US Soybeans Hit The Fan: Will The Chinese Black Swan Blink First

I follow the grain market all the time, mainly because I’m a farmer with grain to sell, but also because I write a lot of market commentary. As you know over the last several weeks I’ve been talking about trading relationships between the United States, Canada, China and various other countries in our agricultural world. So, at times it gets routine. The first thing I do when I get up in the morning is check the markets and post it on twitter. Wednesday morning when I got up, I saw soybeans were down $.40 a bushel. You didn’t have to tell me why it happened.

It was obvious that China had made a move and among other trade elements they were proposing, soybeans were on the list to possibly get a 25% tariff applied against United States soybeans. Well, knock me over with a spoon. I always worried about a Chinese Black Swan, but you never want to see it come to fruition. It would seem our American friends had pushed the Chinese a little bit too far. Call it a bargaining position, call it whatever you want, we’re getting dangerously close to some real long-term market deterioration.

These proposed tariffs into China came on top of immediate pork tariffs of 37 to 45%. Offals, the principal US pork export to China saw tariffs go from 12 to 37% and were immediately put in effect. The proposed tariffs on soybeans were just a proposal, but when the biggest buyer of soybeans snorts, the market listens. The USDA has estimated that the proposed tariff on soybeans could cost $16.5 billion. The pork export tariffs combined with his soybeans would impact roughly $19.5 billion. It’s nothing to sneeze about.

It is a far cry from where we thought we’d be in agricultural trade before the last US presidential election. That seminal event can be looked back on now as a quintessential geopolitical example of how commodity prices can be affected in the world. Some might say that this is a bargaining position deliberately placed by the Trump administration. The president seems to have a style of creating chaos on one side and then making a decision. It would seem that the American farmer is the scapegoat of such negotiating tactics. They are certainly taking a lot of responsibility for it at this time, especially if all of those tariffs come to fruition.

I simply do not know the intention of the Trump administration. However, the American agricultural secretary has responded to farmers and farm groups by saying “These are announcements. We got 30 to 60 days for negotiations to do that. They are not going to take effect.” Simply put, that’s either bravado or the agricultural secretary is in on the Presidential strategy. Or, it is something else.

It is not good news and I feel it is risky behavior between China and the United States. I also think it is so unnecessary. With the USDA predicting 555 million bushels of soybean ending stocks, this dustup we didn’t need.

I did take a call from a CBC reporter asking my reaction to the Chinese move and how this might affect Canadian farmers. There has been the thought that Canadian agricultural commodities would benefit from the Chinese move, but I didn’t see the soybean basis in my neighborhood screaming higher the next day. It might mean something in the long term, but it’s just as bad for us now as it is for the American farmer.

I ended the interview with the CBC reporter by saying it would be so much better if everybody could get along. I see the move by the United States as damaging to their markets. You just need to go back to 1973 when soybeans went up to $12 a bushel. The United States at the time put an embargo on the export of soybeans, as they were concerned about protein feed supplies for poultry and on production. The price immediately dropped to $6 dollars. This strained relations with foreign customers at the time and to some extent this incident has been credited with the development of the Brazilian soybean economy, which now is China’s biggest supplier.

I see this possible action by the United States and China as spurring soybean production over time in other areas of the world like Russia and Africa. That’s in the long-term. In the short term I would hope US Agriculture Secretary Sonny Perdue is right. I hope its just announcements that will never happen. At the end of the day, protein demand in China is likely to just keep growing. Some are wondering who will blink first. With the Brazil soybean basis surging, maybe it will be that Chinese Black Swan.

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