Article
Trade war trumps usual focus on harvests and weather
Published: 16/08/2018
At this time of the year in the agricultural markets, the harvest prospects for the northern hemisphere and weather forecasts for the southern hemisphere are typically discussed, as the 2018/19 planting season is fast approaching for the latter. But this time around the typical discussion has been eclipsed by the uncertainty in the global trade environment caused by the trade dispute between the US and China. - Wandile Sihlobo, Agbiz head of Agribusiness Research *Written for and first published on Business Day on 16 August 2018
At this time of the year in the agricultural markets, the harvest prospects for the northern hemisphere and weather forecasts for the southern hemisphere are typically discussed, as the 2018/19 planting season is fast approaching for the latter.
But this time around the typical discussion has been eclipsed by the uncertainty in the global trade environment caused by the trade dispute between the US and China.
One of the commodities that has dominated the headlines is soybeans, following the introduction of retaliatory tariffs by China. This is important because the US and China are key players in the market. In 2017 the US was the world’s second-largest exporter of soybeans after Brazil, accounting for 37% of global soybean exports, according to data from Trade Map. The major destination of these exports was China. In fact, over the past five years about two-thirds of US soybean exports were absorbed by China.
The retaliatory tariffs hence caused much discomfort in the US farming community. In an article in the New York Times on August 2, an Ohio farmer, Christopher Gibbs, was quoted as saying: "I am a soybean farmer hurt by Trump’s trade war. I can’t take it." It is understandable that Gibbs feels this way, given how critical a market China is to the US.
The trade war uncertainty is partially reflected in global soybean prices, which have declined from levels earlier in 2018. Soybeans are trading at about $350 a tonne. For context, however, the decline is not significant yet; it is still only about 5% year on year. The expected improvement in global soybean production to 367 Mt has added pressure to the market.
Over the past few weeks some industry analysts have argued that China might remain a key buyer of US soybeans despite the trade dispute because of its growing consumption and the world supply structure. However, the communication from the Chinese authorities earlier this week painted a different picture, suggesting the country will be able to cover demand for animal feed and vegetable oil without relying on US soya imports. China claims it will use supplies from South America and alternative oilseeds.
This is good news for South American farmers, which are expecting large soybean harvests in 2018/19. Soybean production in Brazil and Argentina is estimated at 121 Mt and 57 Mt, respectively, according to data from the US department of agriculture.
Coping mechanisms
The International Grains Council also noted last week that China has expanded the use of low-protein animal feed formulas, which could potentially reduce its soybean imports by 5 Mt in the 2018/19 season.
Moreover, China’s imports of canola and sunflower meal are expected to increase this season and potentially substitute 6 Mt of soybean meal. A number of agencies and analysts have revised their forecasts for China’s soybean imports downward since the introduction of retaliatory tariffs.
China National Grain and Oils Information Centre placed its 2018/19 import estimate at 94 Mt last week, 9% lower than the estimates presented earlier in 2018. This is not because of a decline in domestic consumption but rather a function of its trade war coping mechanisms.
Fortunately, SA soybean farmers are in a better position than Gibbs, the Ohio farmer. Local prices have declined marginally, mainly due to an expected record soybean harvest of 1.6 Mt. The silver lining on this trade war cloud is that SA feed manufacturers, and consequently the livestock sector, will benefit from lower global soybean prices. Keep in mind that SA remains a net importer of soybean meal, with 2018 imports estimated at just less than 500 000 tons.