Trade wars, tariffs and the soybean business: Gauging the impact

China is the largest importer of soybeans from U.S. producers. What effects might possible tariffs have on the soybean market?

Tags: International banking, Tariffs, Trade
Published: May 30, 2018

One glance at the latest business headlines reveals the current volatility in the agricultural trade market. Trade and tariff discussions among agricultural providers and exporters are rampant right now, as the U.S. government pursues a more protectionist agenda.

Although an imminent trade war with China appears less likely based on recent talks, the impact of tariffs is still a major point of concern for the industry. What might a prolonged policy of tariffs, combined with a possible trade war with China, mean for farmers and exporters? What can be done now to best protect stakeholders?

Let’s look at this issue through a particular market: the soybean trade.
 

The current situation: Soybean market at risk

A recent study by Purdue University/CME Group and the U.S. Soybean Export Council found that the U.S. soybean market could see drastic export changes if China imposes prolonged tariffs. The study created several scenarios based on a theorized 30 percent tax on Chinese imports. It found that U.S. soybean exports to China could fall by as much as 71 percent. Likewise, total U.S. soybean production could decrease by 17 percent under such tariff levels.

The numbers alone provide a strong glimpse into th impact of prolonged Chinese tariffs on a specific U.S. agricultural market. However, other factors may stem from the increased duties:

  • Overall demand for a U.S. product like soybeans (which resulted in a large farm economy boom in recent years) may be reduced, possibly replaced by other providers like Brazil or Argentina
  • Shipments from Chinese ports could be turned away
  • U.S. produced goods might be purchased at lower prices, reducing profitability for farmers and exporters
  • Increased use of government subsidies may be needed to offset stakeholder losses

If volatility strikes the soybean market at planting season there may be time for the market to adjust. However, prolonged tariffs on such a predominant crop could see Chinese importers looking elsewhere for their goods, and exporters moving to other commodities or markets.
 

What American farmers and exporters can do

The soybean market works as a microcosm of the U.S. agriculture industry. We can use it to illustrate steps each major stakeholder can take in response to recent volatility.


Farmers

  • Chinese actions toward American soybean production could have dramatic effects on farmers, especially as a planting season approaches. Farmers should closely monitor soybean prices as any planned Chinese tariffs draw close.
  • Some soybean farmers could switch to another crop. For others, it may be too late to swap in time to meet planting deadlines.
  • Farmers can shield themselves somewhat by selling a portion of their soybean crop during a market bounce.


Exporters

  • Should the Chinese shift their import actions toward other soybean origins, it would necessitate increased reliance on the European Union (EU) for U.S. exporters. In response to the U.S. tariffs, South American providers have raised prices for soybean production. While that might not deter the Chinese from shifting imports to Brazil and Argentina, it could dry that market up for European importers. U.S. exporters could then shift more production to European markets not hit by the tariffs.
  • However, it’s not clear if increased European imports can offset or balance potential losses from the Chinese market. While the EU is the second largest importer of soybeans in the world, it still pales in comparison to Chinese demand. The Chinese seek to import roughly 95 million metrics tons of soybeans in 2018. Even with expanded production in South America, they might still need to buy from the U.S. to satisfy demand.
  • A long-term shift to increased European exports may push some U.S. growers to non-GMO varieties, to satisfy European food use buyers. Farmers and Exporters will work together to build these supply lines if Chinese tariffs become a long-term reality.
     

Seek stability in an age of volatility

Regardless of current trade and tariff positions, stakeholders can work with a banking partner to help protect themselves. Contact your banking relationship manager for more information.



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