How will China Solve the Soybean Riddle?

(agriCENSUS) – Next week could be a game changer for global soybean trade flows after China said it would slap a 25% tax on soybean imports from the US from Friday.

With global trade of soybeans at around 162 million mt next year, Chinese demand at 103 million mt and US supply at 62 million mt, the world may be in for a re-routing of global supplies if Chinese crushers are to avoid the tax.

In the most simplistic of scenarios, over the long term, Chinese crushers could snap up all global trade from outside the US and lower protein in its feed marginally to avoid paying the tax.

But in the shorter term, the question on the market’s lips is whether Chinese crushers can avoid US supply in the first six months of the upcoming marketing year, starting in September when Brazilian supply dwindles.

And if they cannot, how much will they need to buy?

Currently, the USDA expects next season’s US ending stocks to be 10.48 million mt (385 million bushel), although there are fears that could rise.

“Will the Chinese import tariffs cause demand destruction… If so, how much? What is the absolute minimum the Chinese can take on US bean imports and get away with it? What will the carryout be next season? Are we looking at 400 million bushels? 600 million? 800 million?” said Charlie Sernatinger, a broker with ED&F Man.

How much does China need?

China typically needs a little more than 8.3 million mt of soybeans a month and has contracted all it needs so far this year up to September delivery.

That leaves six months of supply – or 50 million mt – it needs to source to keep feeding its animals from August until March, when Brazil starts to export in force again.

Having exported and sold forward about 56 million mt loading from January through July, Brazil is expected to have about 19 million mt spare exports that could be delivered into China from September onwards.

With supply from other sources expected to be at most 4 million mt, China will need to source at least 27 million mt from elsewhere, or 18 million mt if it runs down its stocks of 9 million mt.

“I have been telling my clients that the figure of US demand for next year is going to be 20-25 million mt,” said one futures broker who asked for anonymity.

The following outlines four different scenarios of how Chinese crushers could fill the gap.

Brazil imports US beans and sells China domestic beans

Brazil is the world’s largest exporter of soybeans at around 75 million mt this year and is the second biggest producer with a crop of around 119 million mt.

The idea of Brazil becoming an importer of any quantity is one that was mooted this week, with the Brazil national grains association saying domestic crushers could buy up to 1 million mt of US beans, according to Reuters.

Demand for beans in Brazil is growing following the nation’s biodiesel mandate, which will create some demand, but imports of any magnitude is unlikely to happen because of logistics.

Unlike many other countries where crushers are at the ports, most of Brazil’s 139 crushers, which have a capacity of about 63 million mt per year, are close to production centres in the southern and centre-west region of the country – miles from ports.

And with freight costs exorbitant as well as an 8% import tax, cost alone will be prohibitive to import beans, let alone the congestion it could cause along the soybean superhighway.

Likely impact: negligible

Argentina imports US beans and sells China domestic beans

Argentina is the third largest producer and exporter of soybeans and the world’s biggest exporter of soymeal and soyoil, thanks in large part to prohibitive export taxes that favour its huge domestic crushing industry.

Unlike Brazil, many of Argentina’s newest crushers are near an international port complex Up River, which means logistics of importing US beans and selling Argentinian beans are somewhat easier than in Brazil.

However, domestic prices of beans are around $90/mt cheaper than Brazil international prices due to punitive export taxes that will fall marginally to 24% this year.

That makes the cost of buying US beans FOB US Gulf, shipping them to Argentina and unloading them in the port complex costly, as freight is expected to be around $30-35/mt from the US Gulf.

That means that US Gulf prices would need to be at least $125/mt cheaper than Argentina FOB prices for the economics to work.

If US beans were that cheap relative to non-US beans, it may make more sense for Chinese crushers to pay the tax.

That said, Argentinian crushers have contracted around 500,000 mt from US suppliers for the next marketing year, according to USDA statistics, although that is thought to be to ensure contracts to sell soymeal and soyoil are fulfilled rather than displace domestic supply, which is down 30% this year compared to last.

Another way would be for Argentina to import Brazilian soymeal and release soybeans into the market, although that also comes up against high freight costs to get the meal to demand centres.

Likely impact: negligible

China reduces demand for soybeans

A third scenario is that China cuts its demand for soybean overall, possibly by replacing soymeal with other feed, namely corn.

Jeffrey Xu, managing director of Overseas China Investment, told the International Grains Council conference in London last month that it could be possible to displace soymeal with corn on a wide scale.

“We can easily reduce the percentage of soybeans in compounds. If we reduce 30% that means 30 million mt and then there is no need for US beans. The industry always adjusts this. When I was a child we never used soybean meal, we just fed animals corn,” he said.

China has huge corn stockpiles, although many in the audience expressed surprise that soymeal could be replaced so easily, suggesting that animals will grow more slowly due to lower protein content and forcing up meat prices – a dynamic the government has been keen to avoid.

Likely impact: unknown

China pays up

Current delivered prices from the US Gulf into China for September loading are around $382/mt. Adding a tax of 25%, that would rise to $477/mt. That compares with Brazilian beans at around $427/mt sourced from Santos.

While the difference is significant, it may be tolerable, as China would only have to source 20% of its beans at $50/mt higher than Brazilian beans – around $10/mt increase in the overall cost of imports.

Indeed, even the most pessimistic studies by academic institutions located in the US soybean and corn belt suggest that exports from the US to China could halve, which would mean 19 million mt next year.

It remains to be seen, however, how politically feasible that route will be, with reports suggesting the government has told crushers to prepare for a 20% cut in soybean supply.

William George, senior agricultural economist at the USDA told the IGC conference in London last month that: “economics will win. Whatever happens the solution will be the most cost-effective option.”