ANALYSIS: Sorghum a warning shot, but China unlikely to target soy

It’s not a great time to be marketing US soybeans into China at the moment.

Tough new rules on selling GMO product, as well as new quality restrictions on foreign matter in cargoes destined for the world’s biggest buyer of beans have made trade much more difficult over the past few months.

Looming on top of that is a huge Brazilian soybean crop that is set to take more market share away from US farmers, not only because it is more competitive on price, but it has far superior protein quality too.

And if that wasn’t bad enough, China’s investigation into US sorghum subsidies, announced Sunday, could be a warning shot to US regulators of what’s in store for soybeans should President Trump go further than simply placing levies on solar panels in his America First protectionist drive.

According to officials at the US Soybean Export Council, it was made clear to soybean growers last September on a visit to China that the sector would be a retaliatory target in the event of a trade war.

And just last week, the chairman of the US Chamber of Commerce in China told reporters that China’s government would target sectors with political significance. That included agriculture.

Pawn
“If there were to be a retaliatory response to greater US protectionism in the steel or aluminium markets, then soybeans could be the target,” Caroline Bain, chief commodities economist at London-based Capital Economics, told Agricensus.

It’s not hard to see why.

According to the USDA, in 2016 soybeans accounted for two-thirds of the $21.4 billion of agricultural exports to China, making it a pawn in what could be a global trade war.

And with mid-term elections looming, placing soybean farmers in the crosshairs would hurt President Trump politically, as many are located in Republican states.

But what happens over the next 90 days will be key.

Threat
President Trump has until 22 April to decide whether to act on the findings of a US investigation into whether Chinese imports of aluminium and steel are a threat to its national security.

The findings, reported two weeks ago, are confidential, although according to a CNBC News article quoting sources that had seen them, high tariffs on imports and targeting certain companies that sell the metals are on the cards.

If that is the policy option of choice, the impact of any retaliatory action on the soybean market would be instantaneous.

“That would put soybeans immediately below $9 per bushel,” said Terry Reilly, an analyst with Chicago-based brokerage Futures International.

Current prices are around $9.75/bu.

“It would definitely hurt. Right now, the US west coast is on the cusp of being competitive to China, but a duty would punch us in the gut,” said Charlie Sernatinger, a broker with ED&F Man, particularly as the US is already losing market share to Brazil.

Last Friday, influential consultants in Brazil AgRural estimated Brazil’s current soybean harvest would produce 116.1 million mt, eclipsing the previous record of 114 million mt set last year.

And that has already had an impact on US exports, which are running at 6 million mt below last year’s volume as Brazil took a 53% market share in bean exports to China versus 34% from the US.

Everyone’s got to eat
Yet despite the talk and fear of a metals versus agriculture trade war, there are good reasons to believe that it might not happen.

Capital Economics’ Bain highlighted that President Trump had spoken of blanket tariffs during his election campaign, but since winning he has been more “piecemeal and targeted” in his approach and that the Chinese would be equally cautious.

“Maybe we have seen that to some extent, with sorghum,” she said.

Sernatinger of ED&F Man agreed: “My customers in China think the GMO certificate problem is more on US origin than South American and that the Chinese government is using this as a non-tariff barrier to US beans coming in,” he said.

But more importantly, it begs the question where else China would get its soybeans from if not the US.

Brazil is the second largest producer in the world and the biggest exporter, but its exports are still only expected to reach 67 million mt this year, short of the 100 million mt that China is expected to need.

“Everyone needs to eat, and I don’t think China is going to mess around with the US bean supply. They have already got more savvy and picky about where and when they pick it up and at what price,” said Futures International’s Reilly.