huge 100-million mt corn crop in Brazil, and the fact that Brazilian farmers are cashing in on it, means they are not under pressure this year to sell soybeans to finance next year’s crop.
That contrasts sharply with last year – when Brazil’s corn crop was hit badly by a drought leaving soybean sales as a necessary source of income.
And current prices of soybeans in Brazil in historical terms are not that high, meaning farmers won’t be in a hurry to sell.
Indeed, the price of soybeans sold at ports in Brazil in reais terms are only marginally higher than the average so far this year and 20% down on the peak last year.
With internal freight prices higher this year than last, it is likely farmers will drive a hard bargain and won’t be selling cheap, according to sources.
Good news for EU
While Brazilian prices more or less flatlined after Trump tweets on Thursday, US cash prices at ports sank alongside futures, leaving the spread between beans loaded at Santos and those at the US Gulf spiking $5/mt to just under $21/mt.
To put this in to context, freight and quality differentials mean US beans are competitive into China when they are about $16/mt below Brazilian prices, so on the face of it they look very cheap.
Nevetheless, that $21/mt differential remains a long way off the $96/mt seen in October at the height of the trade war, and European crushers who buy imported beans will be keen to see how far that differential can grow.
Unless things change dramatically, it’s hard to see why anyone in Europe would buy non-US beans.
But for now, the bets in China are that instead of injecting a fresh round of urgency into the talks with the US, they may actually prolong a trade war.
“New tariffs will by no means bring closer a deal that the US wants. It will only make it further away,” the chief editor of state-owned newspaper the Global Times said on Twitter on Friday.
Given that the US is drowning in supplies of soybeans – with more than 1 billion bushels of ending stocks expected later this month – US farmers will be more keen to sell to China than China to buy from the US.
And with next year’s elections coming into closer view, the administration will be under pressure to help farmers – a key support base for Trump – shift some agricultural products to China.
Trump’s statement on Thursday showed how important the promised purchases of products such as soybeans, ethanol and sorghum by China are to him – alongside sales of opioids they were the only two issues mentioned in his 7am tweet.