Why China's Soybean Tariff Changed Everything

While markets are being somewhat drama queen-ish this morning, China's trade war retaliation was telegraphed well in advance, and as we reported nearly two weeks ago, "China About To Launch "Tens Of Billions" More In Tariffs." As such it should not have come as a surprise that China did just that overnight, when it announced 25% tariffs on $50 billion in 106 US imports.

What was a surprise, was the unexpected announcement that China would also include US soybean exports in the list of items impacted by tariffs, something which we noted earlier opens up the door to a new, third round of tariffs by the US, which would assure that a "nuclear" trade war has indeed broken out.

It is the presence of soybeans in the tariff list that has startled China watchers and analysts, such as Capital Economics' Julian Evans-Pritchard, who writes that "China’s rapid and aggressive response to the proposed US tariffs has raised the stakes for both sides."

What makes the inclusion of soybeans so surprising?

Perhaps nothing more than the fact that while China is seeking to hurt US exporters, it will also substantially and materially impair its own domestic producers and supply chains, will struggle to replace U.S. soybean supplies "inflicting severe financial pain on domestic companies, analysts and executives at feedmakers said" according to Reuters, and potentially risk sparking runaway food inflation as surging feedstock prices send pork prices through the roof.

To be sure, from a trade war perspective the inclusion of soybeans makes perfect sense: for China, the world's top importer of the oilseed in the world, soybeans are considered one of the most powerful weapons in Beijing’s trade arsenal because a drop in exports to China would hurt Iowa and other farm states that backed U.S. President Donald Trump. As the chart below shows, soybeans were the biggest U.S. agricultural export to China last year at a value of $12 billion.

Incidentally, for those who wish to trade, either buy or sell, the biggest corporate suppliers of soybean to China, here is a list of the top sellers, courtesy of Bloomberg:

  1. Bunge
  2. Marubeni
  3. Cofco
  4. Cargill
  5. Dreyfus

China's ravenous appetite for soybeans - the country's purchases hit a record last year and China eats up about 60% of globally traded soybeans - is because it needs to feed the world’s largest livestock industry including 400 million pigs, which in turn provides food for the world's biggest human population. Factories crush the oilseed to make meal - a key ingredient in animal feed.

And here the problem emerges, and why China's action has taken so many by surprise: “There simply aren’t enough soybeans in the world outside of the U.S. to meet China’s needs,” said Mark Williams, chief Asia economist at Capital Economics. “As for reducing dependence on imports, there are a few options, but none is a magic bullet that could hurt U.S. farmers without generating costs at home.”

There certainly isn't enough production at home: China grows only about 14 million tonnes of soybeans, mainly to make food for human consumption, making it especially reliant on foreign imports, and thus, the US.

In short, by crippling US soybean imports, China may have shot itself in the leg.

First, some statistics: Brazil supplied half of China’s imports last year while the United States shipped around 33 million tonnes, about a third of the total. It is replacing those U.S. tonnes that will be no easy feat, if not impossible: crops in Argentina, the world’s No. 3 producer, have been hit by a drought, cutting exports from there to less than 7 million tonnes in the 2017/18 season, its smallest in a decade, according to the U.S. Department of Agriculture. Outside of Brazil, the United States and Argentina, about 17 million tonnes of soybeans comes from a handful of countries.


To be sure, China has some emergency options, but the danger with all is that they could unleash a wave of inflation in a repeat of the events of 2011.  Among China's "Plan B" options include tapping the government’s emergency strategic reserves and rejigging the ingredients that go into feed, analysts, experts, traders and buyers at feed mills say. “Some people say they could just drain their state reserves. That’s a possibility, (but) nobody knows how many tonnes are in it,” said U.S. Soybean Export Council Asia Director Paul Burke.

According to Reuters, some feedmakers are already quietly drawing up contingency plans, such as finding substitute ingredients with feed mills reportedly adding more corn, distillers’ dried grains (DDGS), a byproduct of ethanol production, or rapeseed and cottonseed meal to their feed. But the risk is that adjusting component weighings could impact the overall food system, as maintaining protein levels is complicated. The maximum amount of DDGS in feed is around 20% and toxic ingredients found in rapeseed mean it can only make up 5 percent of pig feed, and it usually isn’t put in sow or piglet food.

But an even bigger risk is inflation.

As U.S. soybeans become more expensive, importers will have to source from other countries, most notably Brazil and Argentina, which will immediately yank their own soybean prices as their biggest competitor has dropped out of the market. In fact, the threat of action has already pushed Brazilian export prices to all-time highs and fueled gains in domestic soybean and soymeal futures prices.

“I don’t want China to escalate the trade tension,” said a feedmaker’s purchasing manager, worried about higher prices and a lack of alternative feed sources with comparable protein content to soymeal. “Sales from Brazil would normally end around September and it’s usually U.S. beans between October to March. Where do we get beans from during that time if we only buy from Brazil?

Well, you get it from whoever is willing to sell, which they will: for a price. And as costs for hog farmers rise, that risks increasing the price of pork, a component of China’s consumer price index. And should food inflation rise too high, rumblings of social instability will re-emerge, as we saw back in 2011, and which prompted the Chinese government to rapidly tighten financial conditions in the process unleashing financial chaos around the globe and - according to some - the next leg of Europe's sovereign debt crisis.

Soybeans are a key input cost to Chinese pork prices and as a result a key source of food inflation

Which means that the inclusion of soybeans in China's tariff list has changed everything: on one hand it shows that China is dead serious in its retaliation and hopes of hurting Trump supporting farmers; on the other it may have started the countdown on its own spike in pernicious, food inflation, the outcome of which could be social chaos and instability, an outcome which Xi will hardly be excited about but which will be music to Trump's ears as both superpower leaders dig in for what appears to be a period of extended trade trench warfare.

Comments

mobius8curve buzzsaw99 Wed, 04/04/2018 - 08:44 Permalink

These trade wars will escalate until the currency markets begin to collapse globally as they have been planning on replacing your fiat with a crypto for 30 years:

https://www.zerohedge.com/news/2017-07-09/economist-get-ready-world-currency-2018

It is all part of creating distractions from global corporatism controlling the world through food:

https://www.independent.co.uk/life-style/companies-control-everything-y…

It can not be a coincidence that the whole system is more leveraged than at any other top in 100 years. Hyperinflation is the plan that will indeed cause the burning cash under the phoenix that should begin in earnest this year right on schedule. This is complete collusion on the part of most central banks coming down from the BIS who is loaded with satanists hanging out between there and CERN.

That will morph into this:

Revelation 13:16-17  And he causeth all, the small and the great, and the rich and the poor, and the free and the bond, that there be given them a mark on their right hand, or upon their forehead;  (17)  and that no man should be able to buy or to sell, save he that hath the mark, even the name of the beast or the number of his name.

Over the next 7 years:

https://sumofthyword.com/2016/10/04/the-rapture-of-the-church-is-after-

The masses already have a physical mark in their retina or hand/finger prints. All that’s required to keep them from buying or selling is to phase out cash and replace it with a crypto currency riding on the back of block chain riding on the back of the internet. Then do away with passwords thus requiring them to burn their retina or hand/finger prints to access their iPhone to access the internet to do any future purchasing. It does not matter how decentralized the crypto currency is if the gate keepers of the internet refuse to allow them to access the internet with their iPhone if they do not comply with the beast:

Revelation 13:16-17 And he causeth all, the small and the great, and the rich and the poor, and the free and the bond, that there be given them a mark on their right hand, or upon their forehead; (17) and that no man should be able to buy or to sell, save he that hath the mark, even the name of the beast or the number of his name.

Our Father proved His physical children “Israel” and now He is about to prove His spiritual children “Israel”:

https://sumofthyword.com/2017/12/19/all-israel/

History(His~Story) always repeats:

Ecclesiastes 1:9-10 That which hath been is that which shall be; and that which hath been done is that which shall be done: and there is no new thing under the sun. (10) Is there a thing whereof it may be said, See, this is new? it hath been long ago, in the ages which were before us.

In reply to by buzzsaw99

two hoots BaBaBouy Wed, 04/04/2018 - 08:59 Permalink

China will grow soybeans somewhere and become as independent as possible, maybe in Africa or elsewhere, they will grow them.  Something tells me that their, China's, “silk roads” will soon supply them with all they need.   We are blazing new ground at an unprecedented pace and no one knows how it will go but go it will.   This is delicate business that could have profound consequences for the US.  We are no longer the last resort for everything for anything.  Good or bad, government controls trade and with most things, that is concerning.

Added later:

Soybeans are only an indicator as market turbulence is an indicator, a precursor, of the many problems facing nations, governments and people today, you know the list. Can one imagine any acceptable, joint/global, solution to any of it?   Are we left with self interest and protection as the final battle ground?  Are things (the list) likely to improve or deteriorate? Any ideas?   

Unrelated but recommend-  Long Shadow, (Netflix) a three-part television documentary presented by Cambridge University historian David Reynolds. Each episode explores an enduring legacy of the First World War through the century that followed, tracing the impact on attitudes to war and peace, on politics and on nationalism (Wikipedia).    Well worth the watch.

In reply to by BaBaBouy

bshirley1968 BaBaBouy Wed, 04/04/2018 - 09:16 Permalink

Growing soybeans is a "low" tech problem. Would take a year to fix, and China has plenty of land and manpower to get it done.

Where are American farmers going to sell their beans if China bails on them? We are talking massive disruption in the farming world.

If China cuts their rare earth element exports, there is no way the US can fix that fast enough to avoid major disruptions in our way of life.

In reply to by BaBaBouy

Itinerant bshirley1968 Wed, 04/04/2018 - 09:30 Permalink

Soybeans are fungible. Europe and the rest of the world also buy a lot of soybeans. What if Europe buys more American and less Brazilian soy and China gets more Brazilian and less American? Soy is soy, so a shift does not always need to include physical source changes. This part of the picture has been completely ignored by the "analyst" above, who concludes that there is not enough soy in the world, without saying anything about the relative size of various importers.

In reply to by bshirley1968

whatswhat1@yahoo.com Itinerant Wed, 04/04/2018 - 09:46 Permalink

Soybeans💀 aren't even safe for farm animals let alone humans. 

The Monsanto💀, glyphosate💀 tainted, gmo💀 product from the U.S. would make good bait for killing rats🐭 and other vermin👩‍✈️.

Ninety-eight percent of the products sold as grocery💀 in the U.S. are toxic to the immune system. 

The remaining 2%, mostly organic👎, are a little less toxic😭.

How great has the past 30 or so years been for Big Pharma💀 and Industrial Sick NoCare©😵? 

Not to infer that any of their products or services, other than some of their less toxic antibiotics💀 and no-fraud surgery💀, are worth two shits.☠☠☠

In reply to by Itinerant

Adolph.H. Four Star Wed, 04/04/2018 - 11:05 Permalink

This latest tariffs increase is neither a feat of chance nor of bad luck. Over the past couple of years Chinese have been very very busy purchasing arable lands everywhere possible around the world including in Europe and Africa, which tells that they need to bootstrap their new agriculture by replacing their imports, especially if it consists in GMO and other pesticides.

Corollary: this single move will also spell a disaster for Monsanto, and this will probably make a lot of people happy around the world. 

This move paves the way for China to develop its independence agriculturally. The response from America will be to destabilize countries where China bought big chunks of land, which will lead to a confrontation, maybe a war. 

 

In reply to by Four Star

fx Savvy Wed, 04/04/2018 - 11:41 Permalink

First, the Chinese are excellent strategic planners. To assume they just foolishly shot themselves in the foot is totally naive.

They have the option to import more pork instead of growing them in China. They can increase purchases from Brazil. They can temporarily substitute parts of the sobean nutrition for their pigs. Other countries could buy US sobeans at lower prices and resell them to China. And Bejing could temporarily subsidize prices for prok in china. Lots of options here.

Who will feel the pain faster? China or the Us farmers?

And how will US farmers react? There are only a few weeks left before they have to plant soybeans. Many may switch to other crops to at least a certain extent to mitigate risk. By June it will be rien ne vas plus. While China could easily slash the tariffs any time, farmers cannot react that fast or not at all. And what do you think where will political pressure mount first? In the US where the miodterm elections are approaching or in China where any impacts won't show up before autumn (and could be cushioned by bejing anyway).

This is poker with high stakes and Navarro and Trump are going to find out that the Chinese are darn good at that game. (unfortunately, for the rest of the world)

 

In reply to by Savvy

Couchtycoon fx Wed, 04/04/2018 - 13:03 Permalink

planning and execution are two different things. this is exactly where large central planning fails. the people on top look to the people in charge of ag and ask can you do this? when the bosses bosses boss asks you to do something you say yes. so there is some poor basted in china who needs to figure out how to feed 1 billion people with a lot less food. you think they have been working on farming land? Farming is not exactly a turn key operation. I woulden't bet my food next year on places that never grew soybeans to supply a billion people, they are going to buy those soy beans in a round about way for more money.

China will feel the pain faster (people starving) much faster than US farmers (subsides Mega Farm run by companies not people )

In reply to by fx

Scipio Africanuz Couchtycoon Wed, 04/04/2018 - 15:46 Permalink

I think you misunderstand, China knows there'll be pain, they're not afraid, they are letting USA understand it's a fight to the finish, in fact, they mentioned that explicitly  some time back.

The question now, is whether the USA is ready, or can endure pain. Btw, they can buy all the American soy they need from third parties albeit at a higher price, if they so desire. The problem for American farmers, is that now, the soy market is a buyers market, which means lower prices and hence lower income and thus, pissed Trump supporters. 

The Chinese got the USA good, real good!

In reply to by Couchtycoon

bitzager Rudog Wed, 04/04/2018 - 12:19 Permalink

What trade imbalance? What tariff? US forgot that it has been EXPORTING $USD by TRILLIONS around the Globe and Getting VALUE of natural resources, products and services in exchange for fake piece of paper printed on demand in any amount necessary.. How about that? US Fed Jokers created 100+ TRILLION DEBT bubble and crying like a wolf about trade fairness? Gimme a f* break!

In reply to by Rudog

MoralsAreEssential whatswhat1@yahoo.com Wed, 04/04/2018 - 12:06 Permalink

China could do the world a favor and stop using GMO soybeans.  As I understand, GMO grains is practically total the world over.  The EU has tried to keep it out, but I know France under Macron has now allowed its planting.  As far as I know Mexico still has NOT GMO grains.  India's entire food production has been compromised by GMO and it has killed their cattle.  Cotton also is now GMO supposedly to 90% of worldwide production.  THIS is a greater evil to anything living than even wars.  I'm assuming Russia does not have GMO.  Is it possible that IF the destruction of our markets for US completely compromised GMO agriculture occurred, non-GMO products could replace it?

In reply to by whatswhat1@yahoo.com

Killdo whatswhat1@yahoo.com Wed, 04/04/2018 - 13:36 Permalink

MONSANTO's 'proof' that GMO Roundup -enhanced corn was safe to for humans to eat was a 90-day study on rats . 

This is what passes as 'science ' in 21st century US of AIPAC. 

that study could not even be replicated - when French scientists tried to - rats got sick and after a year or so on this GMO crap they developed all kinds of cancers including liver cancer. 

In reply to by whatswhat1@yahoo.com