Soy Traders Breathe A Little Easier But Watching China, U.S. Trade Spat

(Reuters) –  The ongoing trade tiff between the United States and China has recently caused concern in the soybean market that the U.S-imposed tariffs could jeopardize the country’s top agricultural trade item with China.

But the initial response from China should bring about a sigh of relief for the U.S. soybean industry as it does not appear to be Beijing’s target.

U.S. President Donald Trump signed a memorandum on Thursday targeting up to $60 billion in Chinese goods with tariffs, which would go into effect after a 30-day consultation period that begins once the list is published.

Early Friday, China responded with a list of $3 billion in U.S. goods that it would target if no agreement was reached including pork, steel pipes, and wine, but there was no immediate mention of soybeans.

Leaving soybeans alone is probably the smarter choice for China as it would be virtually impossible to shun the U.S. product altogether, though that was not necessarily the expected outcome.

Besides, a reduced dependability on U.S. soybeans would require increased involvement from competitors Brazil and Argentina, which either do not have the supply or the incentive to significantly ramp up their export programs, at least not in the short term.

In 2017, soybeans accounted just over half of the dollar value of all U.S. agriculture-related exports to China, the total of which was about $24 billion.

The East Asian country is the world’s No. 1 buyer of soy and is expected to take in roughly 100 million tonnes of the oilseed this year. The majority of those beans get crushed directly off the vessels into high-protein meal to be fed to China’s enormous hog herd.

CHINA, BRAZIL, ARGENTINA

Last August, total soybean supply at China’s ports hit 7.5 million tonnes, the largest in at least four years. Without bringing in any additional product, an inventory of this size would be depleted in about a month’s time given the country’s annual rate of consumption.

Between April and October, Brazil is overwhelmingly China’s main soybean supplier, so China will naturally ease up on U.S. purchases in the near term.

But given the usage rate at Chinese ports, Beijing still keeps U.S. beans on speed dial during this time, since Brazil and Argentina would not be able to pick up too much extra slack.

As of Dec. 31, leading exporter Brazil had a soybean stockpile of just 1.92 million tonnes (71 million bushels) according to the country’s agricultural statistics body Conab. By Jan. 31, this supply dipped to 1.075 million tonnes (40 million bushels) according to the U.S. Department of Agriculture.

These numbers represent the supply that Brazil had left over at the end of its last soybean marketing year. For comparison, the 2016-17 U.S. leftover on Aug. 31 was 8.2 million tonnes (302 million bushels).

Although Brazil’s ongoing harvest may end up surpassing last year’s record of 114.1 million tonnes, much of that supply is already spoken for. The country is planning to export about 68 million tonnes of soybeans and crush upwards of 43 million throughout 2018.

When the 2017-18 cycle ends on Jan. 31, 2019, USDA predicts that Brazil’s ending stocks will land at 1.325 million tonnes. Conab’s target for Dec. 31, 2018 is even smaller at just 565,400 tonnes.

Although the recent drought will significantly limit Argentina’s soybean output, the supply buffer should be sufficiently large heading into the 2017-18 marketing year that begins on April 1.

Argentina’s agriculture ministry places carry-in stocks at 12.3 million tonnes (452 million bushels) while USDA has a more optimistic 18.4 million tonnes (676 million bushels).

These stocks make it appear that Argentina has room to expand its exports, but there are barriers that could keep that idea sidelined for now.

Argentina crushes a large majority of the soybeans it grows and has established itself as the leading exporter of soybean products. Sizable investments have been made in its soybean processing infrastructure, which may be threatened if exporters were to increasingly vie for supply.

Export duties also mean that Argentine shippers may be less incentivized when it comes to soybeans. Although the current tax of 28.5 percent will steadily drop to the 18 percent target by December 2019, there are no longer duties for corn and wheat, so the profit margin on soybeans must be competitive.

It is also unknown whether Argentina is willing to maintain significantly lower supply levels like Brazil in order to step up its export program. USDA says that the country’s ending stocks have been above 10 million tonnes for the past three years.

Brazil and the United States will account for 84 percent of global soybean exports in 2017/18 according to USDA. Shipments from all other countries are expected to total 23.9 million tonnes.

The United States shipped 36.2 million tonnes of soybeans to China in 2016-17.