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June 20, 2018
China's winning hand: Turmoil in US soy markets. Good news for Latin America
China has the power to import almost no US soy for a year and permanently lower US soy exports soy over the long term. It could also bring forward the day soy supply finally matches demand and the next market upturn starts.
By Eric J. Brooks
An eFeedLink Hot Topic
                                                                                           True or False?
 "There simply aren't enough soybeans in the world outside of the US to meet China's needs" 
                                                                                       -Mark Williams, chief Asia economist, Capital Economics.
                                                 Answer: Depends on whether we are talking short-term or long-term
With international politics is casting a cloud over the entire feed crop market, American farmers are experiencing considerable feed crop planting intention uncertainty even going into late April. By slapping a 25% import tariff on soybeans, China gave countless US farming communities their biggest emotional shock in many decades.
Importing a whopping 93.5 million tonnes in 2016-17 and a USDA projected 97.0 million tonnes in the current marketing year, China absorbs 64% of the approximately 151 million tonnes of soybeans that will be exported to the world market this year. It purchased over 60 million tonnes of that soy from Latin America and could easily buy much more.
With China buying US$7.5 billion or 33 million tonnes of the US$12 billion, 52.9 million tonnes of soybeans exported by American farmers annually, its tariff is giving them a lot of second thoughts and forcing them to re-evaluate their planting intentions. Depending on the circumstance, they may opt to plant less soy and more of crops such as rapeseed, wheat or corn, especially since the latter's fortunes do not depend on Chinese buying intention.
From the viewpoint of a feed buyer or feed crop trader, the impact of China's trade retaliation is more specific and nuanced. Upon news of the tariff, CBOT Soy's price swan dived nearly 4%, from US$10.47/bushel to US$10.06/bushel -but within a week, it had rebounded and is now trading above US$10.50/bushel.
That's because while China action creates winners and losers, actual world soybean demand will not be impacted. Even so, Beijing's trade retaliation gives feed buyers and professional traders a lot to think about, especially over the next 18 months -and it may even tighten up the oversupplied world soy market and bring forward the next market upturn.
On one hand, Mark Williams, chief Asia economist at Capital Economics downplays the tariff's impact, stating that "There simply aren't enough soybeans in the world outside of the U.S. to meet China's needs." -Williams should have said that China only needs to depend on US soybeans over the long term- because, during 2017-18 and part of the 2018-19 marketing year, China can definitely go without purchasing US soybeans. 
Over the short-term, Williams is right: On average, America exports 4 to 7 million tonnes of soybeans monthly from November through March, but under a million tonnes from May through September. So China's trade retaliation will not be felt for at least several months. Over the medium term, however, it's quite a different story
The math is simple, reassuring over the long term -but devastating for the second half of 2018 and 2019: China needs to import 97 million tonnes of soybeans this year. Before the 25% import tax was announced, the USDA projected that South American exporters would run down their collective inventories by 12.4 million tonnes, from 62.4 million tonnes to 50 million tonnes. It also projected that the quantity of soybeans exported from Brazil (73.1 million tonnes), Argentina (4.2 million) and Paraguay (5.8 million) in 2017-18 would amount to 84 million tonnes.
Out of these 84 million tonnes of South American soy exports, around 65 million tonnes were expected to be shipped to China, with the other 19 million going to other nations. In theory, that leaves up to 32 million tonnes of Chinese soy imports being purchased from the United States -but in practice, China could easily buy up to an additional 32 million tonnes from combined 50 million tonnes of Brazilian (21.1 million tonnes, Argentine (28.6 million) and Paraguayan (0.3 million) soy reserves.
Conclusion? Latin America probably has enough soybeans in storage to make it unnecessary for China to import from the United States unnecessary for the rest of 2018 and (depending on South America's weather) up to the first two quarters of 2019.
Over the long term, Williams is right: If China chooses to completely boycott US soy, once Latin American inventories are run down, it would have to import 15 to 20 million tonnes annually from the United States -but that still would be a permanent 13 to 18 million tonne reduction on the 33 million tonnes of soy America sold to China last year.
If China decides to run down Latin soy stocks and not buy US soy for a year, it could reduce this year's projected American soy exports from 56 million tonnes into the 30 to 35 million tonne range. Thereafter, America might find it difficult to export more than 45 to 50 million tonnes of soy a year for quite a few years -far below the 59 million tonnes it exported last year.
The trade friction will produce winners and losers. American farmers are obvious losers, as they would need to reduce their soy production by around 20% to adjust to these new market realities. The tariff would also boost China's pork and poultry production costs. Even so, with most of the soy being imported from Latin America, the total feed cost increase would be under 4%.
Cost-conscious Chinese buyers are already looking to source more Latin American soy, which the tariff has become cheaper relative to US supplies. This has already made Brazilian soy sell at a premium to US soy in the world market. Latin farmers will benefit from higher returns on their soy fields, while inventory run downs could make it profitable for them to expand their acreage.
In all, China's tariff on US soy is a windfall for Brazilian and Argentine farmers, a minor irritation for China's livestock industry and a very large blow to US soybean farmers.
But there is one possible, noticeable side-effect to this trade war: Up to now, corn inventories have been adjusting to the persistent oversupply situation better than soy. That's why corn prices are firmer and have downside potential, but this could now change.
China's 25% import tax on US soy may result in a lot of farmers in America substituting other crops in its place. Should China decide to minimize its soy purchases, it could profoundly run down world inventories, up to 25 million tonnes below what is projected for this time next year. Needless to say, both these side effects could bring the world much closer to balancing soy supply with demand, firming up oilseed prices -and finally launching a long-awaited soy market upturn.

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