Experienced commodities traders know that government intervention in free markets creates opportunity. A classic example is occurring right now in the form of new Chinese tariffs on soybeans and other agricultural products. Tariffs were imposed today by the world’s largest soybean buyer, China, on the world’s second largest soybean exporter, the United States.
Global soybean markets are unique in that there are only four exporters large enough to matter of unprocessed soybeans; Brazil, the United States, Paraguay, and Argentina. These four exporters account for all but 8 percent of total global soybean export market volumes. But it’s Brazil and the U.S. together that make up just over 85 percent of total global soybean exports, an astounding concentration by any standard.
On the import side of the balance sheet, there are lots of soybean buyers, but none compare to China. According to the USDA in its World Agricultural Supply and Demand report, the Chinese buy almost 60 percent of total soybean exports from all soybean exporting countries combined. Looked at another way, China buys so many unprocessed soybeans that it needs to buy from virtually every major soy exporter on the planet. The two largest exporters, Brazil and the U.S., are China’s major suppliers and will remain China’s major suppliers, tariff war or no tariff war. It’s available supply that matters in the end, not tariffs.
China needs everyone’s beans, and they must buy from the U.S. at some point. Therein lies the opportunity for adroit commodities traders. Remember, we’ve seen this show before in 2018 and 2019 during the first trade war with China, and there is no reason to think that history will not repeat itself to a large degree. Back then, Chinese soybean buyers shunned U.S. soybeans and turned to Brazil as its soybean source of first choice. But Brazil sells lots of soybeans to lots of countries, and when Brazilian soy supplies ran low, China turned to the U.S. and bought soybeans. Prices in the U.S. reacted rationally during the entire time. Initially, when the trade war intensified and China turned away from U.S. soybeans, bean prices declined in the U.S. all the way down towards their cost of production of very roughly $9 per bushel. When the Chinese returned in force to the U.S. markets in 2020, U.S. soybean prices began a rally and eventually hit $16 by 2021.
Today’s soybean markets aren’t much different than during the 2018-2019 trade war. Bean prices are currently hovering around $10 per bushel, about 10% above their general price breakeven area of $9 or so. As Chinese buyers react to China’s newly imposed tariffs on U.S. soybeans by turning towards Brazil as their main, and cheapest source of bean supply, U.S. bean prices will head toward their breakeven cost of production levels. Sellers of U.S. soybeans at current price levels might be rewarded a little bit, and farmers will feel the pinch for a while as they operate on razor thin margins and rely on possible support from government assistance programs implemented to help them ride out the storm.
But eventually, Brazil will run out of soybeans to sell. At that point, China and a host of other countries will fulfill their soybean buying needs with beans purchased from the United States. Soybean prices will likely do what they usually do, trade sideways around the $9 mark until Chinese buying and other natural market forces combine to rally prices again. It’s a pattern that repeats itself from both a price perspective and a government intervention perspective. Prices historically have very limited downside when any commodity hits its cost-of-production breakeven price. This price pattern is amplified in the case of tariff interventions; tariffs speed up the price decline towards breakeven on the tariffed commodity, in this case U.S. soybeans. But, due to the uniqueness of global soybean markets, demand for U.S. soybeans gets delayed, but not eliminated.
Expect U.S. soybean prices to decline towards their $9 per bushel cost of production area in reaction to the new Chinese tariffs, but as that happens, other non-Chinese buyers will step in and fulfill their buying needs with U.S. soybeans, providing some support to U.S. bean prices. Eventually, when Brazil runs out of beans to sell to China, the Chinese will buy from the U.S. as well. It’s market behavior we’ve seen before, and there is little reason to think the pattern won’t repeat itself again this time.
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