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.
|US||40 MMT||16 MMT|
|Brazil||47 MMT||23 MMT|
|Argentina||8 MMT||0 MMT|
|TOTAL||100 MMT||50 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.
Whatever 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.
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