Release The Soybean Tariff Kraken!

So despite assurances from Wilbur Ross that China’s response to the Trump administration’s Section 301 tariffs are “proportionate” and thus nothing to be alarmed about, markets were most assuredly alarmed.

And the reason is simple. Here’s how we described the flaw in Wilbur’s “logic” earlier on Wednesday morning:

But beyond that, Wilbur’s contention that China’s response “shouldn’t really surprise anybody” because it’s proportionate completely misses the point. This isn’t about proportionality, it’s about the fact that it’s escalating. Wilbur’s “reassurances” amount to telling people not to worry about a war because each side is being careful to only inflict as many casualties as they suffered.

And further:

Speaking of shooting wars, Wilbur had a rather uncomfortable analogy for you on Wednesday. Here’s what he says in that clip:

Even shooting wars end with negotiation.

Right. But again, Wilbur seems to be missing the point. It’s not about proportionality or whether everyone eventually decides to stop killing each other (figuratively or literally), it’s about the body count that accumulates in the meantime. That’s what people are worried about here.

Well, stocks of course got off to a rough start after futures plunged and the administration looks like it’s getting ready to run a full court press to try and contain things, starting with Trump on Twitter. That’s laughable because if there’s anything that’s guaranteed to make the situation worse, it’s Trump tweeting about it.

Anyway, the market is going to be focused pretty intently on the soybean tariffs for a number of reasons, not the least of which is that the move is a pretty blatant attempt to hit Trump in the balls (and not in that good kind of way when Stormy Daniels gently swats at them with a magazine).

“Soybeans are considered one of the most powerful weapons in Beijing’s trade arsenal because a drop in exports to China would hurt Iowa and other farm states that backed Trump,” Reuters notes before reminding you that “soybeans were the biggest U.S. agricultural export to China last year at a value of $12 billion.”

“China’s response carries both economic and political weight as agricultural states are major supporting regions for Trump,” Monica Tu, an analyst at Shanghai JC Intelligence Co. told Bloomberg, underscoring the political ramifications.

“We view the inclusion of soybeans in today’s announcement as political in nature and reflective of the escalation of the trade dispute with the US. Soybean tariffs impact US Midwest political swing states and come at a cost that China appears willing to pay,” Goldman’s Damien Courvalin and Jeffrey Currie write, in a note out this morning.

Soybeans plunged on the news:


Where China is going to get all their goddamn soybeans now is an open question. Here are some additional excerpts from Reuters:

China gobbles up about 60 percent of globally traded soybeans to feed the world’s largest livestock industry. Factories crush the oilseed to make meal – a key ingredient in animal feed.

“There simply aren’t enough soybeans in the world outside of the U.S. to meet China’s needs,” said Mark Williams, chief Asia economist at Capital Economics.

“As for reducing dependence on imports, there are a few options, but none is a magic bullet that could hurt U.S. farmers without generating costs at home.”

Brazil supplied half of China’s imports last year while the United States shipped around 33 million tonnes, about a third of the total. Replacing those U.S. tonnes will be no easy feat.

Right. Argentina is a possibility but there’s a drought down there, which complicates this issue apparently.  Here are some visuals from the USDA and Goldman:


And here are some bullet points from Goldman’s note:

  • As we have argued before, it was not an initial target for Chinese tariffs as China would ultimately be the one paying for these soybean tariffs. In 2017/18, China will import 34.5 million metric tons (mt) from the US with all other soybean exporters only shipping 17.5 mt to countries other than China. So China still needs supply from US farmers and their planting incentive price must therefore remain unchanged, with the landed price in China rising instead.
  • A tariff on US soybeans would therefore increase Chinese domestic soybean prices, at a time when the drought in Argentina has already supported global prices. The pass-through of such higher soybean prices could however initially be mitigated by high Chinese inventories. Further, declining domestic pork prices on increased capacity and efficiencies would initially mute the impact on Chinese consumer prices.


So the ultimate effect on Chinese consumers is impossible to know in advance as there are a variety of factors at play here, but in case any of the above isn’t clear enough, the worry is that it could drive up pork prices.

As for who comes out ahead, Latin American producers are the most obvious beneficiary. “This will benefit Brazilian exporters,” ING’s Warren Patterson told Bloomberg, for the same piece linked above. “They will be licking their lips right now.”

Maybe. But it’s not quite that simple. The tariffs “would incentivize [Latin American producers] to increase acreage at the expense of US farmers [but] this will take time and investment,” Goldman writes, in the note mentioned above. They go on to say that while “Chinese imports have grown on average 6 mt per year over the past decade,” combined production from Brazil, Argentina, Paraguay, and Uruguay “has only managed to keep up over that time period.”

You can make of that what you will, but do note that it seems to indicate China is more than willing to bring out the big guns if they feel it’s necessary and that could portend resorting to yuan depreciation by the time this is over.

For reference, here’s a possibly useful timeline of events from Barclays.




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11 thoughts on “Release The Soybean Tariff Kraken!

  1. Indeed it hurts both producers and consumers. Perfect timing for Canada though and its vast farmlands, the world’s second largest, because Canada can/will plant lots of soybeans instead of wheat etc this spring. Seeding has yet to begin. Perfect timing for canada-china. The chinese are the largest visible minority in Canada, and are an outright majority in its wealthiest city, Vancouver. So china-canada relations are solid.

    No chinese tariffs or trade disputes for china & canada. They’re both doing TPP now. So Canada will say thanks to the US for ceding its market share to Canada on grain seeds. Ceding seeds, get it? haha. Doubt the US gets the huge chinese market back again if they lose it to canada. Really, really stupid move!

    1. Agreed. Don’t forget Russia is at peak wheat right now… can easily change to soybeans as well.

      My oh my… what better way to galvanize the rest of the world against you than to march into the sand box flipping everyone off, spewing amazingly narrow minded, short sighted, inflammatory sequences.

      “I am tired of not having the best sand! I used to have the best sand and I want it back! I want to sit where you are sitting – move over! In fact, you need to pay me for sitting in my spot. BTW, I am going to transform this sandbox and sit on the throne again…. No, wait! I’m too tired and fat to build my throne myself, so line up here to tell me how you are going to build it for me. Why isn’t everyone listening?! “ …. then, in a remarkable moment of self reflection, decides he must adjust his behavior….. … ‘yes. yes. …. must pull more levers!!’

      the dead don’t get to write the meglomaniac’s history, nor did they stand up in time.

    2. U S will prevail on the tree issue. Bunny you were all “. a’dither on the dollar sinking 2months back and now about U S losing out to Canada. Long view: T.he U S comes ahead 2 year from now. H’s hatred of all things Trump causes him o miss big picture. Always do enjoy your viewpoint though.

      1. First , thanks for the compliment.

        In fact, I’ve warned about a falling dollar for much longer than that, since early last year, and since I first posted on this site when the dollar still sported a 10 handle rather than an 8 handle. Also warned 2months ago about a dollar counter trend rally (up) before the next shoe drops. The dollar collapse isn’t over and it’ll be still lower for “2 years”. It’s being particularly crushed by Asian FX this year. “Long run” the dollar is going like the pound before it. Won’t be reserve currency in 10-15 years, maybe sooner because trade deficits are essential to supply a reserve fx globally. But the Trumps don’t get it and could be the blame for loss of reserve currency status the way the Turmp admin has reinvented the dollar policy and is fixated on a trade deficit of physical goods – while ignoring its trade surplus in services which are a component of a total net trade balance deficit of ZERO (source: Project Syndicate).

        Also bullish on grains. So China putting tariffs on beans is dumb and ineffective if grain prices rise this year like I expect. As for Canada, it’s run by a liberal socialist government that pays farmers to grow nothing and “markets” for farmers – who are banned from selling their own product themselves rather than thru the gov’t marketing board – truly counterproductive like all things socialist, so it’s unlikely that Canada can take advantage of its golden opportunity to gain Chinese market share from US. I dunno who else could. Argentina? Russia? Ukraine, if it wasn’t a war-torn shithole, a legacy of the Obama admin.

    1. Then too bad he didn’t stay in the classroom. As those who can, do, those who can’t, teach.

      Dunno whether he can teach, but sure seems he hasn’t a clue about doing.

      He just fucked a whole lot of farmers and that supply chain. Probably for good if Canada gets it.

      But there’s still hope because the Chinese are not actually doing this, unless Trump continues.

  2. Random thoughts:
    I guess the Chinese will have to increase their subsidies to the industries and people affected. I wonder how the government will treat the Chinese companies that US companies were forced to partner with. Do you slap tariffs on those companies? I also wonder how much debt the Chinese will absorb to support their industries in a trade war since so much of their economy is state sponsored. Whether we use tariffs or even go so far as to put bans on their goods, I really think the Chinese have more to lose. Other suppliers of goods will be considered as an alternative and if our consumption has to change until this occurs, so be it. I’m a bit fed up with intellectual properties getting taken, uneven playing field in general on everything they do. They simply do not follow the same rules we do and they should. The training wheels should be off by now.

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