ANALYSIS: US farmers to feel China soybean tax, but not for months

China’s decision to tax US soybean imports took the market by surprise on Wednesday, with soybean futures tumbling 4% in minutes, but the end of the US harvest means the real pain for US farmers won’t be felt for months, which could provide breathing space for a solution to be found.

While Wednesday’s decision was expected, with Brazil cargo cash premiums soaring above US shipments over the past three weeks, it still came as a surprise to many when China said it would tax 106 products worth $50 billion from the US, including aircraft, cars and whiskey as well as corn and soy.

But with the US, the world’s biggest grower of soybeans, and China the world’s biggest buyer, it will be hard for China to wean itself completely off the US oilseed, of which it bought 32 million mt last year.

There simply isn’t enough supply.

This year, China is expected to import 100 million mt of beans to crush, mostly to feed its pigs, while exports from the three biggest exporters excluding the US, all of which are in South America, amount to just 81 million mt.

It’s possible China could substitute demand for soymeal and soyoil with other proteins and oils, such as rapemeal and oil, but market analysts say this will be negligible.

"It will take time to implement substitution," said Charles Clack, a commodity analyst with Dutch bank Rabobank. "And will it make a dent? Very unlikely."

So how much could it hurt US farmers?

According to a study published last week by Purdue University and commissioned by the US Soybean Export Council, US exports to China could fall by 71% in the event of a 30% tariff and 33% in the event of a 10% tariff.

That is between 10-20 million mt (367-734 million bushels) and would cost US farmers between $1.7-3.3 billion, according to the report.

In addition, it could sharply decrease the producer price of soybeans in the short term while over a few years prices would fall by 2-5%. 

Perfect timing

Yet it is not all bad news.

Chinese imports of US beans typically ease off at this time of year as Brazil’s harvest hits the market and US supply dries up, meaning there is still time to find a solution before the taxes really start to bite, according to analysts.

"They timed it right," Carsten Fritsch, commodity analyst with Commerzbank, told Agricensus.

"They already imported a lot in March from the US and most of the US imports already happened and are already on the books," he said.

For example, last year US bean exports to China hit 5 million mt in January, 2.5 million mt in February and 1 million mt in March.

They didn’t climb above 1 million mt again until August.

"Brazil is entering their peak soybean shipping season, so I don’t see a large cut to US exports over the long term if there is a compromise on the table within three months," said Terry Reilly, an analyst with brokerage Futures International.

Crash

And a compromise may be on the cards.

Notably, China has not announced the date the import tax would be implemented, leaving Rabobank’s Clack to conclude that "it’s more of a negotiating tactic for the next two months."

It's also notable that China's state-owned Grain and Oil Information Centre was actively marketing the Purdue report in a bid to highlight how painful these taxes would be to US farmers.

And that is set against the backdrop of US Congressional elections this November, where all 435 seats in the House are up for grabs and a third of all senators in the Senate, which, according to some analysts, could add political pressure to find a compromise.

But if a solution is found it could be very painful for those that have bet on a trade war.

"What if the Chinese moves take us back from the brink, and the adults come to the table? What happens if we come to an agreement without tariffs? DCE meal crashes, Chinese crush margins break, and the Chinese are long a lot of high-priced Brazilian beans," said Charlie Sernatinger with ED&F Man.