In 2019, the US-China trade war will continue to be the main focus for the Asian soybean market. China — the world’s largest buyer of soybeans — is also the biggest importer of US soybeans. In 2017, China imported 55% of the US soybean exports, representing 27% of the total soybeans produced in the US. However, in July this year, China imposed a 25% tariff on US soybeans in a move that has had a major impact on the market.
Triggered by the trade war, soybean futures on the Chicago Board of Trade Exchange dropped almost 15% in value in July. Meanwhile, due to the newly introduced tariffs, China switched — almost exclusively — to Latin American soybeans in the second half of 2018.
In 2018, Chinese soybean imports fell for the first time since 2004. The estimated Chinese imports for 2018 are around 88-89 million mt, down 6%-7% from 2017.
Moreover, with the high tariffs imposed on US soybeans, Brazil has become the main provider of soybeans to the Chinese market. At the same time, Chinese buyers have started searching for other suppliers in order to fill the gap left by the US.
Russia, Ukraine, Uruguay and Canada have all emerged as viable sources of soybeans for China. However, they have been unable to provide China with all of its import requirements, as they could not increase their supply sufficiently over a short period of time. Given the opportunity created by the US-China trade war, these countries are keen to increase their soybean exports to China. The total Russian and Ukrainian soybean production is projected at 10.8 million mt for the 2018-2019 market year, with their combined exports expected at 3.9 million mt, according to the US Department of Agriculture. These exports represent a mere 4.3% of China’s estimated imports for the same period. Nonetheless, the lack of US soybeans does create opportunities for Russia, Ukraine, Uruguay and Canada to develop its cross-border logistics and trade. For Ukraine, Uruguay and Canada, the trade war presents an opportunity to develop their relationship with a significant trade partner.
GLOBAL SOYBEAN SURPLUS
As per USDA’s latest report, soybeans’ end stock-to-usage ratio was 22.7% globally and 23.25% for the US, respectively, both at their highest levels since 2000. An increase in soybean production is projected for the 2018-2019 marketing year. In 2019, soybeans harvested in Brazil and Argentina are expected to be at 126 million mt and 56 million mt respectively. As a result, a global soybean surplus seems inevitable.
DOMESTIC MARKET REACTION
Demand for soybeans in China is expected to weaken in 2019. According to China National Grain and Oils Information Center, China’s soybeans imports in 2019 are forecast to fall to 86 million mt, a drop of 9 million mt on year. “Chinese demand for soybean meal in the feed industry has been falling from its peak since 2017. At the same time, the Chinese government was inefficient in addressing the recent African Swine Fever outbreak,” a trader said. The highly contagious disease is still spreading across the country. ASF may lead to a significant reduction in pigs stocks in the coming year. Meanwhile, in 2018, crushers have been cautious about purchasing soybeans due to the high volatility in prices created by the trade war. Currently, the market believes that requirements for the incoming February-May soybean imports have not been well covered by many crushers. The many uncovered positions could create more risks for Chinese soybean importers in 2019.
WHAT IF THE TRADE WAR GOES ON?
The trade war will likely extend into 2019. As a result, the Chinese soybean market is expected to continue to suffer from potential distortions in price and buyer behavior. The most notable scenario would be a shortage of soybeans in China due to a lack of soybean imports from the US. Market participants think that there several ways in which the Chinese government can address the issue. Firstly, the Chinese government could introduce a new industrial standard on feed meal requirements for pigs and hens. The introduction of new standards could effectively reduce the consumption of feed meals such as soybean meal. Secondly, the Chinese government could release soybean from national reserves to ease short-term shortage in the market. According to a source, the Chinese government has stored as much as 8-10 million mt soybeans, which can meet domestic consumption requirements for one-two months. Chinese state-owned companies such as COFCO and Sinograin have started to purchase US soybeans on behalf of the government, to replenish state reserves. As of December 21, these companies have purchased 3 million mt from the US, all of which is expected to go into state reserves. However, China does not seem keen on removing the 25% import tariff on US soybeans just yet, and until that happens, Chinese crushers will have to find a way to get by.