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Will China’s Soybean Tariff Have Long Tail?

Soybean markets rallied 38¢ Friday following the tariff news.

DES MOINES, Iowa -- So how long will the U.S. farmers have to worry about their soybeans going to China getting hit with a tariff?

How long will the soybean market trade the tariff dispute between the No. 1 and No. 2 world economies?

And, have investors already built the tariff impacts into the market?

On Friday, China implemented a 25% tax on U.S. soybeans in response to tariffs on Chinese goods implemented by the Trump Administration at midnight.

U.S. agricultural exports to China totaled $19.6 billion in 2017. China is the largest international destination for U.S. soybeans, importing more than 27 million tons of U.S. soybeans in 2017, 30% of all U.S. soybean production.

Overall, China is the second-largest ag export market overall for the U.S.

It’s well known that the soybean futures market has dropped over $2.00 per bushel since May. Investors argue whether the drop is due to favorable crop-weather or the trade tariff dispute between the U.S. and China.

Nonetheless, today’s tariff enactment has a lot of investors and agricultural businesses and community leaders wondering what’s next.

Trade Reaction

First, let’s look at the trade’s thoughts on the market impact.

Eric Fransen, director, Market360 Grain for Stewart-Peterson, says that the global demand for soybeans should not be impacted.

“In the end, we don’t expect tariffs to impact overall global demand – they’ll only change who buys from who.

Fransen adds, “We still think we can get a bounce in the corn and soybean markets in the next four weeks, possibly beyond depending on final yields. The crop looks great now, for the most part, but July temperature is key along with August and September not being too hot and getting close to a full fill period.”

On Friday, the CME Group’s August soybean futures finished 38¼¢ higher at $8.77½.  November soybean futures closed 38¾¢ higher at $8.94½.

Right now, the soybean market price moves are a function of trade tariff news and how much tonnage gets disrupted to China, one CME Group trader, choosing anonymity, said.

“Remember this is not an embargo, just a 25% duty. So, the local basis price will adjust (to the tariff) and is already in the process of doing that.”

The trader explained that although China will be diverting some of its purchases away from the U.S. and to Brazil, price does matter.

“With Brazil’s soybean basis at $2.30 per bushel over Chicago’s futures price and U.S. at .60 over Chicago, if Brazil pushes to $3.30 over Chicago, then the Chinese importer would see U.S. beans, with a 25% duty, as par with Brazil at $3.30 over,” the trader says.

The point is that the basis could discount the tariff fairly quickly and the U.S. could be back to selling beans.

“The longer term question then is whether the higher global price of soybeans will spark China into rationing their total demand or not? And, is the U.S. missing 3 to 4 million tons in the first marketing quarter that we never make up... building our new-crop stocks,” the trader stated in an email.

It's A Tariff, Not An Embargo

Along with impacting farmers’ soybean prices, the trade tariffs are expected to have rippling affects on agribusinesses and rural economies throughout the U.S.

Because the Mississippi River plays a large role in getting U.S. soybean exports to China and elsewhere, mayors of cities located along the waterway joined with the American Soybean Association to share with reporters the long-term tariff impacts.

John Heisdorffer, American Soybean Association president and Iowa farmer, told reporters that he understands this trade move is a tariff on China’s part and not an embargo, but losing marketshare is a bigger concern.

“I just can’t see the United States getting this business back completely. We’re going to lose some of it regardless. Let’s say we only lose 10% of it. Well, that’s 10% we gave away. We have no way to regain that. The only way we have is through either technology or genetics.”

“Regarding our Brazilian competitor, the state of Mato Grosso, alone, still 18.0 million acres to open up and grow soybeans. So that’s one state in Brazil. So just imagine what we’re up against,” Heisdorffer says.

In general, the mayors were asking what the goal was with the tariff move.

“What’s the point of all of this? Is it to get a trade advantage with different partners, other than China? We need a sit-down with the U.S. Trade Representative to get a clearer explanation of this trade move,” says Helena, Arkansas, mayor Jay Hollowell.

Hollowell added, “I would like the vadministration to be clear with us, as mayors and farmers, on the trade tariff goal. Is it to lower trade deficits with other countries like China, or is it to protect American industry?”

Davenport, Iowa, Mayor Frank Klipsch, says that this tariff is not an urban or rural issue.

“This is an everybody issue that impacts all of us. And the bottom line here is that we can all probably be in favor of better trade relationships, but the scorched earth approach of using trade war to accomplish that is going to exact a pretty high cost,” Mayor Klipsch says.

Going Forward

Jerry Gidel, The PRICE Futures Group, says that investors will keep an eye on how long the market will trade today’s tariff announcement and any additional tariff news.

“After last week’s U.S. Acreage Report that showed higher plantings than expected for many crops, the trade’s focus has switched to the ending stocks for these crops and the impact of today’s U.S. and Chinese tariff announcements on the U.S. soybean trade going forward.

“With the U.S. corn crop’s pollination period occurring over the next three weeks, the trade will also be watching the central U.S. forecast,” Gidel says.

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