Column: Trump’s New Tariff Threats on China May Finish Off Soybean Bulls

(Reuters) – The soybean market has not had a whole lot going for it in the past year with ample supplies after years of large global crops, weakening demand out of China, and the U.S.-China trade war.

The trade war has undoubtedly, and perhaps single-handedly, kept Chicago-traded soybean futures afloat for the past several months, even in the face of overwhelmingly large U.S. stocks. The idea that China may remove tariffs and/or agree to buy a specified amount of U.S. beans as part of a deal has been the glue keeping the market together.

But traders have been slowly losing patience for the United States and China to work out their differences. That may have come to a head on Sunday when U.S. President Donald Trump unexpectedly announced plans to raise tariffs against Beijing this week.

The news sent soybean futures plunging on Monday near an eight-month bottom in the low $8-per-bushel range, dangerously close to decade lows.

Part of traders’ disappointment has to do with the fact that the trade talks have been reportedly going well for months and a deal had seemed just weeks away. The shock of new tariffs when things were supposedly progressing added to Monday’s market bloodbath. One possible glimmer of hope is that commodity funds are already record short in soybeans, which in theory might prevent the price from plunging too much further. But new records have been set for two weeks now, and by trade estimations, funds have expanded their massive short in the last few days.

It might be a mistake to prescribe never-ending doom and gloom for the unpredictable soybean market, though. Last summer, most traders would not have forecast soybeans would have a $9-handle to open 2019.

But soybean futures may be within striking distance of a $7-handle, something that has been absent for more than a decade.

The last time most-active CBOT soybean futures dipped below $8 per bushel was on Dec. 8, 2008, and the last time they closed below that mark was just three days earlier.

Since then the pressure has only grown: Global soybean consumption has risen 52 percent since 2008, but global production has more than matched that with a 64 percent rise.

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Outside of optimism over the trade talks, CBOT soybeans have barely had a good reason to rally over the past year. Dryness during the height of Brazil’s growing season spooked the market at the start of the year, but it soon became clear that the losses would not be significant enough to threaten world supply.

The timing of the trade war was horrible since it began just as the 2018 U.S. soybean shipping window closed and China and other soybean buyers would turn to Brazil for six months. That made it difficult to determine whether China was actually avoiding U.S. beans or just buying from Brazil at that time as was normal.

But now the timing has become even worse because feed demand in China has been curbed by a deadly outbreak of African swine fever (ASF) in its hog herds. This could prevent a trade deal from producing more demand for U.S. soybeans right away.

When the trade war broke out, Brazil set monthly soybean export records in 10 straight months starting last May. But new highs were not made this March and April. Setting new export records in those months should have been a breeze for Brazil under normal conditions given that U.S. exports to China were down 85 percent year-on-year between September and February, and this is tangible evidence that Chinese demand is down.

Recent wet weather in the U.S. Midwest has delayed corn planting and has sparked fears that this could eventually lead to more unneeded soybean acres. Earlier in the year, CBOT futures were suggesting that soybeans may be just as profitable as corn, even though the cash markets were not sending the same message.

The new-crop soybeans to corn futures ratio certainly favors corn now, and farmers will likely make every effort to get those acres in. The ratio was between 2.35 and 2.4 from January through late April, but it has plunged down to 2.23 as of Monday, the lowest May levels since 2013.

Ratio values around 2.5 or greater favor soybeans, while values under 2.3 clearly point toward corn.

A return to $7 beans would be very unlikely without some involvement from China, and it could be the lost demand from ASF rather than the trade war that could firmly cement futures in that range for a long while.

China’s soybean consumption has risen to 30 percent of the world total from 22 percent in 2008, and its imports have nearly doubled over that timeframe. A change in Chinese demand would certainly change the aesthetics of the soybean market, and that might be the inevitable destination for now.