March 14 – China Isn’t Ready for a Trade War Involving Soybeans

The possibility of China putting tariffs on soybeans is looming in the minds of U.S. soybean farmers. China isn’t ready for a trade war with soybeans.

As trade tensions grow, the possibility of China putting tariffs on soybeans is looming in the minds of U.S. soybean farmers. However, a trade war with soybeans is not a move China is ready for. 

After Donald Trump put tariffs on steel and aluminum, tariffs on soybeans would be the perfect revenge move for China. 60% of America’s soy exports go to China, and a tariff would hurt rural midwest farmers the most, who grow a quarter of the nation’s crop. 

However, China is not ready for a trade war involving soybeans. Even though China is trying to become self-sufficient, it has sacrificed domestic production on soybeans for other grains. Also, soybeans are high in protein, which makes it a perfect feed grain. As demand for meat continues to rise, a soybean tariff would raise meat prices, which would anger domestic consumers. A trade war does not only hurt the producers but the consumersChina is far too reliant on imports for their soybean consumption to minimize the domestic damage of this move. 

China cannot meet its domestic demand through domestic production, it has to import since its soybean production is currently in decline. Soybean production in China is at a record low since the Great Leap Forward famine in the early 1960s. Brazil, Argentina, and India have all risen up to higher levels of soybean production than China. 

However, of bigger concern than the soybean trade war conversation is the falling quality of the U.S. soybean crop. As protein levels decline, it becomes a less valuable feed grain, and prices go down. China is already turning more and more to Brazil for its imports. The U.S. is unlikely to lose its Chinese soybean market, but it will be prudent to pay close attention to protein content moving forward. Meanwhile, put soybean trade war fears on the backburner. 

 

Why China Won’t Pull the Trigger on Soybeans

How could China hit back against President Donald Trump’s tariffs on steel and aluminum? Soybeans are often suggested.

Restrictions on the legume would hit farmers right in the middle of the Trump-supporting rural midwest. Iowa, Wisconsin, Michigan and Ohio, which all flipped from Democratic to Republican in the 2016 election, produce about a quarter of America’s crop. Potential battlegrounds including Minnesota, Indiana and Missouri are all major growers, too.
On China’s Dalian Commodity Exchange, prices for soybean meal — the protein-rich leftover from oil extraction, which is much in demand for animal feed — hit the highest level in more than 18 months last Wednesday as trade tensions grew. Could China, which consumes about 60 percent of America’s soy exports, use a humble bean to bring America’s heartland to its knees?
Probably not.
China’s government wants normal trade relations to prevail in agricultural produce, Patrick Yu, president of the country’s biggest food producer Cofco Corp., told Bloomberg News in an interview published Tuesday. “I don’t think that any government wants to take any action to block the agricultural trade, because it not only benefits China and Chinese consumers, but I think it will benefit” U.S. farmers, he said.
Those are not just mollifying words. As Gadfly argued last week, the easiest products to target in a trade war are those where punishing your trading partners does the least damage to your domestic consumers. China’s anomalous import dependence in soybeans means it’s hard to hurt U.S. producers without making users suffer.

In crops as diverse as rice, wheat, apples, asparagus, cabbages, groundnuts, lettuce, mushrooms, cotton, sweet potato and watermelons, China is the unquestioned top global producer.

That’s not the case with soybeans, where output has slipped behind Brazil, Argentina and India over the years and seems destined to fall soon below Paraguay. The number of hectares under cultivation declined in 2015 to its lowest level in records dating back to the Great Leap Forward famine of the early 1960s.

Why should this be?

First, because soy trades on an unusually open market. China’s desire to be self-sufficient in grains means that rice, wheat and corn imports are heavily affected by tariff quotas that are currently the subject of a U.S. complaint at the World Trade Organization. In the give-and-take of international trade diplomacy, having a wide-open market for soybeans is the price Beijing paid for keeping control of its market in other grains.

Second, because in recent years China’s appetite for meat has been limitless. Soybean’s high protein content means it acts as a sort of superfood for livestock, helping chickens and pigs bulk up faster when added to grain-based feed. Chinese pork prices have been weak in recent months, but President Xi Jinping is also in the midst of consolidating his personal power by abolishing term limits. At such a delicate time, no circumspect government is going to risk inflaming the public mood by jacking up food prices.

The bigger risk for American soy farmers isn’t action by Beijing, but the falling quality of their own crop.

As with wheat, protein levels in American soy have been declining in recent years. That’s a problem for feed producers, who are largely paying for protein — and as a result, China’s imports from Brazil have decisively overtaken those from the U.S.

It’s probably wrong to regard that as permanent. China tends to be obsessed with security of supply for major commodities, so it’s unlikely to want to be any more dependent on Brazilian soybeans than it already is. That’s particularly the case because the different seasonal patterns of the Brazilian and U.S. crops mean it needs both countries to avoid swings from glut to dearth.

So midwestern farmers should sleep a little easier at night. The hedge funds that are currently holding a record net long position in soybean meal, however, should take care. This bumper crop could be about to fail.

H/T: Bloomberg
About the Author
Lucia Larsen