Todd's Take

For US Soybean Growers, Trade War Is Here

Todd Hultman
By  Todd Hultman , DTN Grains Analyst
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This chart from USDA's Oilseeds: World Markets and Trade report from Friday shows how China increased soybean purchases from Brazil by 7.19 million metric tons (264 million bushels) in the first quarter of 2017-18 from a year ago while cutting purchases from the U.S. by 5.37 mmt (197 mb). (Chart courtesy of USDA)

As we head into 2018, one of the news stories gaining momentum is the approach of an impending trade war with China. The threat has been long anticipated as President Donald Trump made it clear during his campaign that he would get tough with China on trade policies, at one time vowing to name China a currency manipulator.

As president, Trump backed down from the manipulation charge, but according to CNBC.com, "The U.S. Department of Commerce (is) on the cusp of deciding whether to place tariffs on steel and aluminum imports" ("Cramer: The US-China 'trade war' could explode in 2018" by Elizabeth Gurdus, Jan. 4, 2018 at: http://cnb.cx/….)

In August, the U.S. began an investigation to determine if China is violating intellectual property rights. In response, AP News reported last week that "China warned Washington on Thursday it will 'resolutely safeguard' its interests ahead of a possible decision in an investigation into whether Beijing improperly pressures foreign companies to hand over technology." ("China warns Trump ahead of possible trade decision" by Joe MacDonald, AP Business Writer, Jan. 11, 2017.)

While the looming trade war has not yet been officially declared, there is good reason to believe China has already started taking hostile steps against U.S. soybean growers. On Dec. 20, 2017, Bloomberg news reported that USDA agreed with a request from China to impose stricter standards on U.S. soybean shipments to China. The article also explained that the requirements are not applied to soybeans from Brazil. ("U.S. to Tighten Standard for Soy Shipped to China, USDA Says" with assistance by Alan Bjerga, Shuping Niu, and Jeff Wilson, Dec. 20, 2017 at: https://bloom.bg/….)

Shortly after Bloomberg's article, USDA's Animal and Plant Health Inspections published its own statement with the title "Ensuring Continued U.S. Soybean Exports to China" (http://bit.ly/…). USDA's posting explained that participants across the U.S. grain supply chain will bear the responsibility (and cost) of reducing the level of weed seeds or other foreign material in U.S. soybean shipments to China to less than 1%, starting in 2018. USDA's Federal Grain Inspection Service will inspect and certify whether shipments are below or above the 1% allowable limit.

U.S. shipments certified below 1% foreign material are supposed to be expedited by China's inspection service (AQSIQ), while shipments over 1% are likely to require further cleaning. According to USDA, China will not hold or unnecessarily delay U.S. shipments based solely on foreign material.

Clearly, there will be a cost to complying with these new requirements, and it is not clear why USDA would agree to comply when Brazil is not required to do the same. There is also no reason to believe that agreeing to China's request has earned U.S. soybean growers any favors.

While USDA's popular WASDE and Grain Stocks reports were being examined on Friday, the less-noticed Oilseeds: World Markets and Trade report was also released with the heading: "China is Key to Slow Pace of U.S. Soybean Exports." An accompanying graphic showed how China increased soybean purchases from Brazil by 7.19 million metric tons (264 million bushels) in the first quarter of 2017-18 from a year ago, while purchases from the U.S. dropped 5.37 mmt (197 mb) from a year ago.

At the same time, U.S. soybean purchases from other sources were running slightly higher than a year ago. One other interesting number from Table 22 showed USDA expects Brazil to have just 77 million bushels of ending soybean supplies when the current marketing year ends on Jan. 31.

In other words, China has bought nearly every soybean in Brazil to avoid the U.S. before Brazil's next harvest starts shipping out, typically in February. Some will point out that the 2017 U.S. soybean harvest had a lower protein content than Brazil and that may explain some of China's preference. However, for the past several months, China has also paid a higher FOB price for Brazil's soybeans. Given the building trade tensions, China's shunning of U.S. soybeans looks a lot like political retribution.

Had Brazil's weather been hot and dry this season, China would have been forced to take on more U.S. soybeans. However, crop conditions have been good, and both USDA and Brazil's government are estimating Brazil's next soybean crop slightly above 4.0 billion bushels (110 mmt). With trade tensions running high and weather giving Brazil its sixth-consecutive large soybean crop, U.S. soybean growers are already facing bearish headwinds in 2018.

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

Follow him on Twitter @ToddHultman1

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Todd Hultman