China is not buying U.S. soybeans because of 25% tariffs that make it more expensive. No. China’s government has sanctioned its private sector from buying them.
What are the odds of every single private soy crushing facility in China turning away from the U.S. market? The U.S. is the biggest soy exporter in the world. Are we to believe that every soy importer in China has given up because American soy at, say, for the sake of easy math, at $10 a bushel (it’s really $8.66 a bushel) is now $12.50 a bushel?
Yes, it’s because of the trade war. But the U.S. hasn’t stopped importing Chinese widgets. To the contrary. Based on our trade balance, we keep importing more and more stuff from China.
China started “sanctioning” U.S. soy last year. Technically, the drop in sales is not a Beijing official sanction.
Instead of buying from U.S. farmers, they bought around 13 million more tons of soybeans from Brazil, the No. 2 exporter, now the No. 1 exporter.
As a side note, all this talk about Brazil’s Amazon being chopped down because of new president Jair Bolsonaro — if you want to know what keeps the Amazon in tact, it’s Chinese demand, not Rivers International or Greenpeace.
“It’s really, really getting bad out here,” Bob Kuylen, who’s farmed for 35 years in North Dakota, was quoted saying by CNBC this weekend.
He blames President Trump.
“Trump is ruining our markets. No one is buying our product,” he says.
Well, when you base your market largely on one customer…
China is not getting a better deal from Brazil, whose soy harvest runs counter to the U.S. as seasons are reverse.
Brazil prices its soy differently, so here goes an attempt at breaking down the price differential. Soy export prices are currently R$81 per 60 kilograms. That’s $20.31 based on Friday’s closing exchange rate. Sixty kilograms is equal to 1.6 bushels.
At $8.66 per bushel of soy in Chicago, 1.6 bushels is $13.86. U.S. soybeans based on these numbers are around $6 cheaper than Brazilian soybeans.
China’s last inflation numbers surprised to the upside because of…food. That doesn’t necessarily mean soy, or the chickens and pigs that eat it. But the fact that China is paying more for Brazilian soybeans than American soybeans is clearly a political decision, not a business one.
The U.S. Department of Agriculture (USDA) said Monday that the U.S. will harvest 18.7% less soybeans this year than last year, at around 100 million tons total this season. For some reason, the market was forecasting 102 million despite low commodity prices and China basically banning American soy from its ports.
In terms of stocks, the USDA says American silos will get packed with another 20.5 million tons of soybeans this crop season, which is about 10% below market estimates. American farmers will be harvesting soy over the next three months.
That 20.5 million estimate sits on top of the already 29.1 million tons leftover from last year’s crop, at least half of it owed to China, which took its business elsewhere.
The U.S. is harvesting less soy, but the Brazilians are harvesting more, so that means soy prices are not going up unless the dollar tanks.
The USDA thinks Brazil will harvest 5.1% more soybeans this year at 123 million tons.
“It’s Like Beer.”
In the 1980s comedy Three Amigos, a trio of hapless, out of work silent picture actors on a trip to Mexico ask a bartender for a drink. The barman offers them tequila. They don’t know what tequila is, so one asks them if it is like beer. The bar man confirms: it’s like beer.
China’s actions in the soy market is similar. A trio of hapless farmers asks a Chinese government official what he thinks about Trump. He says they want him to lose so won’t buy soy beans from Trump supporting states. They ask him if that’s election meddling. The man confirms: it’s like election meddling.
Last year at this time, the Chinese did a full-stop on purchases of American soy and pork in hopes to influence the Midterm Congressional elections in November. The strategy, to maximize economic pain and fear in farm counties ultimately helped flip red counties blue. The Democrats won in a landslide, a victory China hopes gets repeated next November.
Assuming China is going to use that strategy again, American farmers will have to find new markets — maybe the meatless movement will do them some good. Beyond meat, there will be more soy farmer desperation due to their old, go-to market going cold.
It is highly unlikely that China dips back into American agriculture, barring a 180 policy shift by Trump.
The U.S. already tried to offer China a deal, whereas they would give telecom giant Huawei a non-tariff barrier reprieve and allow it to buy American components in use in Huawei smart phones. Huawei was banned from doing so this summer.
China wanted Huawei to be removed from that Department of Commerce blacklist, a list that also prevents Huawei from buying U.S. components used to build out its 5G network not only in China, but globally. The U.S. said no deal to Huawei’s full removal.
China has also demanded the complete removal of tariffs, another non-starter in trade negotiations.
Most China investors believe the trade war is here to stay. But it is clear that China is betting on two Democratic Party candidates to be in their corner. Both Joe Biden and Kamala Harris are considered pro-Wall Street on China. Either candidate, if they beat Trump, would likely let tariffs die a slow death, putting an end to tariff escalation and bringing back the old way to go after China, through long, cumbersome, countervailing duties enacted by the U.S. International Trade Commission. Tariffs are always much higher, but sector specific, and often quite niche focused. For example, kitchen cabinet makers won a triple digit tariff on Chinese made kitchen cabinets this year.
A Biden/Harris victory would be great news for China, but they are the only bet within the current crop of top 5 Democratic Party candidates that would be seen as a return to status quo trade relations. Farmers might bet that way too.
For Trump, he better start hoping the fast food chains double down on soy burgers. China’s not coming back to the Midwest anytime soon.