Todd's Take

A Soybean Tariff With Many Tentacles

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
Connect with Todd:
On June 1, 2018, FOB soybean prices in New Orleans were going for the same price as at Brazil's port of Paranagua. Much has changed since, largely due to the July 6 enactment of China's 25% tariff on U.S. soybeans. For starters, soybean prices in New Orleans are now $1.63 less than those in Paranagua (DTN ProphetX chart).

The popular notion that the flap of a butterfly's wings could cause a tornado in a distant location is traced to Edward Lorenz, a professor of meteorology at MIT in the early 1960s. Lorenz found that minute changes in his forecast variables had dramatic effects on future forecasts.

See the article, Peter Dizikes in TechnologyReview.com, Feb. 22, 2011, here: https://www.technologyreview.com/…

Some misconstrued the butterfly story into thinking it meant events were predictable, given enough information, but that was not Lorenz's view. To him, the variables of weather were so complicated and initially sensitive, he became skeptical of any forecast beyond two weeks.

Somewhat like weather, market factors are also varied and interrelated in complicated ways, making price forecasts difficult. Take China's 25% tariff on U.S. soybeans for instance, enacted just two months ago on July 6. The tariff is certainly bigger than a butterfly, and it has already set in motion all sorts of market adjustments, some expected and some surprising.

It is not surprising that a 25% tariff from the world's largest buyer of soybeans had a bearish effect on U.S. soybean prices -- that was widely anticipated. One look at a chart of FOB soybean prices on June 1 shows prices in Paranagua, Brazil, just 2 cents higher than the $10.89 a bushel posted in New Orleans. As of Thursday, those same two prices were $1.63 apart with Paranagua at $10.31 and New Orleans at $8.68.

Notice U.S. prices are currently 16% below Brazil's price, not 25%. There is no question that China is the world's most influential buyer of soybeans, but it is not the only buyer -- a point that was driven home Wednesday by the latest export data from the U.S. Census Bureau for the month of July.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

One year ago in July, the top three destinations for U.S. soybean exports were familiar names: China, Mexico and Netherlands. This year, not only did Egypt replace China as the top destination, its 10.9 million-bushel (mb) increase in shipments offset China's 10.8 mb reduction.

Shipments were also stepped up to Netherlands, Indonesia, Pakistan and Colombia. Not only did China's tariff not cause a drop in U.S. soybean exports, July U.S. soybean shipments actually increased to 125.9 mb from 85.2 mb a year ago. The world smells a bargain.

Granted, there is pain for U.S. producers seeing soybeans sold off so cheaply, but we have to acknowledge that from a demand perspective, the active movement is encouraging, and just maybe, USDA's 250 mb export reduction in the July WASDE report was too pessimistic. World demand for soybeans remains strong, and it appears that China has opened a back door for the rest of the world to obtain soybeans on the cheap.

The other factor helping U.S. soybean demand this year has been Argentina's drought. While the world's largest exporter of soybean meal is low on soybeans and facing financial problems at home, U.S. Census Bureau data showed U.S. soybean meal exports up 23% in 2017-18 from a year ago. That same demand for meal has also kept crush incentives at historically high levels here in the U.S.

The other tentacles of China's soybean tariff have clearly not been good for soybean prices -- just ask growers in the Dakotas where a lack of demand in the Pacific Northwest has pressured local cash prices $1.50 or more below the November futures contract. DTN's National Soybean Index shows pervasive bearishness around many areas of the country with an average cash price 98 cents below November, the most bearish basis in at least 11 years.

At the same time, U.S. soybeans are starving for business in the western Plains, Brazil is getting ready to plant its next crop and with China needing Brazil more than ever, the incentives are high to maximize soybean acres. An expansion of 6% or more would not be unreasonable for Brazil's 2018-19 crop.

USDA's offer of aid to soybean producers of $1.65 a bushel on half of 2018 soybean production, announced on Aug. 27 goes a long way to ease the pain of this year's lower prices. Another installment may come later, but no one expects taxpayer support to provide a sustainable replacement for the loss of China's business.

Further south, the U.S. is poised to get another competitive break in 2019 from Argentina's financial problems. Earlier this week, President Macri announced that the government needed to raise revenue and he would be reinstating export taxes on grains, and once again raising export taxes on soybeans and soy products.

Similar to Mr. Lorenz, I have always been skeptical of price forecasts that venture very far into the future. Given all the moving parts of this year's soybean market, including U.S. trade relations with China, predicting demand in 2018-19 with any accuracy is about as easy as predicting the locations of next year's tornadoes.

At this point, I don't know if U.S. ending soybean stocks will finish at 400 mb or 900 mb in 2018-19, but I can say the market's own clues still lean bearish. As usual, it is the market itself, and not fragile predictions about demand, that offers us the best light through this year's dense fog.

Stay tuned to DTN to keep up with the latest twists and turns of soybean prices in these unprecedented times.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BAS/ SK)

P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]
P[R1] D[300x250] M[300x250] OOP[F] ADUNIT[] T[]
P[R2] D[300x250] M[320x50] OOP[F] ADUNIT[] T[]
DIM[1x3] LBL[] SEL[] IDX[] TMPL[standalone] T[]
P[R3] D[300x250] M[0x0] OOP[F] ADUNIT[] T[]

Todd Hultman