U.S.-China Trade Threats Make South American Soybeans More Expensive

Market inefficiencies, brought on by a drought-reduced crop in Argentina and the US-China trade dispute, increased Brazil’s soybean prices above expected levels. Prices have already started to ease in recent weeks and the highs should be short-lived. Given the risk of an additional 25 percent duty on U.S. soybeans into China, Chinese buyers have paid higher prices for non-U.S. origin soybeans. If trade negotiations and potential policies continue to distort Chinese imports of U.S. soybeans, other countries will benefit from lower U.S. soybean prices, which will be offset by higher South American soybean meal prices. China will also have to pay continued premiums for South American soybeans, pushing other destination markets to an extended U.S. export window, maybe closer to year-round.

Examining the Drivers for Higher Brazilian Soybean Prices

China’s soybean purchases from Brazil’s record 2017 harvest continued at higher levels from August to December 2017, when Brazilian exports usually fall to very low levels, resulting in higher overall exports (see Figure 1). Higher out-of-season exports resulted in tighter Brazilian supplies and higher FOB prices in Brazil, which have continued into the first half of 2018. US-China trade tensions, including threats of duties on U.S. soybeans into China, have contributed to Brazilian FOB prices remaining at a level where they are not as competitive with U.S.-origin soybeans for many destinations. In addition, disruptions like the Brazilian truckers’ strike have hampered port deliveries and are also priced into Brazilian soybean markets since their start in May 2018.

Figure 1: Monthly Soybean Exports Concentrated from the U.S. and Brazil during their Traditional Export Windows - but Brazil's Window Remained More Open at the End of 2017 and Early 2018

Soybean_Tariff_Fig1

Source: Global Trade Atlas, Rabobank 2018

Measuring the Market Inefficiencies in Brazil’s Soybean Prices

RaboResearch F&A modelled a seasonally and drought-adjusted regression examining FOB Brazil soybean prices from January 2008 through May 2018. Figure 2 shows prices compared to expectations. Past periods where observed Brazilian prices exceeded the model prediction typically coincide with larger out-of-season Brazilian exports. Pricing disruptions occurred in years such as 2013, 2014, and especially 2018, when Brazil’s export season extended into the traditional U.S. season. In 2016, short domestic Brazilian supplies contributed to the divergent prices. During these years, observed FOB Brazil soybean prices exceeded expected prices by more than USD 30/metric ton.

Figure 2: Observed and Predicted Monthly Values for FOB Brazil Soybeans, January 2008 – May 2018

Soybean_Tariff_Fig2

Source: Thomson Reuters Eikon, Rabobank 2018

The impact of a 25% additional duty on U.S. Soybeans into China

Growth of soybean production in South America and the U.S. met the growing global demand mostly occurring in China. Constraining U.S. exports to China by a potential introduction of import duties will stress continued increases of Chinese demand for South American soybeans with a likely elevated Brazilian FOB price impact as discussed in this document.

Without the geographic and timing distribution of soybean production that currently exists between the northern and southern hemispheres, supply risks and logistical strains could further impact China’s supply of soybeans beyond just price. If China increases its dependence on South American soybean supplies, the Chinese buying pattern might be limited from year-round purchases to a shorter sales window typical for South America. Recent years have also demonstrated the yield risk that can arise in soybean production if depending on only one continent.

As one of the two major soybean producers in the world, the U.S. also has a large storage capacity. This capacity to store large soybean volumes is likely to be tapped into to extend the availability of soybeans to, often non-Chinese, export customers who otherwise would have sourced from Brazil. While the ability exists to stretch out the U.S. export window, this shift would result in decreased efficiencies when moving soybeans and likely create additional costs in the export channels. However, the ability to move product year-round could allow the U.S. soybean industry to further monetize the abundance of storage. Despite the grain storage capacity, U.S. producers, who hold 55% of the total US storage capacity, prefer not to store soybeans.

If U.S. soybean exports fall below 2bn bushels per year, the RaboResearch baseline outlook will call for fewer planted soybean acres. In the long term, corn and other crops will likely gain more acres in the U.S. as the annual soybean acreage contracts by 3m to 4m acres from our current ‘most likely’ baseline scenario, which will further increase the world’s dependence on South American soybean production. U.S. farm prices are projected to contract by up to USc 50 per bushel (5%) over the same time period, assuming such a disruption lasting through 2022. Soybean and grain industry participants will likely make adjustments through any trade disruptions to minimize policy impacts.

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