China-U.S. trade war gets real as soybean tariffs imposed

A growing trade war between the United States and China is weighing heavily on American soybean prices, which have fallen sharply from the spring highs.

However, the value of Canadian canola is hanging on better.

The weather in the U.S. Midwest is co-operating and the amount of soybeans in good to excellent shape at 74 percent is much better than last year at this time and better than the 10 year average.

So that is weighing on soybean futures, but the trade battles that U.S. President Donald Trump is launching are creating additional headwinds against prices.

His administration upped the ante June 15, announcing 25 percent tariffs on $50 billion worth of Chinese imports with a threat of more to come if China does not stop subsidizing its high technology industries and does not start buying more American goods to narrow the trade deficit between the world’s two largest economies.

China immediately retaliated with its own tariffs on a list of goods, including U.S. soybeans and most other major crops.

And in the ongoing frictions between the U.S. and Mexico, news agencies report that the latter is also considering putting tariffs on soybeans and corn in the near future.

It is hard to keep up with conflicting developments in this row between the Trump administration and China.

Trump one day says Chinese President Xi Jinping is a great friend and a solution can be found. On another day the Chinese offer to buy more American agricultural goods and energy but then a few days later the rhetoric intensifies, tariffs are imposed and China says the agreement to buy more from the U.S. is off.

Grain traders have been pricing in the potential for trade disruptions for weeks.

The spring high in new crop November soybeans was reached May 25 and the price had fallen since then by almost 12 percent as this column was written June 15. That is the sharpest decline for this time of year since 2004. The U.S. price has declined even as its main competitor has exporting problems.

A national truckers strike in Brazil in May and a continuing dispute over truck freight rates has its ports severely backed up. The number of ships waiting to load grain at Brazilian ports is up 60 percent over this time last year.

But even with the logistics problems, exporters are raising their cash bids for Brazilian beans in expectation that they will eventually ship more to the Asian giant.

The China-U.S. soybean trade war is a major price factor but we can’t ignore Mother Nature’s influence.

I’ve already noted that U.S. soybeans are off to their best start in years and so is the corn crop.

December corn futures peaked May 25 and have since fallen almost 10 percent. China buys little American corn, and so the decline is likely due mostly to the excellent spring weather in the Midwest.

Falling soybean prices normally weigh down canola futures, but November canola is down only about 3.3 percent from its spring high posted May 29.

The Canadian dollar has weakened a little against the U.S. currency in that period, particularly since the Federal Reserve raised interest rates, so that supported canola values. However, the main underpinning has been the idea that if China reduces soybean purchases it might raise imports of Canadian canola. The dry spring in much of the Prairies was also a concern, but recent rain in much of the canola growing region has helped.

Canola is also supported by the fact that soy oil has not fallen as much as soybeans. Soy oil is down only 6.8 percent from its spring high. Oil yields from the 2017 American soy crop are below normal, and soy oil stocks at the end of May were much below expectations.

I’ve written before that even with its huge soybean crops, South America can’t supply all of China’s needs. Overall, more Brazilian beans will likely go to China, but other markets that it would have served will start buying American beans.

However, usually by November Brazil’s exportable soybean supply is mostly spoken for, and international buyers turn to the newly harvested American crop.

That is the time when the situation will really get serious if the U.S.-China dispute is still ongoing.

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