February 15 – What Impact Would Less US Soybeans Have on Chinese Consumers?

US soybeans may be the most powerful weapon in the potential trade war between the US and China, as tensions continue to escalate.

Recently, we reported that China has taken steps to explore the impact of restrictions on US soybeans.

Naturally, that has American farmers in a panic. What would happen if such an event transpired?

That’s what I’m going to explain today.

No one should want a trade war.

Nor should we be tearing up the North American Free Trade Agreement or avoiding the Trans-Pacific Partnership.

Yes.

There are winners and losers in any agreement and any deal in bilateral trade. It is the nature of free trade and the basis of market economics. Not everyone can come out on top.

But when we start throwing up barriers, everyone loses.

China is the largest buyer of US soybeans.

Even though we’ve witnessed a decline in market share in the region, China is the most important demand factor in the complex.

Now, the first thing that people want to know is what will happen if China comes out and says “We’re not buying any more US soybeans” until the U.S. lifts its tariffs on certain electronics.

My take is this: There would be a significant market reaction to the downside.

But it would be a much more short-term issue than people think.

In fact, the ban on U.S. exports might hurt China in the long-term more than it hurts the United States.

Let’s unpack that argument.

First, we have a pretty good example of what happens when China takes aim at U.S. agricultural products.

Our case study centers on the 2009 ban on U.S. poultry products (shipped as chickent feet).

With chicken back in 2009, the ban pretty much failed.

In fact, many trade economists consider China’s ban (in retaliation for tire tariffs by the Obama administration) to be one of the worst failures ever in terms of protectionism efforts.

Now, Bloomberg reported just last week that during the time that the U.S. appealed China’s decision to the World Trade Organization, chicken feet exports plunged by 90% to China.

What Bloomberg left out is that U.S. shipments to Hong Kong went through the roof.

What does this tell you?

First, robust demand for global commodities like chicken exist.

Second, it tells us that China is probably struggling to identify products and commodity categories that would be smart to target in retaliation.

Like chicken, soybeans are part of a global market with significant demand. China may increase its demand for Brazilian beans, but the expectation is that the U.S. Soybean Council would be able to identify new markets for their products.

After all, that is the job of export groups. 

But the final thing worth mentioning is that banning U.S. soybeans would have a significant impact on China’s growing livestock industry. The ban would drive up the cost of current operations and potentially deter investment and expansion in the industry.

 

 

 

China’s Best Weapon in a Trade War With Trump May Backfire

As tensions escalate between the U.S. and China, one crop is emerging as the most powerful weapon in a potential trade war: the soybean.

China is the biggest buyer of American soybeans, picking up about a third of the entire U.S. crop, which it uses largely to feed 400 million or so pigs. President Xi Jinping’s administration is studying the impact of restricting soybean imports in retaliation for U.S. tariffs on washing machines and solar panels, people familiar with the situation told Bloomberg last week.
Any China soybean curbs would directly hit farmers in Midwestern U.S. states that President Donald Trump needs to win re-election in 2020. Yet they would also pose a big risk for Xi: His nation is the world’s largest pork producer and consumer, and higher costs for pig farmers could increase prices of meat for his nation’s 1.3 billion citizens.
Food prices have long been a politically sensitive issue for China’s ruling Communist Party, which rose to power in 1949 in the wake of economic mismanagement that led to hyperinflation. A surge in the cost of everything from pork to electronics in the late 1980s also stoked dissatisfaction in the run-up to the Tiananmen Square protests.

‘Worst-Case Scenario’

“Using soybeans to retaliate against the U.S. would be a worst-case scenario” for China, said Li Qiang, chief analyst with Shanghai JC Intelligence Co., a private grains consulting firm. “Pork is a staple meat for Chinese people.”

China’s Commerce Ministry said Wednesday it can initiate an investigation on its own or upon requests from domestic industries if there’s evidence that imports have been dumped or subsidized.

“According to the WTO rules and China’s related laws, before an anti-dumping or an anti-subsidy case is filed, Mofcom has the obligation to keep silent, and cannot reveal relevant information to the public,” the ministry said in a reply to faxed questions.

On pig farms in rural Tianjin, some 200 kilometers (124 miles) from Beijing, concern is growing. Standing next to a sow delivering piglets, Shi Ruixin said his costs would increase sharply if China squeezed US soybean imports.

 “Hog feed prices will rise as well as pork prices,” the 68-year-old farmer said.

The seasonality of the soybean trade is one reason that China can’t easily replace U.S. supply, even though authorities in Beijing have sought to diversify. Last year, China’s imports from Brazil rose 33 percent to about 51 million metric tons, while those from the U.S. fell 3.8 percent to 33 million tons.

Soy War

Brazil benefits the most from China’s record soy purchase.

Sun Chao, the president of Tianjin Tianjiao Group — the hog feed producer that supplies Shi — said that US soybeans meet Chinese demand from October to February, when the South American crop is still growing.

“U.S. supplies can’t be replaced,” said Sun, a 20-year veteran in the animal-feed industry who manages a cooperative with 150 farmers and 30,000 pigs. “We rely on each other.”

‘Extremely Concerned’

Chinese officials began looking into measures against soybeans in January as trade tensions with the Trump administration began to heat up. The Commerce Ministry held a meeting with some Chinese companies to get feedback, and no conclusions were reached, Bloomberg reported earlier this month. Any final decision would be made by senior Chinese leaders.

“We are extremely concerned by suggestions that U.S. exports, including soybeans, may face unjustified trade restrictions,” Agriculture Secretary Sonny Perdue said in a statement. “American farmers are facing serious economic challenges without having to face bogus barriers erected strictly for political purposes. We are examining all tools available to us to assist our stakeholders.”

‘Painful for Everybody’

Trump has sought to close a trade gap in goods with China that surged 8.1 percent last year to a record $375 billion, according to Commerce Department data. Besides the duties on imported solar panels and washing machines, the administration last year began a probe into China’s aluminum and steel sales and its intellectual property practices.

China has responded by launching an anti-dumping and anti-subsidy investigation against U.S. shipments of the grain sorghum, a substitute for corn. Restricting soybeans would have an even bigger impact on American farmers.

“It would definitely put downward pressure on prices,” said Dave Salmonsen, senior director of congressional relations with the American Farm Bureau Federation, the biggest U.S. farmer group, based in Washington. “We’re already in a surplus situation, and losing China would just make everything worse.”

Still, one U.S. farmer who hosted Xi during his 2012 visit to the U.S. doubts China will take action against soybeans. Grant Kimberley, who raises 4,000 acres of corn and soybeans northeast of Des Moines, Iowa, said Chinese soybean restrictions would lead to “dramatic swings” in prices that would disrupt trade throughout the world.

“It would be painful for everybody,” Kimberley said. “Painful for the Chinese, painful for the U.S. I don’t see why anyone would want to do it.”

H/T: Bloomberg
About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.