By John DePutter & Dave Milne – June 26, 2018
“Traders blame much of the recent steep decline in prices for soybeans and corn on the intensifying trade quarrel between the US and China. They’re right, but it’s a dispute that may eventually feed still more demand for these crops.”
– MarketWatch, June 23, 2018
What it means:
We would tend to agree with the general sentiment expressed here, that the trade spat between China and the US isn’t going to do anything to substantially curtail global consumption.
Here’s one important thing to remember:
Amid all the bluster, China – the world’s largest soybean buyer – is not going to stop purchasing soybeans on the world market, even if it implements its planned import tariff on US supplies beginning July 6. In other words, we’re not removing the largest source of demand from the international market. Instead, we’re simply entering an unknown set of scenarios where established trade flows are potentially upset.
One scenario is that China may begin sourcing more of its soybean needs from non-traditional suppliers. Indeed, it was just reported today that China is planning to remove import tariffs on animal feed ingredients, including soybeans, from five Asian neighbours, apparently to prepare for a drop in American supplies. But if that’s the case, then the US will likely in turn have the opportunity to sell more of its beans into what are now non-traditional markets.
Another aspect of the tariff-driven trade flow shift is different price relationships. For example, soybeans within the US will probably trade at a discount to soybeans in various other countries. The discount won’t always reflect the full tariff but will often reflect some of it. Actually, this is already happening to a degree, as soybeans in Brazil have taken on a stronger than normal price relative to US beans.
But at the end of the day, the level of consumption in world markets shouldn’t be substantially different. People will still need the same amount of soybeans they’ve always needed, and perhaps even more if prices stay low enough, long enough to pump up more demand.
Low prices spark consumption
Speaking of the demand side, let’s remind ourselves of a truism in the markets: Low prices tend to stimulate consumption.
Point being, the US$1.70/bu downfall in US soybean futures has dramatically cheapened the price for various users of US soybeans and soy products. While growers of soybeans might not like it, the price-decline is warmly welcomed by North American livestock, poultry and dairy operators who use soybean meal. In effect, the price break is supportive for the domestic demand side of the equation.
The same goes for corn. It too has fallen to a level that will stimulate demand.
Admittedly, there may be some impact on corn and soybean prices to reflect the fact trade may become less efficient as a consequence of dealing with alternative markets – a cost that is likely to be borne by both the US and China. However, that’s a conversation for a different day.
For now, soybean futures – which have been under pressure for weeks – are probably reacting more to the uncertainty of the trade situation, rather than any real demand loss from China.
And by the way: Some of the recent price decline in soybean and corn futures can also be attributed to great weather in the US, and to computerized spec fund selling that has been feeding on itself. It wasn’t just from the trade war and tariff issue.
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