CHICAGO (Reuters) - (The opinions expressed here are those of the author, a market analyst for Reuters)
In the wake of trade tension between the United States and China, some agriculture market participants fear that the U.S. soybean export program could have a target on its back.
It is unclear whether Beijing has legitimate intentions to include soybeans in any retaliatory action against the United States, particularly following steel and aluminum tariffs imposed by the Trump administration last week, a move the Chinese did not view favorably.
But slapping duties on U.S. soybeans would be a great disservice to Chinese importers, crushers and farmers as the East Asian country would still need to import the U.S. product, but at a higher cost.
The U.S. Department of Agriculture predicts China will import a record 97 million tonnes of soybeans during the 2017-18 marketing year, but some analysts expect this number to top 100 million.
No other country imports soybeans or any other agricultural commodity to such a staggering degree, and the United States provides a considerable chunk of that supply. The total value of U.S. soybean exports in 2017 was approximately $22 billion, so it would be a crushing blow to the United States if China could afford to shun U.S. beans.
One glaring, perhaps rhetorical, question remains. Why would China make obtaining a product it very much needs more expensive and difficult?
Basic math proves China must continue to import just as many U.S. soybeans as it has in recent years. China’s own 14.2 million-tonne bean crop can cover just over six weeks of its annual needs, so imports are essential.
There are three main global soybean suppliers: Brazil, the United States, and to a smaller degree, Argentina. Other countries such as Paraguay and Ukraine combine to export roughly 12 percent of the world’s total.
Argentina’s soybean crop has been whittled to a six-year low amid its worst drought in several decades, and USDA has cut the country’s 2017-18 exports to 6.8 million tonnes. But Argentina is a much heavier exporter of soybean products than raw beans, anyway.
This means if China is going to import 100 million tonnes of soy, more than 80 million must be sourced from Brazil or the United States, at the very least. With a soybean crop no smaller than 113 million tonnes, it would appear that Brazil can handle the task alone.
But it surely cannot. USDA estimates that Brazil needs at least 46.5 million tonnes of beans during the 2017-18 global marketing year to cover its domestic needs, leaving close to 70 million available for export.
China will scoop up at least 49 million tonnes of this exportable supply, give or take, based on the typical share of Brazilian beans it claims.
After exhausting all possible non-U.S. suppliers in this highly simplified scenario, China would be left with a gap in the neighborhood of 31 million tonnes. The only possible source for that amount of beans is the United States, and luckily for China, those beans are readily available and competitively priced.
Some 36.2 million tonnes of U.S. soybeans arrived on Chinese shores in 2016-17 compared with 30.6 million in the prior year, according to U.S. census data.
SOYBEANS ARE NOT SORGHUM
China largely stopped buying U.S. distillers dried grains (DDGs) in early 2017 following Beijing’s installation of anti-dumping and anti-subsidy duties on the product. Earlier this year, China launched a similar investigation into U.S. sorghum, of which it is the largest buyer.
But these cases are not a sign of things to come with U.S. soybeans as the situations are entirely different.First of all, the import volumes are in different leagues. Prior to China’s import duties on U.S. DDGs, the country imported around 4 million tonnes of the feed ingredient, on average. For sorghum, that value is close to 5 million or 6 million tonnes, but keep in mind the United States exported 36.2 million tonnes of soybeans to China in 2016-17.
More importantly, these grain-based feed ingredients are replaceable as both China and the world are stuffed with affordable supply, and the sources are far more plentiful than those of soybeans.
China is the No. 1 consumer of pork and it uses its massive soybean haul to feed the world’s largest hog herd. Soybean meal is very high in protein relative to other animal feed ingredients such as DDGs or sorghum, meaning that substitution would be nearly impossible.
In the week ended March 1, U.S. soybean merchants sold at least 1.3 million tonnes of soybeans to China for the current marketing year, much more than usual for the time of year.
In the days since, China has purchased at least another half a million tonnes as reported by the USDA in its daily export sales.
This reflects not only tightening world supply stemming from Argentina’s drought but also the relatively favorable pricing situation for the U.S. product.
Regardless of the reason behind China’s recent uptick in U.S. soybean purchases, the fact remains it cannot exclude the United States from its import program. So if Beijing were to impose any kind of tariffs on U.S. beans, it would simply raise costs for its domestic end users.
Editing by Matthew Lewis
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