Wednesday, April 4, 2018

"Why China's Soybean Tariff Changed Everything"

I was asked why we didn't cover last week's USDA grains and soyabeans inventory and planting intentions report when it was so bullish for corn and especially beans. We didn't understand how the market could be so enthusiastic with the sword o'Damocles trade war potential hanging over things. So we said nothing.
Here's the last couple week's action via FinViz:

And the headline story from ZeroHedge:
While markets are being somewhat drama queen-ish this morning, China's trade war retaliation was telegraphed well in advance, and as we reported nearly two weeks ago, "China About To Launch "Tens Of Billions" More In Tariffs." As such it should not have come as a surprise that China did just that overnight, when it announced 25% tariffs on $50 billion in 106 US imports.
What was a surprise, was the unexpected announcement that China would also include US soybean exports in the list of items impacted by tariffs, something which we noted earlier opens up the door to a new, third round of tariffs by the US, which would assure that a "nuclear" trade war has indeed broken out.

It is the presence of soybeans in the tariff list that has startled China watchers and analysts, such as Capital Economics' Julian Evans-Pritchard, who writes that "China’s rapid and aggressive response to the proposed US tariffs has raised the stakes for both sides."

What makes the inclusion of soybeans so surprising?
Perhaps nothing more than the fact that while China is seeking to hurt US exporters, it will also substantially and materially impair its own domestic producers and supply chains, will struggle to replace U.S. soybean supplies "inflicting severe financial pain on domestic companies, analysts and executives at feedmakers said" according to Reuters, and potentially risk sparking runaway food inflation as surging feedstock prices send pork prices through the roof.

To be sure, from a trade war perspective the inclusion of soybeans makes perfect sense: for China, the world's top importer of the oilseed in the world, soybeans are considered one of the most powerful weapons in Beijing’s trade arsenal because a drop in exports to China would hurt Iowa and other farm states that backed U.S. President Donald Trump. As the chart below shows, soybeans were the biggest U.S. agricultural export to China last year at a value of $12 billion.
Incidentally, for those who wish to trade, either buy or sell, the biggest corporate suppliers of soybean to China, here is a list of the top sellers, courtesy of Bloomberg:
  1. Bunge
  2. Marubeni
  3. Cofco
  4. Cargill
  5. Dreyfus

We'll have more on the ag commodities.This was Agrimoney's coverage of the market's reaction to the March 29 USDA report:
Corn, soybean prices soar as US farmers plan sowings cutbacks