OPINION: What are the consequences of a U.S.-China trade deal?

One of the most compelling stories in the agricultural marketplace over the past two years has been the trade dispute between China and the United States, and how much the skirmish between the world’s largest producer of soybeans and the world’s largest consumer of soybeans has had on oilseed prices for farmers caught in the crossfire. As we enter a phase in the trade talks where these two super powers start to announce resolutions to at least parts of their differences, what can Ontario soybean producers expect to see in crop prices moving forward?

The ultimate impact of a tariff is that it scrambles logistics. In a situation where there are no trade restrictions, products move from where they were produced to the markets where they are consumed based largely on taking the path with the lowest cost of movement. China didn’t impose a 25 % tariff on American soybeans in order to collect the levy as revenue from oilseed processors in their own country. They imposed the tariff so that Chinese soybean buyers would be motivated to source their beans from somewhere other than the United States. The impact on the trade war on soybeans prices around the world is largely the increase in freight costs as soybeans move in non-typical trade flows in order to reach end user demand.

One of the best ways to keep track of the cost of the soybean tariff, is to track the price spread between American soybeans loaded at the U.S. Gulf (to which Chinese tariffs would apply), and Brazilian soybeans loaded at Paraguay (to which Chinese tariffs would not apply). The price spread between those two major soybean exporting ports has been relatively consistent at about $15 per tonne premium for the Brazilian beans.

Since the only difference between U.S. and Brazilian soybeans loaded on Panama-sized vessels is which ones are subject to a trade tariff, it’s reasonable to presume that if the tariffs came off, the price spread would close. US $15 per tonne is Cdn $20, or about $0.50/bu upside if the tariffs were to be cancelled, and the marketplace were to return to its normal patterns.

Ontario-grown soybeans do not reach price parity with Brazilian or central U.S. soybeans for a couple of reasons. First of all, we don’t have the ability to load the largest class of export vessels because the St. Lawrence Seaway simply isn’t big enough to accommodate them (just like shipping grain on smaller trucks results in higher freight costs). Secondly, because in the international marketplace, soybeans are valued based on their oil and protein content, and due to Ontario’s cooler climate, our soybeans simply don’t match up to those grown nearer to the equator. Ontario soybean prices will move up and down in lock step with values in the U.S. Gulf, but our quality and freight differences hold our prices back at a consistent spread to U.S. Gulf and Brazilian port values.

The core issue behind the drop in soybean and canola demand in China over the past year has gone somewhat unnoticed behind the headlines of the trade dispute. African Swine Fever has killed roughly 90-million pigs in China over the past 12 months. Those 90-million hogs represents about 30-million tonnes of feed, which would require about 7-million tonnes of soymeal. It would take about 10-million tonnes of raw soybeans to make 7-million tonnes of soymeal, so based on the principle that dead pigs don’t eat, it’s actually easy to account for a big portion of the drop in Chinese soybean demand over the 2018–2019.

The most encouraging news in soybean markets occurred during the first week of December when U.S. export sales were announced for the month of November, and the USDA reported that China had bought 2.6 million tonnes of American soybeans in the previous month. That occurred in part because the Chinese government had waived the tariffs on U.S. soybeans as a sign of good will in the trade negotiations, but most market watchers saw it as an indication that Chinese feed demand was starting to recover and Chicago soybean futures prices firmed significantly over the weeks to follow.

One of the biggest challenges for farmers, as they establish their crop marketing plan, is to have a reasonable expectation of what the market may be able to do as they place target orders of set resting prices for the crop which they have to sell. In terms of the soybean markets going forward into 2020, the potential price recovery, which could be generated from a U.S.- China deal on soybeans, is likely to be in the range of $0.50/bu, but certainly not the entire 25 % amount of the tariff.