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Why the soybean could be China’s trump card in the trade war

Krystal Hu

China just made an incredibly controversial move with one the world’s more important traded goods: soybeans.

In response to the U.S.’s list of 1,300 Chinese products that would be subject to tariffs, the largest soybean importer in the world announced a proposed 25% tariff on U.S. soybeans on Thursday. This has raised alarms among U.S. farmers.

However, while soybean imports are significant to China, analysts say the impact on China’s economy should be muted for now.

It hurts U.S. farmers in the GOP heartland

China is the dominant consumer of U.S. soybeans, purchasing about 1 billion bushels annually. That accounts for about 60% of total U.S. soybean exports and more than 30% of overall U.S. soybean production.

John Heisdorffer, President of the American Soybean Association expects the tariff on soybeans to have a “devastating” effect on soybean farmers. Following the tariff announcement, CBOT May soybean futures dropped 3.9% to $9.9775 a bushel on Thursday morning.

China has a huge appetite for American soybeans. Now it wants to leverage it in the trade dispute with President Trump. (Yasuyoshi Chiba | AFP | Getty Images)

“At a projected 2018 crop of 4.3 billion bushels, soybean farmers lost $1.72 billion in value for our crop this morning alone. That’s real money lost for farmers, and it is entirely preventable,” Heisdorffer said in a statement.

With the tariff, American soybeans will be less competitive in the international market, making the export business even harder as farmers already face headwinds from producers in South America. Besides the economic pressure, China also wants to leverage the agricultural products to move President Trump, who has a lot of supporters in the U.S. farm belt. The largest soybean producers in the U.S. are Illinois, Iowa and Minnesota.

President Donald Trump speaks at the Iowa State Fair during the 2016 presidential campaign. As a  leading soybean producing states, Iowa now worries Trump’s tariff will impact the local economy.

China hasn’t issued a specific date for the proposed tariff going into effect, saying that it depends on what Trump does about his own plans to raise duties.

In an effort to convey the message to President Trump, lobby group Farmers for Free Trade launched an ad campaign on “Fox and Friends” and MSNBC’s “Morning Joe” last week.

“I’m supportive of the Trump administration, but I have a lot of concerns about current actions that have been taken on trade and tariffs,” Indiana soy and corn farmer Brent Bible says in the ad. “The fact that China is our number one soybean customer makes us very vulnerable. Our farm and many others like ours will be one of the first casualties of a trade war.”

China can handle a soybean supply disruption

The tariff on U.S. soybeans also bears the risk that China’s customers will eventually eat the price increase. China has long been studying its impact and inflation risk on the economy. It has also been developing trade relationships with other soybean producers including Brazil and Argentina to reduce the dependence on U.S. imports.

While China is the most important buyer of the U.S. soybeans, the U.S. is no longer the biggest supplier to China. China has increasingly invested in South America for soybean production. Brazil, for example, contributed the most soybean export to China in 2017. Compared to the U.S., Brazil has competitive prices and higher protein content of its crops, thanks to lower production cost and favorable weather conditions.  

The impact of the soybean tariff on China’s economy could be contained. (Screenshot/Goldman Sachs Note)

It might still be hard for China to replace the U.S. export soybeans in the short term, but Goldman Sachs analysts say declining domestic pork prices and increased inventories would initially mute the impact on Chinese demand. China can also work around by using other crops like corns to replace soybeans in feeding for cattle, pigs, chickens and fish.

“While China would still require US soybean imports, all else constant, such tariffs would favor Latin America farmers to the detriment of US farmers,” Goldman Sachs analysts wrote in a research note on Thursday. “The pass-through of such higher soybean prices could however initially be mitigated by high Chinese inventories.”

Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.

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