The Chinese Ministry of Commerce announced today that there would be an additional list of 106 U.S. goods that would be hit with tariffs pending trade discussions finishing in May 2018. Specifically, these new tariffs included a product that could rock Iowa, soybeans. This is also in addition to the 25 percent pork tariffs announced early in March, which would also touch one of Iowa’s top products. In order to understand the type of impact these tariffs would have on whole bean exports looking at the last 2 years of exports gives an idea of both the cyclical nature and magnitude of soybean exports to China from the U.S.

Generally, at the peak of the export season during the months of September through March exports can be as high as $3.5 billion exported in a given month. In 2016 and 2017 the peaks were in October with $3.5 billion and $2.7 billion, respectively. In 2016 exports to China for the year totaled $14.2 billion and in 2017, $12.4 billion. If tariffs had been added to these years the landed cost of soybeans into China would have increased the cost of these exports by $3.5 billion in 2016 and $3.1 billion in 2017.

Another way to look at this is if soybeans at the US export port are trading about $10 per bushel, the imposition of a 25% import tariff by the Chinese government makes those same soybeans cost $12.50 per bushel to a Chinese crushing plant.  So, the relevant questions are: (1) if US soybeans suddenly cost $2.50 more to a Chinese user, what will their demand response be? And (2) Are their alternative supplies of soybeans available so that Chinese importers can source soybeans from other destinations? And (3) To what extent will higher prices for US soybeans cause Chinese crushers and feed users to substitute other sources of protein into their feed rations?

The answer to the first question is that Chinese users would not “quit using” US soybeans simply because the effective, landed-price into China increased to $12.50 per bushel.  It is likely that they would reduce their consumption.  While I am not aware of a country-specific price elasticity of demand for soybeans in China, it would be reasonable that the actual elasticity is somewhere around -0.4, meaning that for each 1% increase in price, the expected volume of imports of soybeans into China would decline by 0.4%.  Thus, imposition of a 25% tariff on $10 soybeans would be a 25% price impact, and the result would likely be a decline of soybean imports of 10%. 

The answer to the second question is that yes, to a degree there are alternative supplies of soybeans for the Chinese to “tap into” instead of paying a 25% import tariff on US-origin soybeans.  Brazil is already a major supplier of soybeans into China.  And Brazil is in the process of harvesting a record or near-record soybean crop.  Can China purchase a higher than normal percentage of Brazilian soybeans? Yes, but there are limits to how much export loading capacity they have and to what extent increased purchases of soybeans by Chinese customers simply displace sales of Brazilian soybeans to other customers that would look to the US for supplies since they would not be paying the import tariff.  Additionally, loading more soybeans out of Brazilian ports could increase the near-record premium that is already being paid for loading capacity out of Brazilian ports.  Paying 50 cents or a $1 per bushel extra would still be less than what a Chinese buyer might buy soybeans from US-origin with the tariff, but those extra costs will have some negative impact on total world demand for soybeans.

The answer to the third question is Yes, but.  In the long run, feed manufacturers and feed users in China can adapt to other protein and oilseeds.  But crushing facilities tend to be set up for soybeans and not necessarily for other oilseeds.  Also, the amino acid mix and nutritional values of substitute feeds are not exact matches for soybean meal.  Trying to find substitutes for protein feeds would be only minimally successful in the short run (next 6 to 12 months) and would have long-term market implications if such substitute strategies are actually implemented.  For soybean oil, there are more substitutes available to consumers and consumers are not very price sensitive to soy oil prices at the household level.  The primary impact of the Chinese tariffs on imported US-origin soybeans would be felt mostly by the Chinese crushing industry and Chinese feed users.

The impact on US and Iowa farmers would be the complex result of all of these actions working simultaneously.  Yes, exports to China would decline, but some of those sales would be diverted to other destinations for those that could not get all the Brazilian soybeans they normally did.  Second, the world price of soybeans would likely decline modestly (likely 5-8%) and that decline could stimulate increased usage by non-China importers (who make up about 40% of the soybean export market).  Third, the impact would not be felt uniformly on the soy complex.  It is likely that world soybean meal prices could actually increase in response to less soy crush in China and less soy crush in the US.  Soybean oil prices would likely fall as substitute products are more likely to be available to Chinese consumers.

The initial reaction of the futures market was a 50 cent (5%) decline in soybean prices and similar declines for soy products.  By the end of the trading day, soybeans were down about 2.5%, soybean meal was slightly higher than the previous day and soybean oil was down more than 5%.

Tariffs are trade distorting and most often, trade distortions are negative to world values of the underlying commodity products.  Iowa produces about 14% of U.S. Soybeans. Soybean production is vital to many of the rural communities in the Midwest. With USDA projections of planted acreage of soybeans expected to exceed that of corn in 2018, this tariff would further depress prices as a vital market for U.S. soybeans would receive an added cost to exportation. A portion of this added cost comes back to the farm price of soybeans. 

All of this should be understood within the context that these tariffs, as of now, are announced but not implemented. The implementation is pending trade discussions between the U.S. and China, to be completed in May 2018.  However, as we have seen in the pork market, and now the soybean market, talk of trade disruptions such as tariffs and retaliatory actions can and does move ag markets.  Our markets do not wait for actual government actions.  They move on assertions, expectations, uncertainty, tweets, official statements and rumors of any of these.  In my opinion, the current process of trade negotiations may work for manufacturing goods and financial products, but they can be quite damaging to agricultural trading systems and to farmers’ pocketbooks during the process.