Why China can’t count on Brazil to fill the soybean gap in its trade battle with the US

Gustavo Oliveira writes that timing, huge demand and structural bottlenecks diminish Brazil’s reliability as a backup soybean supplier to China

PUBLISHED : Sunday, 24 June, 2018, 6:54pm
UPDATED : Monday, 25 June, 2018, 12:59pm

The escalating threats between the United States and China are raising tensions to another level. US President Donald Trump’s proposed 10 per cent tariffs on an additional US$200 billion of imports from China set the bar above Beijing’s ability to retaliate with tit-for-tat tariffs, since China’s total imports from the US amount to only US$154 billion.

So China is likely to impose restrictions on US investments and boycott US products.

Boycotting US soybeans by turning to Brazil’s bumper harvest seems like an ace in the hole for Beijing, since soybeans alone account for 10 per cent of total US exports to China. Moreover, destabilising US agricultural exports could turn the traditionally conservative and soy-dependent American Midwest against the Republican Party in November’s midterm elections.

After all, China’s gargantuan market accounts for 65 per cent of global soybean imports; thus, without being able to offload its harvest to China, the economy of the US Midwest would essentially risk collapse.

But can China count on Brazil to substitute US soybeans? The answer is no.

China-US trade war is making American soybean farmers anxious

First, seasons alternate between the northern and southern hemispheres. So while US soybeans are harvested from late September through November, Brazilians gather in their soybean crops from February through May.

This distinction means the recent sabre rattling between Washington and Beijing has taken place during the Brazilian harvest-and-export season, when abundant supplies enable Chinese companies to avoid US imports.

Indeed, Chinese buyers cancelled 60,000 tonnes of soybean shipments from the US in April, according to the USDA. They are likely responsible for the cancellation of at least another 580,000 tonnes and upwards of 949,000 tonnes during May, according to industry insiders.

They also made a strong run on the Brazilian market during March and April, bringing windfall profits for Brazil’s exporters even while prices on the Chicago Board of Trade were on the volatile but negative trend that followed the initial beating this year of the drums of trade war.

Soybean buy buoys Chinese imports as Beijing tries to stave off trade war with US

This dynamic will shift after September, however, when Brazilian harvests are mostly exported, and international buyers must turn instead to US supplies.

Second, total annual demand for soybeans in China exceeds Brazilian export capacity. In fact, it exceeds global export capacity, excluding the US crop.

At 97 million tonnes, China’s soybean imports in 2017-18 account for 30 per cent of total production in the rest of the world, gobbling up almost the equivalent of total production in the US (119.5 million tonnes) and Brazil (119 million tonnes).

But Brazilian processors must crush at least 43 million tonnes of their soybeans domestically to supply the country’s world-leading livestock sector, leaving only 76 million tonnes for export.

That is 21 million tonnes short of China’s demand. The next largest producer, Argentina, produces merely 37 million tonnes, down from 57.8 million tonnes last year due to severe drought.

To meet the needs of its domestic processors and European demand for soy oil and meal, however, Argentina is already tapping its stocks, leaving almost nothing for China.

Brazilian stocks are also very low, hovering below 2 per cent of domestic supply since 2013.

To prevent a trade war, Beijing may agree to import a larger share of US soybeans, much to the chagrin of Chinese companies that have invested in Brazil and broken the US suppliers’ monopoly

If tariffs take effect next month, there will certainly be record Chinese imports from Brazil, and US soybean exports will realign to Europe and other smaller markets. But Chinese buyers will still need to swallow some high-tariff US soybeans.

Third, Brazilian exports face significant structural bottlenecks and political instability, as witnessed last month when a massive truck drivers’ strike paralysed the country for 11 days.

Chinese investments in South American export infrastructure may once again become highest priority, but they are unable to alter conditions in the time frame in which trade disputes are wrangled.

China says exporters front-loading shipments due to changes in trade environment

Moreover, political upheaval may grip Brazil this October, when general elections proceed without the most popular candidate, former president Luiz Inacio Lula da Silva, barred on corruption charges widely seen as politically motivated.

Another wave of massive strikes could curtail Brazilian exports – precisely when US suppliers gain the upper hand.

To prevent an all-out trade war, Beijing may agree to import a larger share of US soybeans, much to the chagrin of Chinese companies that have invested heavily in Brazil since 2014 and have managed to break the monopoly of US suppliers.

This move could rescue US farmers in the short term, with stocks reaching record heights at 11 per cent of total supply. Yet the Beijing-Washington trade dispute is not merely about tariffs and supplies, but the power relationship between the world’s two largest economies. In particular, it concerns their ability to set prices, and the consequences of their recent actions for finance and reserve currencies.

China orders farmers to grow more soybeans despite deal to buy more produce from US

Amid the looming trade war, soybean prices in Chicago already reflect tweets from Washington and statements from Beijing more than production conditions in Iowa or Brazil.

Chinese companies are doubling down on investments in South America, which is gradually joining Beijing’s “Belt and Road Initiative”. The long-term effect of this trade war may ultimately be the consolidation of Chinese infrastructure in South America. And this may also drive a possible shift of soybean prices: from the US dollar at the Chicago Board of Trade to the yuan in Dalian.

Gustavo Oliveira is a geographer and political ecologist at Swarthmore College in Pennsylvania, USA