The News & What it Means – US-China Trade Battle Increasing Brazil Soy Area

By John DePutter & Dave Milne – August 15, 2018

 

The news:

“Shifting trade flows are redefining the Brazilian landscape, spurring more farmers to align their crops with Chinese appetites.”

– Reuters, Aug. 14, 2018

 

What it means:

Newton’s third law of motion states that for every action (force) in nature there is an equal and opposite reaction.

 

Although he was about 300 years early, Newton might have also been opining on the current trade spat between China and the US

 

Earlier this year, when China and the US were both still in the stages of threatening each other with import tariffs, a number of analysts suggested that if the tariffs did come to pass (which they did in early July), China would simply look to other countries – primarily Brazil – to fill its soybean import needs while US supplies eventually backfilled whatever demand those other countries were now unable to meet.

 

Essentially, the idea was that total overall world demand for soybeans would stay the same, amid a brief period of musical chairs during which buyers and sellers would figure out a new world trade order. For example, more Canadian soybeans are now apparently flowing to China, while the resulting void here is filled by additional imports from the US.

 

Longer-term impacts could be severe

However, the Reuters story points to a potential longer-term impact that spells trouble for the American soybean industry. As the article reveals, more and more Brazilian farmers are forsaking crops like sugarcane and planning to plant more soybeans instead, motivated by the rising prices the additional demand from China has created.

 

Already, Brazilian soybean area has increased by almost 5 million acres over the past two years, while sugarcane area has declined by about 988,000, according to government data, reports Reuters.

 

With more soybean acres going into the ground in Brazil, that means China will need to buy less and less from other countries. And while it’s always been assumed that China would still need to come to the US to source some of its soybean needs in spite of the tariffs in the short-term, the longer-term outlook is considerably murkier.

 

For the US, there’s a major risk that softening Chinese demand will eventually translate to fewer domestic soybean acres. And for a country that normally exports about one out of every three soybean rows produced to China that could leave a significant amount of established infrastructure and a mature soybean industry flailing to find alternative markets.

 

Additional consequences:

There’s more: If US soybean acres decline, more production of other crops ranging from corn to wheat to smaller crops could result, lowering prices for those crops.

Or, what if the US government continues to offers financial assistance to soybean growers beset with low prices because of the trade battle? That could motivates US farmers to not cut soybean production, making soybean prices stay lower for longer.

 

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