Todd's Take

A Recap of Tariff Warnings

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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USDA's March estimates of ending soybean stocks from the top three producers shows a slim level of carry in Brazil as China continues to avoid U.S. soybean purchases and even proposed a tariff on U.S. soybeans. (Source: USDA, Oilseeds: World Markets and Trade, Mar. 8, 2018; DTN graphic by Todd Hultman)

I'm a little embarrassed to admit, but when Wednesday's news of China's proposed soybean tariff hit the wire, I was not at my post. I had taken my first day off in 2018 and didn't hear the news until after the markets were closed.

Scrolling through office emails that afternoon, I got a brief sense of how hectic it was in the DTN newsroom early Wednesday. Editors, reporters and analysts were poring over various reports, checking facts and putting out information to our subscribers as fast as they responsibly could.

A one-minute chart autopsy shows May soybeans broke lower at 2:43 a.m. CDT; down 38 cents within five minutes, down 44 cents in 14 minutes and then reached its low of the session, down 54 1/2 cents, an hour and 14 minutes later. Having been at this line of work since 1985, I am all too familiar with what days like this can do to even disciplined traders. Mike Tyson's famous quip comes to mind, "Everyone has a plan until they get punched in the mouth." (…)

As a DTN grain market analyst, however, I wasn't concerned so much about traders as I was for DTN subscribers and my own responsibility in the matter. Had I done my part to help warn our customers that days like this were part of the risk they were facing?

The first time I wrote about a possible trade war with China was Dec. 27, 2016, a little over a month after President Trump was elected. "Soybeans' Gathering Storm" (…) talked about President Donald Trump's campaign rhetoric, noted the people he was surrounding himself with and talked about how China might respond to the new president's tactics.

For U.S. grain producers, a possible halt of U.S. soybean imports by the world's largest soybean buyer was not a pleasant thought and we went through the math of what that might look like. Similar to 2018, we noted that China could avoid U.S. soybean purchases for a while, but would be vulnerable in the fall, when Brazil's exports typically wind down.

As the Trump Administration took its time in preparing its plans, U.S. soybean trade flowed relatively unhindered in 2017. In August, however, the U.S. launched an investigation to determine whether Beijing improperly pressured foreign companies to hand over intellectual property rights. The concern has been that China twists the arms of foreign companies to get trade secrets that they then share with their own high-tech companies.

The investigation struck a nerve with the Chinese government and remains the core issue underneath all the layers of proposed tariffs. In December, China fired back with a "request" for USDA to comply with, and pay for, stricter shipping standards for soybeans -- a demand that was not applied to either Brazil or Argentina. For some reason that still makes little sense, USDA complied and I wrote about this in "For U.S. Soybean Growers, Trade War Is Here" on Jan. 16, 2018. (…)

I was a bit surprised to encounter some flak for that article as readers were eager to point out China's overwhelming preference for Brazil's soybeans in early 2018 could be explained by differences in soybeans' protein levels and transportation costs. Both points were valid to an extent, but missed the larger picture of what was happening. They also could not explain why nations other than China increased their soybean purchases from the U.S. at a time when China had clearly pulled back.

"For Soybeans, Timing is Everything" (…) is the latest column on the topic, posted Mar. 27, shortly after China had responded to President Trump's steel and aluminum tariffs. China's list included U.S. pork, but not yet soybeans. The column also revisited the math on how far China could go on Brazil's soybeans and suggested October to January as the four-month window when U.S. soybeans would be needed.

Fortunately for China, Brazil had good growing weather in 2018 and China could have extended its purchases a little longer had Argentina not gotten hit with drought. On Thursday afternoon, the Buenos Aires Grain Exchange estimated Argentina's soybean crop at 38.0 million metric tons (1.40 billion bushels) in early 2018, down from 57.8 mmt (2.12 bb) the previous year. USDA is likely to lower its own estimate of 47.0 mmt (1.73 bb) in Tuesday's World Agricultural Supply and Demand Estimates (WASDE) report.

One market clue that I currently find difficult to explain (and may be a sign of China's current stress) is the difference in FOB soybean prices. As of Thursday, Brazil soybeans were at $11.30 a bushel, 37 cents above the equivalent price in New Orleans, even as Brazil is in the midst of a large harvest.

Put that together with a November 2018 soybean price that is 2 1/4 cents above the March 2019 contract and see commercials already willing to pay up for new-crop soybeans at roughly the same time China is expected to turn to the U.S.

That initial column I wrote shortly after Christmas 2016 was early with its warning, but seemed to come to fruition on Wednesday afternoon:

"I hate to say it, but it is possible that we will wake up one morning to read that China is no longer importing U.S. soybeans. Even if it is a temporary move, I shudder to think how prices might respond and producers should consider some kind of protective action now. We can't say we didn't see it coming."

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Todd Hultman