Global Markets: Soybeans – Brazil Premiums an Effective Barometer For U.S.-China Trade Tensions

©Debra L Ferguson Stock Photography

In the ebb and flow of United States and China trade negotiations, price premiums for Brazil’s soybeans appears to be an accurate barometer for the degree of tension surrounding the negotiations. When tensions rise, premiums emerge in Brazil for soybeans at Paranagua versus the U.S. Gulf. Similarly, when tensions ease, premiums slowly evaporate.

These price premiums have risen and fallen within the framework of global price movements that have focused on the situation regarding the 2019 U.S. harvest. Prices rose in both the United States and Brazil as wet conditions hindered corn and soybean planting in the United States and high river levels raised the cost of moving soybeans to the U.S. Gulf.

As conditions have improved, both Brazil and U.S. soybean prices have trended lower.

Where U.S. and Brazil prices deviate correlates directly with the rise and fall of trade tensions. In early May, the United States announced plans to raise tariffs from 10 to 25 percent on $200 billion of Chinese products. This resulted in a 7 percent premium for Brazilian soybeans.

With premiums eventually falling to 1 percent by late July, a new round of tariff hikes that took effect on September 1 pushed Brazilian premiums to near 10 percent. In all cases, a rise in Brazilian prices, relative to the United States, accounted for nearly all of the premium as U.S. prices continued to trend lower on improving production prospects.

The situation in September 2019 is similar to what was observed at the start of the trade engagement with China in 2018. Again, U.S. prices declined on improving crop prospects while Brazilian prices rose and stabilized leading to premiums that ultimately exceeded the 25 percent tariff level.

These premiums evaporated when tensions eased in late November 2018 coinciding with the G20 meeting held in Argentina.

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