Both soybean meal and soybean oil markets in China have remained relatively calm over the past two weeks after China started taxing U.S. soybeans with a 25% punitive tariff on July 6.
The Dalian Commodity Exchange (DCE) closed at RMB 3168 per ton ($471.57 a ton), $2.68 a ton lower, on the day when the U.S. and China started the tariff dispute, and then closed at $461.90 per ton on Friday, a drop of $9.68 in one week.
“Many market analysts believed that the market should be jumping higher after the news, but it did not happen,” said Jun Wang, a professor at China Agricultural University. “A tariff on U.S. soybeans will restrict the import of U.S. soybeans to China, hence impacting on meal and oil supply in the next crop season, which will bring a supply shortage and higher price.”
Jim Sutter, CEO of the U.S. Soybean Export Council, said Wednesday at a United Soybean Board meeting near Omaha that he’s heard the same information.
“The market went way up and everybody (in China) bought up a lot,” Sutter said. “They still have ships arriving, and the crush plants have beans and are producing meal. That’s something to watch carefully because that could begin to tell us when a shortage could be felt, but right now they aren’t feeling any shortage in China.”
Not only is the futures market down — the cash market is also showing pressure. Soybean processors did not increase their crushing volume, because both meal and oil demand was slow.
“When we were facing the trade dispute the first time in March and April, people were confused with panic and tried to buy more meal and oil for their stockpiles,” said Dongping Lu, a purchasing manager for Yangxiang Stock Co. “However, when the two countries started to slap tariffs on imported goods from each other, the market got calm. Many people are getting tired of following the dispute.”
Yangxiang Stock Co. is one of the largest feed and livestock companies in southeast China’s Guangxi Province. Some companies bought more soybean meal in March and April in fear of higher prices after the tariff. To their surprise, prices did not go up, but these companies are locked in to the higher-priced stockpiles.
At the beginning of the year, most of the feed companies had a one-month supply of soybean meal in storage; now they have a more than two-month supply in storage.
“We believe China will lack around 10 million metric tons (40.4 million bushels) of soybean supply next crop year because of the tariff dispute, but so far, the market is not reacting on it yet,” Lu said. “Feed companies either do not want to buy, or they cannot buy because of their high storage in higher prices.”
U.S. soybean prices have dropped roughly 20% since the tariff dispute began heating up in May. On the surface, that almost offsets the impact of the tariff, but the Chicago Board of Trade is a benchmark for soybean prices globally.
“So as the futures have come down, the competing soybean values have also come down,” Sutter said.
Basis in South America, though, has strengthened. On an equivalent price, Brazilian soybeans are about 15% more expensive than U.S. soybeans right now. It’s now a question of whether that 10% spread between the Brazilian beans and the 25% tariff will hold.
“I sure hate to think of that, but if Brazil is truly going to run out of soybeans to supply China, as people predict, they are going to have to turn to the U.S. to buy some soybeans on a limited quantity,” Sutter said. “We’re watching that carefully.”
Like people in other industries, Sutter is looking for signs that the U.S. and Chinese governments may begin some formal talks to cool down tensions. Once talks occur, Sutter thinks agricultural trade will likely be one of the easier issues to resolve between the two countries.
The Chinese feed industry was facing volatility in the first half of this year. Business was good after the Chinese New Year in February and March, then feed demand declined after that. The market shrank 20% to 30% in many areas after April. It still hasn’t recovered, though seasonal demand should improve this summer.
“Pork prices are still at the bottom now while hog farms are losing money,” said Lu. “Many hogs are finished earlier at a small size to reduce feed consumption. In the meantime, hog and poultry farms did not rebuild their stock to a normal level.”
“It is both risky for feed companies to buy or not buy,” said Professor Wang. “We do not know when China and the U.S. government can make a deal — it could be next week or next year. If the two governments can reach an agreement before the U.S. harvest, it is possible that China will buy 30% more U.S. soybeans in the next crop season. Then, the big supply of soybeans to the Chinese market will flood the soybean meal market and soybean meal price may decrease 10% from the current level.”
“We are waiting and observing how the market goes and not stepping in,” added Lu.
Editor’s Note: DTN Ag Policy Editor Chris Clayton contributed to this report.