Soybeans are a special commodity in the tariff war between the US and China.
After nearly three-months of negotiations (see G. Lauriat’s Let’s Make a Deal), President Trump and China’s President Xi still haven’t made a deal with the next round of tariffs being “postponed indefinitely” and U.S. soybeans remaining an innocent casualty of this Sino-U.S. trade war.
U.S. soybean exports to the People’s Republic of China (PRC) have stopped as China’s retaliatory tariff has priced them out of the market. And price might not even be the issue as the centrally planned Chinese economy has in all by words effectively banned U.S. soybean imports.
For U.S. exporters, the failure of China and the U.S. trade tariff negotiations represents a difficult setback. American Soybean Association (ASA) President Davie Stephens, a soybean grower from Clinton, Kentucky, wrote after the talks broke down, “We are glad that talks between these two countries will continue without the tariff hike… it’s still hard to see a tangible end in sight.”
It’s worth noting that soybeans aren’t just another crop when it comes to China – it is the agricultural export. In a little over two decades the value of the U.S. soybean has risen from a modest $414 million in 1996 to $14 billion in 2017. China imported over 30% of U.S. production in 2017, amounting to around 60% of total U.S exports. Both Chinese importers and American exporters – prior to the current dustup – expected the U.S. to be the main supplier to the PRC. But the possibility of the U.S.-China soybean trade being permanently damaged stands to alter the shipments of agricultural commodities for the foreseeable future.
When China and the U.S. agreed to sit down for trade talks, Beijing said it would buy five million soybeans as a goodwill gesture. This kicked off a spate of buying in late January into early February. Industry estimates believe the tally will eventually hit ten million tons – although with the trade talks slowly grinding along the possibility of Beijing suddenly closing the tap is very real.
At a February 26th meeting before the U.S. Senate Committee on Commerce, Science and Transportation, Donna Lemm, an Advisory Board Member for the Agriculture Transportation Coalition (AgTC) and Executive VP, IMC Companies, Inc., noted how deep and long-term the damage from tariffs could be, “It is essential to emphasize the daily threat of global competitive sourcing confronting all your agriculture and forest products constituents:
- There is nothing that we produce in agriculture and forest products in this country, that cannot be sourced somewhere else in the world. What is produced in Nebraska and Illinois, for examples, Brazil, Australia, Argentina, Canada and Mexico are more than eager to supply.
- When we cannot deliver, affordably and dependably, to our customers in Asia, Europe and around the world, those customers will find alternative sources.
- When our foreign customers go elsewhere, and establish new sources and new supply chains, it is incredibly difficult to get those customers back.”
Bean Counter: The Soybean Dilemma
Lemm’s comments point out the real danger of an extended trade dispute – foreign customers (i.e. China) going elsewhere. In the case of soybeans, Brazil and Argentina are rivals to the U.S. for the China market. And China itself has the ability to produce more soybeans with crop conversion. Although crop conversion, say from wheat, itself, invites economic volatility by creating shortages in another sector.
It can be easily argued China’s readiness to “buy” U.S. soybeans in January-February in advance of the talks as matter of “good faith” is less about “good faith” than dire need. As much as the tariffs have hit the U.S. heartland, they have hit China’s gold coast of cities like Shanghai, Guangdong and Xiamen just as hard – it’s tough to make soy sauce without soybeans.
Because China imports a great deal less from the U.S. than vice versa, the impacts of the tariffs have been slower to percolate through the economy. Nonetheless, the U.S. tariffs are sowing havoc with the machinery of the “Factory-to-the-World” export oriented economy.
Recently Beijing announced a lowering of the growth of its GDP target from 6.5% to a range of 6% to 6.5% - the first concession of the economic squeeze of the U.S. tariffs and general issues China has with its trade partners. This is the lowest growth forecast since the 1990s. Chinese Premier Li Keqiang said of the ongoing and widespread trade disputes, “Economic and trade frictions ... [have] had an adverse effect on the production and business operations of some companies.”
Part of the dilemma of Beijing taking aim at U.S. soybeans and other agricultural products is the difficulty in replacing them. According to the United States Department of Agriculture (USDA), Brazil – the number two exporter of soybeans to China – will have less supplies to ship. The USDA reported, “Record soybean exports in 2017/18, coupled with a reduction in the 2018/19 harvest, will significantly reduce Brazil’s exportable supplies in the coming year. Local year (Feb/Jan) exports last year reached a record 84.2 million tons, 15.4 million above the previous record volume of 68.8 million recorded in 2016/17.”
What this means is China will either have to dig in and prepare for some domestic economic discord or make a deal. In a sense this was outlined by Premier Li at the opening of the National People’s Congress (March 5) when he said, “We must be fully prepared for a tough struggle. The difficulties we face must not be underestimated, our confidence must not be weakened, and the energy we bring to our work must not be allowed to wane.”
The dilemma for U.S. negotiators is no less problematic. According to a Bloomberg report in late February, China proposed a deal for some $30 billion in U.S. agricultural exports – more than twice the $14.8 billion China spent in 2017. China imports globally around $126 billion in agricultural products annually. Back in 2017 soybeans accounted for just over $12 billion with another $2.5 billion split largely between cotton, corn and wheat.
But buying more agricultural goods at the expense of other boxes yet to be checked like IP [intellectual properties], financial access and accountability might be more than the Trump Administration is willing to concede… even with the 2020 Presidential elections becoming the “elephant in the room” for all negotiations.
U.S. soy producers, with or without an agreement, still have crops to sell. To that end, looking for alternative markets as means of transporting soybeans to customers has become a new priority. In Illinois, the number one State for production in 2018, Lynn Rohrscheib, a soybean farmer from Fairmount, Ill., and Illinois Soybean Association (ISA) chairwoman said, “Maximizing yields and profitability are priorities, but how we approach them has changed as the world around us changes.”
Among the technological innovations that the ISA is looking to deploy is the shipping container. While a vast majority of soybeans are shipped either bulk or breakbulk, container shipping offers advantages in ship scheduling, unit sizes, storage and accessibility to wider markets.
Austin Rincker, a soybean farmer from Moweaqua, Ill., and ISA Marketing Committee chairman, said of the box alternative, “We focus on improving logistics to get soybeans to market, including by rail, road and waterway. On the heels of another record harvest in Illinois, we continue to focus on expanding trade opportunities. For example, we are working with industry partners to step up container shipping to open the door to new, diverse international markets for soybean exports.”
If a deal gets made between the U.S. and China, soybean farmers stand to be the big winners. In the meantime, finding alternative markets and transportation measures is a skill that might come in handy for the next time around.