BEIJING (Reuters) - Chinese buyers of soybeans, the United States’ biggest agricultural export to the country, are quietly drawing up contingency plans to ensure supplies of critical raw materials in the event of a trade war, sources said.
The moves are the strongest sign yet that businesses in the world’s most populous country are growing worried that critical commodities could get caught up in escalating trade tensions.
At least two trading houses have started buying more rapeseed meal, an alternative ingredient used to make animal feed, in case the oilseed is a target of retaliation by Beijing, sources at the company familiar with the strategies said.
“It is an obvious choice to seek other protein sources. We are buying more rapeseed meal, for example,” said one of the sources.
As an extra layer of protection, his company has also started to include exit clauses in purchase contracts with U.S. suppliers giving them the right to cancel the order if needed.
The second source said their firm was also purchasing more domestic distillers’ dried grains (DDGS), a byproduct of ethanol production used as an animal feed ingredient.
The company is also considering ramping up purchases of Brazilian soybeans.
The sources declined to be named as they are not authorized to speak to the media and would not disclose further details due to the commercial sensitivity of the issue.
Penalties on soybeans would be a powerful weapon in Beijing’s arsenal because they would especially hurt Iowa, a state that backed U.S. President Donald Trump in the 2016 presidential elections. U.S. Ambassador to China Terry Branstad was previously a long-serving governor of the farm state.
The United States shipped more than $12 billion worth of soybeans to China last year. China buys two thirds of the beans traded worldwide, mainly from Brazil and the United States.
China’s commerce and agriculture ministries told a delegation of U.S. soy growers last September that soybeans were being considered as a target for retaliatory action in the event of U.S. trade action against Beijing.
On Thursday, Trump announced plans for tariffs on up to $60 billion in Chinese goods for what he says is misappropriation of U.S. intellectual property, moving the world’s two largest economies closer to a trade war.
China showed readiness to retaliate by declaring plans to levy additional duties on up to $3 billion of U.S. imports including fruit and wine in response to U.S. import tariffs on steel and aluminum, which were due to go into effect on Friday.
(GRAPHIC: U.S. agricultural exports to China - reut.rs/2G3zlfu)
U.S. PRICES UNDER PRESSURE
Jim Sutter, chief executive of the U.S. Soybean Export Council, said it would not be a surprise for Chinese crushers and importers to make emergency plans.
“They’re business people and they have to be thinking about their alternatives,” he said.
Sutter had not heard of any specific contingency plans being developed. However, Chinese buyers would likely find it difficult to get by only using alternatives, because its industry relies so heavily on U.S. soybeans, he said.
Even so, worries that China may cancel orders pushed cash bids for both soybeans and corn lower at grain elevators along Midwest rivers on Thursday, indicating decreased demand from export terminals at the U.S. Gulf, a U.S. grains exporter said.
Soybeans dropped by about 2 cents to 6 cents per bushel and corn was down 1 to 4 cents per bushel.
NOW IT SEEMS REAL
The threat of a trade war drove up prices for soymeal, hurting feedmakers and pig farmers, on Friday. The most-active soymeal futures prices on the Dalian Commodity Exchange were up 1.4 percent at 3,046 yuan per tonne.
Traders and millers who crush soybeans and rapeseed to make meal and oil in China say there are no signs of panic in the country’s vast farming and livestock sector.
Any immediate impact on crushers will be cushioned by a Brazilian crop coming to market.
“We will deal with it if it happens,” said Ji Feng, a senior soybean trader at global commodities merchant Cargill, in a panel discussion at an oilseeds conference on Thursday.
Still the increasingly heated rhetoric between the two countries has given some industry insiders pause this week.
“I feel the trade war is really happening. Before it was just talk, but now it seems real,” said a purchasing manager at a medium-sized feed company who is bracing for a further spike in soymeal prices.
“For me, the impact will be mainly on soymeal prices.”
Reporting by Hallie Gu and Josephine Mason in BEIJING; additional reporting by Mark Weinraub and Tom Polansek in CHICAGO; Editing by Bill Tarrant
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