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Closer look: No time to panic over Chinese soybean tariffs

During market uncertainty, look for buying opportunities.

China’s plan to slap a 25% tariff on U.S. soybeans is no reason for farmers to panic, says a leading U.S. market analyst. In fact, there may be a silver lining.

“If the market thought this was the end of the world we’d be down the limit today, which is 65 cents, but as of Wednesday morning we’re only down 40 cents,” says Farm Futures senior market analyst Bryce Knorr. “We haven’t really beaten up this market all that much yet.”

Disruptive news causes uncertainty in any market. But instead of panic selling, look for buying opportunities, he says. Energy-based inputs may be a bargain, as crude oil is down a buck a barrel right now. Chicago-based diesel prices are 8 cents off recent lows, despite higher demand from spring field work. The propane market is also worth looking at, especially if you’re thinking about switching acres from soybeans to corn at this late date.  

“The propane market is closing in on lows compared to last summer,” says Knorr. “So if you’re worrying about fuel for drying corn this might be a market to watch.” Propane was down to 53 cents on the wholesale market last summer, and it’s 8 to 9 cents above that level right now.

“Presumably farmers have already made some (soybean) sales so they have some protection on the books,” says Knorr.

Cold shower for soybean market

U.S. soybean exports to China were already weak - a fact the market had ignored up until now. The market had been bullish, driven by Argentine drought, which triggered fund buying and more fund buying.

“The reality is, our exports to China are terrible - below last year’s levels and getting worse,” says Knorr.

That weakness could have been fueled by U.S. soybeans’ lower protein content, or Chinese buyers already nervous about a potential trade dust-up. But the reality is, U.S. soybeans are cheaper than South American beans, considering freight and other factors, says Knorr.

The immediate, tit-for-tat statement from the Chinese indicates a calculated, well-choreographed response was at the ready.

“If you want to get your opponent’s attention the best way to do it is by hitting them with a 2x4 or do what magicians do – a big bang and a cloud of smoke,” he says. “As a tactic, this was a little of both. It’s showing Trump that the Chinese can talk smack as well as anybody.

“These guys aren’t stupid,” he adds. “No doubt they had been mulling this over. Now they’re saying, ‘let’s talk.’”

If the recent South Korean trade deal is any indication, the Chinese-U.S. standoff could blow over quickly. Although there have been few details released on the Korea deal, all indications point to very little change in the status quo.

The best outcome would be a face-saving measure on both sides to wind down threats. Such a move would leave the status quo agreements in place, but the U.S. would still faces the daunting prospect of being labeled an unreliable world supplier. It can take years for U.S. trade and farm organizations to build those overseas relationships, and just one swipe of a populist President’s pen to undo that work.

“The risk is that they lose control of the situation,” says Knorr. “That risk is probably low, but it’s impossible to quantify right now. Sometimes things spin out of control, but most of the time they don’t.

Take home points from today’s news:

  • The world economy keeps grinding on, because it’s bigger than any one person or politician.
  • In a supply market, demand goes up and down in small increments; the wild card is always exports because they have the potential to move demand dramatically one way or another.
  • All markets are risk averse, which is why today’s flurry of events might appear to be an over-reaction.
  • Traders buy and sell based on headlines. But no one knows exactly where the markets are headed.

 

TAGS: Soybeans
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