The humble soybean has joined the front lines of the trade war between the United States and China.
Since the Sept. 1 start of the 2018-19 market year, the flow of U.S. soybeans to China has effectively stopped, down 96 per cent from last year, the most recent U.S. Department of Agriculture statistics show.
In pure dollar terms, the halt makes little sense: U.S. soybeans have at times in recent weeks been cheaper than the Brazilian supplies flooding into China, even accounting for the 25-per-cent tariff Beijing levied on U.S. product in July.
But Chinese buyers are nonetheless refusing to buy U.S. soybeans. They have joined forces in an effective embargo that offers a window into how Beijing is using the economic levers at its disposal – using the immense government sway over the country’s corporate sector – to punish Washington far beyond the mere imposition of tariffs.
The conflict shows how China is exercising influence despite a trade imbalance that gives the U.S. a significantly larger volume of trade to tax. For the United States, there’s a growing risk that China will settle into new trade patterns that increasingly exclude its products.
Last week, U.S. Vice-President Mike Pence similarly told The Washington Post that the United States is better able to endure the trade war than China. “We really believe we are in a strong position either way. We are at US$250-billion [in tariffs] now; we can more than double that,” he said.
But that rhetoric stands in contrast to realities unfolding around the soybean trade.
In the United States, farmers are stockpiling soybeans in a desperate hope that calm will prevail and China will again begin buying. Chinese agricultural companies, meanwhile, are in the midst of a full-scale reshaping of their industry, changing where they buy their raw materials, how they make their feed and what crops they plant.
Cargo ships laden with soybeans that once sailed from the United States to China have been diverted to Japan. Meanwhile, barges are carrying Russian product across the Amur River to China, while ocean vessels bring an ever-mounting quantity of soybeans to Chinese shores from Brazil – and Canada. Canadian soybean exports to China from June to September of this year are more than three times higher than last year.
The U.S. “reliance on us is much bigger than ours on them. We can go to Russia, Ukraine, Brazil and other countries to make it up,” said Liu Shuxin, a buyer with Yihai Kerry Investments Co., Ltd., a grain and oil processing and trading company. “Sure, China will go through a certain period of adjustment,” she said. But the risk to China has been “overstated,” she said.
“If relations between the two sides continue to worsen, the number of soybeans imported from the U.S. will be zero, for sure.”
Indeed, China has been able “to shrug off the effects of the trade war quite easily,” said Andrea Zhang, a sales executive with AGREX (Beijing) Co., food importer and exporter. Her company used to source half of its soybeans from the United States. Now, the U.S. component “is totally gone. The number was zero on the past three months.” And, she added “we don’t have any plans for U.S. soybean imports in 2019.”
On its face, that seems impossible. From Sept. 1, 2016 to Aug. 31, 2017 – the soybean marketing year – China imported 36 million metric tonnes of U.S. soybeans, more than a third of its total imports. Soybeans have been the key source of protein for pork and poultry feed.
How then, at the effective snap of a finger, could Chinese importers go cold turkey on U.S. product?
“The simple answer is, they stopped buying,” said Ken Courtis, the former vice-chairman of Goldman Sachs who now oversees a commodity trading operation that handled 11 per cent of Chinese soybean imports last year. “China has a lot more resources to handle this conflict than many people outside of China understand.”
Some of the China’s largest agricultural firms are under direct state control, including COFCO, the state-owned giant that is China’s largest food-processing company. Any plans to import future U.S. soybeans will be determined by the “political climate,” said Shi Liucun, general manager of the purchasing department at COFCO’s oil and oil-seeds division. “We are basically a policy-led company. Our principle is to view government orders and policies as a priority.”
Government planners have also played a direct role in encouraging the creation of more domestic supplies, with subsidies of up to 2,100 yuan – nearly $400 – per hectare, nearly double past incentives for those who plant soybeans.
But in a country where political favour remains a key factor in corporate success, China’s reach extends deep into the private sector, too. Government have officials “haven’t said anything specific, like, 'You’re not allowed to buy American.’ Because it’s a market-based economy; they can’t say that,” said Lucia Vancura, director of global markets at Meros Consulting, which specializes in agriculture and food.
“But the definite message the traders are getting is, ‘come on, don’t be antagonistic. Why would you go ahead and buy this stuff?’”
Loren Puette, director of ChinaAg.org, a market intelligence provider, said he’s not optimistic about China’s ability to sail through the trade war.
“In the short and medium term, China’s animal feed, pork and poultry companies will suffer financial losses since the issuing of bank loans and profit calculations are partly based on the availability of cheap U.S. soybeans,” he said. “A prolonged trade dispute could force many small- to medium-sized animal feed and meat producers into bankruptcy.”
In recent weeks, Chinese leadership has sought to calm overseas nerves, pledging to increase imports and further nudge open its markets. But Washington’s adversarial posture also threatens to elevate Beijing’s interest in reducing dependence on the United States.
Soybeans may be the first glimpse of what that looks like.
“If the China-U.S. standoff doesn’t halt, it will undoubtedly in the end change the structure of the global soybean trade as a whole,” Mr. Liu said.
“In the worst-case scenario, U.S. soybeans will vanish from the Chinese market, and that, to all sides involved – and even to countries from around the world – would be a great waste.”
With reporting by Alexandra Li