China Won't Make Soybeans a Weapon in a U.S. Trade War
(Bloomberg Gadfly) -- How could China hit back against President Donald Trump's tariffs on steel and aluminum? Soybeans are often suggested.
Restrictions on the legume would hit farmers right in the middle of the Trump-supporting rural midwest. Iowa, Wisconsin, Michigan and Ohio, which all flipped from Democratic to Republican in the 2016 election, produce about a quarter of America's crop. Potential battlegrounds including Minnesota, Indiana and Missouri are all major growers, too.
On China's Dalian Commodity Exchange, prices for soybean meal -- the protein-rich leftover from oil extraction, which is much in demand for animal feed -- hit the highest level in more than 18 months last Wednesday as trade tensions grew. Could China, which consumes about 60 percent of America's soy exports, use a humble bean to bring America's heartland to its knees?
China's government wants normal trade relations to prevail in agricultural produce, Patrick Yu, president of the country's biggest food producer Cofco Corp., told Bloomberg News in an interview published Tuesday. "I don't think that any government wants to take any action to block the agricultural trade, because it not only benefits China and Chinese consumers, but I think it will benefit" U.S. farmers, he said.
Those are not just mollifying words. As Gadfly argued last week, the easiest products to target in a trade war are those where punishing your trading partners does the least damage to your domestic consumers. China's anomalous import dependence in soybeans means it's hard to hurt U.S. producers without making users suffer.
In crops as diverse as rice, wheat, apples, asparagus, cabbages, groundnuts, lettuce, mushrooms, cotton, sweet potato and watermelons, China is the unquestioned top global producer.
That's not the case with soybeans, where output has slipped behind Brazil, Argentina and India over the years and seems destined to fall soon below Paraguay. The number of hectares under cultivation declined in 2015 to its lowest level in records dating back to the Great Leap Forward famine of the early 1960s.
Why should this be?
First, because soy trades on an unusually open market. China's desire to be self-sufficient in grains means that rice, wheat and corn imports are heavily affected by tariff quotas that are currently the subject of a U.S. complaint at the World Trade Organization. In the give-and-take of international trade diplomacy, having a wide-open market for soybeans is the price Beijing paid for keeping control of its market in other grains.
Second, because in recent years China's appetite for meat has been limitless. Soybean's high protein content means it acts as a sort of superfood for livestock, helping chickens and pigs bulk up faster when added to grain-based feed. Chinese pork prices have been weak in recent months, but President Xi Jinping is also in the midst of consolidating his personal power by abolishing term limits. At such a delicate time, no circumspect government is going to risk inflaming the public mood by jacking up food prices.
The bigger risk for American soy farmers isn't action by Beijing, but the falling quality of their own crop.
It's probably wrong to regard that as permanent. China tends to be obsessed with security of supply for major commodities, so it's unlikely to want to be any more dependent on Brazilian soybeans than it already is. That's particularly the case because the different seasonal patterns of the Brazilian and U.S. crops mean it needs both countries to avoid swings from glut to dearth.
So midwestern farmers should sleep a little easier at night. The hedge funds that are currently holding a record net long position in soybean meal, however, should take care. This bumper crop could be about to fail.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
©2018 Bloomberg L.P.