CHICAGO (Reuters) - As the trade fight between the United States and China escalates, many agriculture market participants have taken comfort in the idea that China cannot fulfill its soybean needs without importing massive quantities of the U.S. product.
But that situation only holds in the short term. Yes, as the world’s top buyer, China needs U.S. soybeans today, in a few months, and likely even next year. However, it is not unreasonable for China eventually to wane itself off American beans in the longer term, which could have detrimental and irreversible effects on U.S. markets.
U.S. President Donald Trump on Friday went ahead with $50 billion in tariffs on Chinese goods to take effect July 6. Beijing quickly hit back with its own tariff list, including soybeans, to be enacted on the same day. On Monday, Trump upped the ante with new tariff threats against China of $200 billion, sending futures markets into a tailspin.
China is not backing down from the U.S. actions and has vowed to fight back, a sign it is willing to stomach higher soybean prices right now as long as the United States enforces tariffs on Chinese goods.
Even in the immediate aftermath of Beijing’s April 4 warning that U.S. soybeans could come under fire, it was hard to believe the events of last Friday would ever come to pass.
On paper, a soybean trade war involving the United States and China makes no sense for either party. China imports roughly 100 million tonnes of soybeans each year, primarily from Brazil and the United States, which together produce 70 percent of the global supply.
Simple math demonstrates that under the current structure, China cannot avoid U.S. soybeans right now if it is to meet its import schedule. And besides, why would China want to pay more for a product it clearly needs? Why would the United States threaten its No. 2 export (behind aircraft) to the East Asian country?
But logic apparently matters not in this case, as these are the choices that have ultimately been made under the decision to proceed with the tariff tit-for-tat, and potentially a full-on trade war.
Unfortunately, the U.S. farmer could become the biggest loser in this fight without a resolution between both sides at some point soon, as China likely has more options to work with.
No one wins a trade war in the short term, but over the longer term, the soybean opportunity for China may be greater than that for the U.S. farmer. And underestimating China’s ability to seek and develop new sources could mask the risky bigger picture for American producers.
China’s own soybean crop can cover up to seven weeks of the country’s annual needs, which is why it relies so heavily on imports. The first obvious possibility is for China to materially expand production over the next several years, but variation in climate and competition with other crops could be barriers to that effort.
Finding other overseas markets may be the preferred option. For one, lead exporter Brazil planted a record soybean area in 2017/18 and will very likely top that in 2018/19. Brazil hardly has any soybeans left over at the end of its marketing cycles, so China will not be able to simply grab more exports from Brazil without a production increase.
But Brazil has already risen to the challenge of supplying more protein to the world over the last two decades. In 20 years, the South American country has increased soybean production by 266 percent, compared with 63 percent for the United States. China’s import volume has multiplied by 33 times over that period.
Brazil also has the possibility to expand agricultural land use, but it may not have to do it alone. If China wants to curb reliance on U.S. supply, Chinese investors may be looking to buy and develop land in Brazil, another country in South America, Africa, or somewhere else that is affordable and suitable for growing soybeans and other crops. This suggestion has been tossed around among analysts in recent years, but the possibility is especially relevant now.
This might be the best option for China as relying solely on Brazil as the supplier would drive up the import cost. Additionally, Brazil’s agriculture minister said on Tuesday that a U.S.-China trade war “will only hurt Brazil,” emphasizing cost strain on its animal protein producers.
The Chinese land investment scenario would take a few years at least, but it could be worst-case for the U.S. soybean industry since without China, the domestic market would be entirely different.
In 2016/17, the United States produced 116.9 million tonnes of soybeans. Some 44 percent of those beans were crushed domestically and 31 percent were exported to China. Another 20 percent were shipped off to other countries.
All else being equal, the United States would need to replace more than 30 million tonnes of global soybean business if China were eventually to walk out the door for good. But global soybean demand is not growing at such a rate, so U.S. farmers may be forced to cut acres significantly due to much lower prices and lack of demand.
Corn would likely pick up a lot of that lost bean acreage and over time, the huge surplus of corn that may result could also depress prices in that market, so the impact of a possible U.S.-China trade war could reach well beyond soybeans.
Right now, the Chinese crusher is feeling the pain of having to buy U.S. supply at a higher cost in a couple of months. U.S. farmers are feeling the pain of seeing soybean futures plunge to near 10-year lows on Tuesday after they felt some optimism about prices earlier this year.
So instead of teaching the Chinese a lesson when it comes to trade, the unintentional result over the long term might be that China learns to get along without U.S. soybeans, depending on how long the conflict drags on.
Editing by Matthew Lewis