Will China Send Soybeans Higher?
May 22, 2018
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Over the weekend the US and China announced that they had been working on an agreement to drop tariffs on each other's imported goods. This is certainly a positive development in the ongoing trade talks that have been a concern for many markets, especially soybeans. In addition it has been said that China will work to narrow the trade gap by increasing purchases of US agricultural and energy products. The soybean market responded with a sharp move higher, but is this really going to be a huge windfall for US soybeans? Maybe...
Since President Trump was elected agricultural markets have been concerned about his platform to renegotiate our trade partnerships and challenge China to more fair trade. NAFTA renegotiations have been a concern mostly for beef and corn but China has been the main focus for soybeans. On the domestic US balance sheet soybean exports make up almost half of overall demand with a vast majority going to China. The thought is that any disruption of this could send soybean prices spiraling lower.
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April 4th, 2018 China announced retaliatory tariffs on the US, included on the list of good was soybeans. This sent soybeans sharply lower in the night session with soybeans at one point down just shy of 55 cents. However, by the close soybeans were only down 23 cents and in the days to come soybeans managed to shrug off trade worries and make a new recent high. This was mostly in part because of the realization that the US will not do much in the way of soybean business with China again until September as the South American export season takes over, and (maybe more importantly) the realization that if China buys more from Brazil there will be a mostly equal amount of displaced demand (other countries that would have bought from Brazil) that would have to come to the US for their needs.
Part of the reason for this is that with concerns of China buying all of the soybeans in Brazil to avoid the US prices in Brazil spiked making the US more attractive to our non-traditional trade partners. US soybean export sales saw a boost in the weeks to come. This is demand displacement in action. Global demand didn't really change, it just shifted who was getting their needs from whom.
This could be the case again as trade talks improve between the US and China. If China were to increase buying from the US it could send prices in Brazil sharply lower making them more attractive to the rest of the world, and also China. Combine this with a sharply lower Brazilian currency and all of the sudden the competitive advantage is squarely in the hands of South America. This might not have a positive effect on US soybean prices despite the pickup in China purchases.
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This brings us to the idea of China purchasing an additional (reported but contested) $200 billion in US agriculture and energy. For one, I am always skeptical of what China says they are going to do until they do it. We have heard time and time again that they were going to import US beef on a large scale and we are still waiting to see that come to fruition. We have also not heard the breakdown of how this would happen... Is this new demand or will they buy more US and less Brazil? What commodities are they going to buy? Corn? Ethanol? Beef? Pork? Sorghum? Soybeans??? And how much?
The Devil in the Details
Until details are know it is very difficult to say if/how this will impact the US balance sheet and therefore US prices. It is my opinion that with a projected 7mmt increase in China's crush and 6mmt increase in exports next year that there is not much room to grow demand unless they are planning to build strategic soybean reserves. This is possible, but they have not offered any details. If this is not new demand or an intention to stockpile... then as mentioned before it could just mean that as China buys more US soybeans other countries will go buy the bushels from Brazil that they would have bought from the US leaving the global balance sheet mostly unchanged. Again, this sort of demand displacement may not have a profound effect on prices.
For now the sharply higher knee-jerk reaction in soybeans may be warranted. The idea of China, the global soybean imported powerhouse buying more soybeans from the US is exciting. If they are indeed intending to increase their US purchases and keep their South American constant then this will have a significant impact on the global balance sheet and prices. If however China is just going to buy more US and less Brazil it may not have a huge impact after all. That is, if they are going to buy more US soybeans at all. Right now we do not have the details, and the devil is in the details.
I am concerned that if we do not get more details soon the market may start to grow impatient. Without a concrete plan, a signed agreement or new purchase orders the market may grow restless and optimism may start to fade quickly. Either way the US crop still needs to finish getting planted and grown. The quality of the US crop may have a huge impact on the global balance sheet and prices. China knows this so they may want to drag their feet a bit until more is known about the US crop. One thing does seem clear, all eyes will be on the US crop and it could be an interesting growing season.
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July Soybeans Daily chart:
Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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