by Hari Kapoor
The U.S. Soybean Market, Pre-Trade War
Agriculture has been a backbone of the American economy, but the industry has been facing strong headwinds amidst the tit-for-tat trade war between the U.S. and China. For soybean farmers, the economic outlook is dire. For nearly two years, soybean growers have been caught in the crossfire of the trade war, and the industry has become mired in tremendous uncertainty and monetary losses. Chinese trade is one of the most significant revenue drivers for soybean producers within the United States, and political friction is only slowly beginning to ease.
Before the tariffs, soybeans were among America’s largest agricultural exports. As the largest trading partner in the past, China purchased over $12 billion, or nearly 33 million tons of all U.S. soybean exports, in 2017. For the past five years, China has consistently purchased over 70% of all U.S. soybean exports. This relationship is no accident – it’s a culmination of 60 years of trade. To help feed China’s giant appetite, the U.S. soybean market grew from $414 million to $14 billion from 1996 to 2017.
The Decline of the Soybean Market, Post-Tariff
Then came 2018.
China’s retaliatory tariffs targeted some of the United State’s most vulnerable industries, including agriculture. The soybean industry’s dependence on Chinese importers made it a prime target for tariffs. Due to more expensive U.S. soybeans, Chinese importers have eschewed decades of close relationships for other international producers.
In just a year and a half, the 25 percent (later raised to 30 percent) retaliatory tariff caused the volume of U.S. soybean imports that China bought dropped from $12.2 billion in 2017 to just $3.1 billion in 2018, a decrease of over 70%. Stepping in to fill the void left by American distributors include Brazil and Argentina, which became some of China’s new largest soybean suppliers. By 2018, Brazil supplies over 57 percent of all Chinese soybean imports.
Incentivizing Soybean Production in South America
Brazil, in particular, has seen enormous benefits from the U.S.-China trade war. China has turned to Brazil as the primary supplier of soybeans. In January 2018, before the dispute, China purchased less than $900 million in Brazilian soybeans. By May 2019, China was buying $3 billion in soybeans from Brazilian producers and just under half a billion from U.S. farmers.
The good news for the American soybean industry is that China is in the process of removing the retaliatory tariffs on soy. The Asian country has already waived tariffs on 10 million tons of U.S. soybeans, but that constitutes under a third of U.S. soybean exports at the peak of the market. Unless new quotas for waivers are issued, U.S. soybean farms may experience much of a benefit. China has already exhausted all waivers to buy U.S. soy-free of trade tariffs, which will prompt the market to return to Brazilian and Argentinian producers.
When looking towards the future, Brazilian and Argentinian farmers have a huge incentive to grow and sell as many soybeans as they can. In Brazil, the release of the jailed former president Lulu caused the Brazilian real to dip to historic lows, meaning soybeans priced in dollars earn producers a windfall due to F.X. rates. In Argentina, the political situation is also favoring soybean producers. Growers are anticipating the return of Peronist rule in December, which is projects to grow export sales on soybeans while restricting wheat and corn exports. In addition, the end of a drought in Argentina will bode well for local soybean production as well.
The Future Domestic and International Soybean Market
What has this meant for domestic soybean farmers? The prognosis is mixed.
According to a U.S.D.A forecast, U.S. soybean yield for 2019 has regressed to 2013 levels. For 2019, the total domestic yield of soybeans is down 20% from the previous year due to adverse conditions, such as the combination of spring planting delays, the lack of summer warmth, and a wet autumn harvesting season. For example, North Dakota has only harvested about 56% of mature soybean crop due to snowfall, compared to the last five-year average of 95% harvest completion by this time of year.
The global soybean yield is down for the year too. India experienced the wettest monsoon season in twenty-five years, which decimated the country’s soybean output. The unexpected low yield helped trim America’s year-end soybean stocks to 460 million bushels, down from the 640 million estimates last month and the nearly 1 billion estimate in the summer. The lower-than-expected stockpile is pushing farmers to plant roughly 10% more soybeans in 2020, which is key in maintaining a healthy market.
The soybean demand in China also decreased for the first time in 15 years, due to an outbreak of swine fever. Since the disease was discovered, China has culled over a million pigs, and the epidemic shows few signs of a slowdown. On the other hand, China’s increased reliance on Brazilian and Argentinian soybeans have incentivized growth in production in these countries. Fortunately, the higher cost of South American soybeans enhances the competitiveness of U.S. soybeans, slightly offsetting the loss of sales to China.
When looking towards the future, the number one biggest unknown is the trade friction between China and the U.S. Even if China eliminates the tariffs on American soy, it’s unlikely soy export levels will reach 2016 and 2017 levels within the next three to five years.