JT’s Insights

Finally, Chinese proposed tariffs target US soybeans

By support@jt.capital / April 6, 2018

 April 4, China announced tariffs of 25% on certain US imports in response to yesterday’s proposed US tariffs. These include automobiles, chemicals, aircraft and US crops, with implementation depending on whether the US applies its own proposed tariffs after the consultation period.

We view the inclusion of soybeans in today’s announcement as political in nature and reflective of the escalation of the trade dispute with the US. Soybean tariffs impact US Midwest political swing states and come at a cost that China appears willing to pay. This is consistent with comments by Chinese officials yesterday that they would retaliate on what was an explicit goal from the US of targeting key government industrial policies.

We believe the impact on China’s inflation would remain modest initially, however, given high inventories and falling domestic pork prices, for which soybeans are a key input. While China would still require US soybean imports, all else constant, such tariffs would favor Latin America farmers to the detriment of US farmers.

The introduction of a tariff creates downside risk to US soybean exports this year, either through Chinese destocking or partial origin substitution. With China accounting for 60% of US soybean exports, this is likely driving prices lower today. Yet, the outlook for Chinese pork demand is not impacted medium-term, leaving the global soybean supply outlook also unchanged. As a result, the introduction of tariffs should eventually support soybean prices instead to limit the loss of US acreage and accommodate the only gradual acreage substitution that would occur between the US and Latin America.

  • From China’s perspective, we believe soybean was always the US crop to target: its exports are worth $14 billion, half of all US agriculture exports to China, with China the largest US export market. It is also produced in all the electoral Midwest swing states.
  • As we have argued before, it was not an initial target for Chinese tariffs as China would ultimately be the one paying for these soybean tariffs. In 2017/18, China will import 34.5 million metric tons (mt) from the US with all other soybean exporters only shipping 17.5 mt to countries other than China. So China still needs supply from US farmers and their planting incentive price must therefore remain unchanged, with the landed price in China rising instead.
  • A tariff on US soybeans would therefore increase Chinese domestic soybean prices, at a time when the drought in Argentina has already supported global prices. The pass-through of such higher soybean prices could however initially be mitigated by high Chinese inventories. Further, declining domestic pork prices on increased capacity and efficiencies would initially mute the impact on Chinese consumer prices.
  • If these tariffs are implemented, China would pay more for soybeans from the US and Latin America producers would realize higher landed prices in China. All else constant, this would incentivize them to increase acreage at the expense of US farmers. This would not occur until next fall’s planting at the earliest. Further, it will take time and investment: Chinese imports have grown on average 6 mt per year over the past decade and Brazil/Argentina/Paraguay/Uruguay production has only managed to keep up over that time period. Finally more logistical infrastructure would be needed to accommodate such production, transport and export growth.

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