MI Prospects

Daniel Rooney

Daniel Rooney, Analyst, AHDB Market Intelligence
Daniel.Rooney@ahdb.org.uk, 02476 478840

Aidan Wright

Aidan Wright, Analyst, AHDB Market Intelligence
Aidan.Wright@ahdb.org.uk, 02476 478894

ADS Felicity Rusk Trainee Analyst 024 7647 8818

Felicity Rusk, Analyst, AHDB Market Intelligence
Felicity.Rusk@ahdb.org.uk, 02476 478818

US-China trade dispute: Setting the scene 

Key points:

  • The US-China dispute over trade has escalated this spring, US pork imports now face a 25% import tariff with US soyabeans potentially facing similar tariffs in coming months.
  • Consumption and demand for soyabeans in China is becoming greater each year as the country develops. Domestic production capacity is small, so there is a heavy reliance on imports to meet domestic demand.
  • The US and Brazil supply the majority of China’s soyabeans, but imports from the US are slowing and it is unclear as of yet if Brazil can fill this demand.
  • Global geo-political events can affect markets significantly, as was experienced in the pork industry when the EU imposed sanctions on Russia in 2014. Further articles in this series will explore what these potential impacts could be, and their repercussions on the UK

 

Introduction

Escalating media rhetoric of the trade dispute between two of the world’s biggest superpowers, the United States and China, has captured the attention of global markets in the past month. In response to US tariffs on imported Chinese steel and aluminium, China brought agricultural markets to the forefront of the trade dispute by threatening a reciprocal 25% tariff on a range of US food commodities, including soyabeans. This article is the first of a series of pieces, and in it we set the scene by tracing the origins of this potentially market-changing dispute, before exploring the importance of Chinese soyabean consumption and imports.   

In following articles, we will look at the potential consequences if a tariff on US soyabeans is introduced; this will include how trade flows could change. We will also look at how implications for soyabean as an animal feed could impact the pork market.

What we know so far

In early March the trade dispute began in earnest, with the US announcing intentions to impose tariffs on aluminium and steel imports. This was the spark for a sequence of events and tariff increases, which were described in the media as ‘tit for tat’. The graphic below summaries the key events that have occurred in the escalating trade conflict between the US and China.

Fig 1

No sign of slowing the Chinese soyabean appetite

Despite originating in China, soyabean production has dwindled in the world’s most populated country, even with strong demand. Global soyabean production is predominantly focussed in the Americas, with the US, Brazil and Argentina comprising a five-year average of 82% of global output (2012-17) century. This was likely a result of increased wealth and development in the country, resulting in improved infrastructure for the development of crush facilities to process soyabeans.

The rise in demand for soyabeans is predominantly due to the crops versatility for use when crushed and processed as either an oil or a meal. The growth of the Chinese middle class has brought increased demand for commodities such as eggs, milk and meat, which has in turn increased demand for animal feed. Soyabean meal, produced by crushing whole soyabeans, is a key protein source in animal feed, particularly for pigs and poultry.

Chinese soyabean domestic production and harvested area have declined over the past two decades, with yields remaining flat. The five-year average yield between 2012/13 and 2016/17 was 1.79t/ha (USDA), well below the yield of 3.01t/ha for the average combined performance of Brazil, US and Argentina over the same period. Unlike domestic production, consumption of soyabeans is booming in China, with demand for the crop growing faster than for the three largest grain crops (wheat, maize and rice) since the 1960’s. Since 1995/96, Chinese soyabean consumption has increased by 687%, from 14.1Mt to a forecast 110.8Mt in 2017/18 (Figure 2). Over this period, the proportion of soyabeans crushed domestically has increased from 53% to 86%, highlighting the growth in soyabean demand as a feed source.

Fig 2

In recent years, growing maize and wheat has been subsidised by the Chinese government in order to increase domestic supplies. As a result, this has provided an incentive for Chinese farmers to plant these grains rather than soyabeans, leading to the stagnation of soyabean production. However, news of increased subsidies for soyabeans was reported days before the threat of 25% tariffs was announced. This increases the incentive for Chinese farmers to plant soyabeans over maize. The timing of this statement is perhaps telling, and could indicate a possible shift in Chinese domestic policy if tariffs on US soyabeans are introduced. Therefore, it will be interesting to monitor if China does attempt to increase soyabean area in the coming weeks, to try and reduce their reliance on imports.

Chinese soyabean import dependence

China is the world’s largest importer of soyabeans, accounting for 65% of global imports of the oilseed last season. In 2017/18, Chinese soyabean imports have been forecast by the USDA to increase to 97Mt from 93.5Mt in 2016/17, which if realised would represent a 122% increase in imports since 1995/96. Chinese dependence on soyabean shipments, particularly from the US, was highlighted in one of our recent articles looking at the anniversary of President Trump’s inauguration.

So far this soyabean marketing season (Oct 17-Mar 18), 56% of the 44Mt of soyabeans imported to China have been sourced from the US, significantly higher than the five-year average (2012-17, Oct-Sep) of 37% (Figure 3). However, between January-March 2018, since trade tensions started to ratchet up, US soyabean exports to China fell 21% (3.2Mt) from the same period in 2017. Meanwhile Brazilian shipments to China, between January-March 2018, increased approximately 229% on the previous year. This is likely in part due to weakening real against the dollar and the uncertainty surrounding the threat of tariffs on US soyabeans.

The expansion of Chinese soyabean imports has been fuelled, in part, by the growth of the pig industry in China, the world’s largest pig producer. However, China still imports pork products to satiate domestic demand. Imports have been growing in recent years, but are forecast to decline slightly, from 2.7Mt in 2016/17 (Oct-Sep) to 2.5Mt in 2017/18 (Oct-Sep). Much of this pork has been supplied by the EU, with 59% of Chinese pork imports between October-17 to March-18 coming from EU origins. That said, the proportion of pork imports coming from the US has been increasing as more US plants have been approved by Chinese authorities, with US shipments accounting for 25% of total Chinese pork imports so far in 2017/18 (Oct-Mar) up 2 percentage points from the five-year average (2012-17, Oct-Sep). As the US is a key origin for both soyabeans and pork, the proposed tariffs could remap the current trade situation and leave both the US and China searching for new markets.

In the next article in this series, we will examine potential changes in global soyabean trade flows moving forward and the impacts that these shifts could entail.

Fig 3

Closing comments

Soyabean and pork trade could face implications due to the current stand-off between the US and China over trade.

Chinese soyabean production is insufficient to meet the country’s insatiable demand, resulting in the nation relying heavily on imports. As the US is a key origin source, it will be interesting to see the repercussions of a potential 25% tariff on US soyabeans.

Global geo-political events, such as this dispute, can impact markets significantly. An example of this was the Russian decision to ban EU food imports in 2014 following EU imposed sanctions on Russia. What started as a disagreement between the US and China over steel has broadened into potentially affecting numerous food and agricultural products, so although European and UK farmers are not the target of any implemented/planned tariffs, they could be indirectly affected.

We will look more closely at possible implications in our next article in this series. Using predictive scenarios, we will examine how trade flows may change, focussing on new import and export destinations for the major global players in the soyabean trade.

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