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On Friday, at 12:01, US imports of $ 34 billion came into force, and China was quick to retaliate by imposing tariffs on a number of US goods, including 25% import tariff on American soybeans. We believe that the price impact is already built into the price and therefore does not provide any additional pressure on CBOT soybeans.
What happened to soybean prices since the initial announcement?
Unsurprisingly, CBOT soybeans have come under heavy pressure following the initial announcement by China in April of its intention to take revenge on US tariffs. CBOT soybean prices have dropped by just over 21% since mid-April, trading at less than $ 8.50 / bu, which was revised in 2008. In fact, CBOT has declined to levels where even if we take into account tariff, American soybeans are still achievable in the Chinese market. At the present time, we estimate that import parity is approximately $ 8.70 per bushel, compared to the CBOT contract of November 2018, which is around 8, $ 56 a bushel.
Meanwhile, the Chinese domestic soybean futures market has been strangely traded down, dropping about 7% since mid-April. If we look at the evolution of the domestic market in US dollars, prices fell by almost 12%, reflecting the depreciation we saw recently in the CNY. It appears that the domestic market started setting these rates earlier in the year, with domestic futures significantly up during the first quarter of the year.
CBOT and Dalian Standardized Soybean Prices
ING
Has there ever been an impact on soybean flows in the United States?
The United States exported 36.16 tons of soybeans to China last season, accounting for 39 percent of total Chinese soybean imports. Meanwhile, China accounted for 62% of the total US export demand. If US export sales are examined in the current marketing year, exports to China are significantly lower than in the previous season. Latest data shows that cumulative sales in China are down 20 percent year-over-year. However, it is important to point out that exports began to lag behind last season before escalating trade resurgence. There are about 1.14 million outstanding sales in the current marketing year, which shows China as a destination. Given the introduction of the tariff, we are likely to see these sales canceled, or at least the destination changed, with an incentive for Chinese buyers to supply Brazilian soybeans, a situation that will satisfy farmers Brazilians.
United States soybean export sales to China (in tons)
ING
The American loss is the gain of Brazil
Brazil is about to harvest a record crop of soybeans this season, estimated at 118 Mt, up 3.5 % yoy. with the United States when it comes to soybean production. Chinese tariffs on American soybeans have arrived at a good time for Brazilian farmers. Redemption values of Brazilian soybeans rebounded on the CBOT, a sign of growing demand for Brazilian products. However, we are in a period where Chinese buyers are seasonally dependent on the Brazilian supply. It will be interesting to see how the purchase of American soybeans will evolve as the supply of new crops reaches the market later in the year.
Cash value of soybeans in Brazil compared to CBOT soy (Usc / bu)
ING
What does it mean for prices?
While Chinese buyers will be keen to buy soy from origins that do not attract 25% import duty, we believe that China will still have to rely on the United States to help meet domestic demand. In order for US flows to China to be meaningful, we must either see a rebound in domestic prices, either a weakening of the CBOT soybean, or a combination of both. Clearly what the market has seen up to here is the low CBOT prices.
As mentioned earlier, the CBOT is traded at levels where US soybean imports into China are achievable with the 25% import tariff. Therefore, we do not believe that there should be much more weakness in CBOT, with prices probably trading between 8.00-8.70 / bu over the next 12 months.
The effect of driving down soybean prices
The weakness of the soybean market also had an impact on other agricultural products, as CBOT corn prices fell by more than 12% since mid-April. Although it is too late for US farmers to adjust their plantings by 2018, it is likely that farmers will make a major adjustment in 2019, as they seek to plant more corn at the expense of soybeans . The soybean / corn ratio is already sending this signal to farmers, who currently stand at 2.26. Therefore, assuming that weather conditions and yields are normal in 2019, the market could expect a significant increase in corn supply in the United States compared to initial forecasts.
However, the underlying fundamentals of the maize market remain constructive and we believe that the market needs this additional supply to meet the demand.
The ratio of soybeans to American corn decreases
ING
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