Global Perspective | Trading shots will backfire

Trading shots will backfire


Grains
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President Trump's 10 per cent tariff on aluminium and 25pc on steel could have consequences for the global soybean market.

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REJOICING US steelworkers cheered as hard-hatted colleagues joined President Trump to announce a 10 per cent tariff on aluminium and 25pc on steel.  

The reality of the “backhanded favour” that President Trump has delivered to the US economy will take some time beyond implementation to sink in.  

Only then, will American workers realise that by guaranteeing jobs in the steel sector, their wages will have reduced purchasing power because goods will become more expensive.  

This will be because: 

a) imports will be less available and more costly and

b) local production may be less efficient and therefore also at a higher cost.  

China – having thrown soybeans into the mix of potential retaliatory actions it could take in reply to the US steel and aluminium tariff announcements – must forge a balancing act between showing strength of conviction and delivering negative impacts to its own economy.  

Due to the volumes and concentration of supply and demand in the global soybean market, China’s own “backhanded favour” of staying strong would come home to roost much sooner in relation to soybeans than in the case of steel and aluminium which represents just a small proportion of total US imports (especially after exemptions are included).  

China is reliant on imports for 90pc of its soybean consumption – consumption that has been growing at a compounded rate of eight per cent during the past 10 year to have more than doubled.  

In 2017-18, China’s soybean consumption is tipped to exceed 110 million tonnes, and account for more than 30pc of global soybean consumption and over 60pc of global imports.

Meanwhile, the supply side of the soybean equation is also concentrated.  

The US and Brazil together account for close to 70pc of global production, and approaching 85pc of exports.  

In 2016, China sourced 41pc of its soybeans from the US and 45pc from Brazil, with just 10pc from Argentina and two per cent each from Canada and Uruguay.  

Given the concentrated market dynamic, China is somewhat snookered on what it can do.  

If it imposes a trade restrictive level of tariff on US soybeans, China will be forced to seek alternative origin soybeans, at a higher price, and still there would be a shortfall in availability.  

China does not have the supply base, or policy structures in place, to find that shortfall at home, and of course there are supply risks and seasonality to take into consideration from sourcing only from Brazil, even if Brazil could make up the shortfall.  

So what can China do to, in its words, ‘not recoil from a trade war’ but not deliver a backhanded favour to its people through higher prices of edible oil, processed foods and livestock, which are fed on the meal of crushed soybeans?  

At this point, a small soybean tariff so that China can be seen to be doing something, but the impact on China is minimised, looks on the cards.  

A dramatic gesture of stopping shipments for a few month (before the US 2018 crop is available anyway) or invoking other non-tariff measures are other possibilities. 

For Australia, Chinese action on US soybeans raises the prospect of increased export demand for canola, which would be welcome for its pricing prospects  during this year.  

Reduced profitability of US soybean production would almost certainly lead to increased US wheat and corn acres, and an unwelcome addition to pricing prospects for global grain markets (though the timing of any announcements in the context of US planting will be a critical factor for this year at least).

When it comes to Chinese action on US soybeans, how small is small enough, yet still large enough, is the question in the trading of shots.  

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