Economic Pains of the US - China Trade War: Implications for Soybean Farmers, Processors and Traders

Global economic growth will end 0.7 percentage points lower in 2030 if the current US-China trade restrictions stay in place, than it would in a trade-war-free world. China’s burden compared to the US is larger, but for US farmers the impact is huge.

Chinese GDP growth hit harder than that of US

The US-China trade war has a severe negative impact on global as well as US and Chinese GDP. Analysis by Rabobank’s Global Economics team shows that global economic growth will end 0.7 percentage points lower in 2030 than in a trade war-free world, if the current trade restrictions stay in place. In case of a further escalation, global economic growth could even be 2.0 percentage points lower. In both cases, the average Chinese citizen will have to bear a larger burden than the average US citizen. However, US farmers are not the average US citizen and for them the equation is not that easy and especially for soybean farmers the trade war impact is huge.

China sources alternative supplies

China’s feed industry recently introduced new standards for the protein content in feed. This helps to lower the overall volumes of soybean meal used. In addition, the country imports larger volumes of protein alternatives, such as sunseed or, most recently, rapeseed meal from India, for example. The extent to which such measures will cut the demand for soybean meal in China is impossible to forecast, however 2018/19 will bring the first year-on-year reduction in China’s soybean imports since 2003/04. The questions for the future will be whether China can source all of its soybean needs outside of the US and how the US will have to change its export structure and plantings to deal with the heavy loss in export market shares. Rabobank believes in a reduction of Chinese imports of about 8% from last season’s 94m tonnes of imports and also acknowledges that the tightest supply months for China are still ahead, until the new soybean harvest out of Brazil becomes available.

Soy-Game-Changer_Fig1

The future of US soybeans without exports to China

Global soybean trade has changed its rhythm. Once China has manouvered the tight supplies through March 2019, it becomes pretty clear that there are only two chances for US soybeans to trade to China again: 1) a US - China trade deal is agreed and implemented (or temporary Chinese purchases are made as a ‘good will gesture to enhance trade talks’) or 2) a drought in Brazil cuts production and export availability below Chinese requirements.

For US farmers the loss of trade to the world's prime importer of soybeans is painful, as it requires US soybean players to buy market share in other countries around the world through all-year-round lower US soybean export prices (compared to competing origins). Cheap US soybeans will keep the US crush of soybeans at record high levels while spurring crush of imported US soybeans in destination markets outside China. Rabobank expects that US exports in the coming years will fall short of previous years and that inventory levels in the US are poised to rise to record highs, potentially doubling from the previous record. US farmers will have to react by cutting the 2019 soybean acreage massively and shifting to alternative crops, like corn, wheat and cotton.

Brazil: Stretching exports on the back of crush

Brazilian soybean exports will stretch above 80m tonnes, with >90 percent going to China, benefiting prices and production expansion in South America. At the same time it negatively impacts soybean crush margins in South America, cuts into local soymeal availability, and lowers soymeal exports to traditional import destinations. Increased Brazilian soybean exports also mean that exports need to be distributed more evenly throughout the year – in the past the majority was exported right after harvest. In the future, a continuous monthly volume of 6m-9m tonnes needs to be shipped to China.

Soy-Game-Changer_Fig2

What’s the impact on Grains & Oilseeds?

1. US soybean crush to run at all-time high. Exporters will lose volumes and need to export more consistently (4m-6m tonnes every month) to non-Chinese destinations. US farmers to heavily cut soybean acreage with knock-on effect on grains

2. Brazilian farmers to further expand soy acreage. Exporters will more consistently need to export 6m-9m tonnes every month, almost exlusively to China. South American crushers will face increased competition for soybeans and lose some soymeal export volumes

3. China to consistently pay a premium for non-US soy, resulting in high feed costs. This will reduce soymeal feeding and increase the import and use of alternative protein feed

4. Rest of World: Soybean import countries outside of China to heavily buy and process ‘cheaper’ US soybeans, within the limitations of local crush capacity availability.

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  • Stefan Vogel

    Global Strategist - Grains & Oilseeds; Head of Agri Commodity Markets
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