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The Risk of Tariffs to Midwest Farming

Apr 12, 2018
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Chinese tariffs "will have a devastating effect on every soybean farmer in America," American Soybean Association President John Heisdorffer said in a statement last week.

Farmers across the US, and especially the Midwest, are bracing themselves after China announced a possible 25% tariff on soybeans. While rhetoric between the US and China is ongoing, industry and trade groups are urging both sides to find common ground in order to minimize the impact and potential losses.

The Importance of Soybeans

Soybeans are the fourth leading crop produced globally and account for more than 10% of global agricultural trade. Approximately 80% of soybeans are refined into meal for animals and the remaining 20% is consumed by humans or processed into oil for cooking. China currently consumes about two-thirds of the world’s soybeans and this number is expected to grow as meat and protein play a greater importance in the Chinese diet. According to the US Department of Agriculture (USDA), China was the largest buyer of soybeans in 2017, purchasing $12.3 billion worth of the product. The USDA expects world trade in soybeans to increase 22% by 2025.

The US and Brazil compete to supply China’s soybeans and farmers in the Midwest already fear giving up more market share to Brazilian farmers. Soybeans from Brazil are slightly richer in protein and the US tariffs would potentially make the Brazilian bean even more attractive to Chinese buyers. Based on USDA reports, Brazil’s soybean exports are expected to reach a record 70.5 million tons this year while the US is expected to export more than 2 billion tons of soybeans. Therefore, the tariffs would largely hurt farmers, especially in Ohio and Illinois where soybeans are the number one agricultural export.

The Impact on Farmers

While trade analysts were already predicting 45% tariffs during the 2016 Presidential Elections, this move came as a surprise to many market participants. Soybean futures plunged more than 5% at the CME Group after the China tariff news was released. However, later in the week, futures recovered and settled only 1% lower.

In February, the USDA predicted that net farm income in 2018 would fall to its lowest level in nominal terms since 2006. Coupled with the tariff news, some farmers are saying they might have to quit or drastically change their planting and harvesting plans. Many are asking if they want to plant a crop that could potentially lose money.

The ripple effect of Chinese tariffs could be significant and potentially hurt an already suffering industry. The impact would trickle down to affect machinery companies, seed dealers, and other soybean and livestock related companies.

Others are feeling “okay” with potential tariffs; Mike Zuzolo, President of Global Commodity Analytics & Consulting LLC said that many of his corn and bean producer clients are unlikely to change their rotation at this stage, especially given the profitable hedge still afforded with new-crop soybeans. “Most of the producer-clients I am speaking with regarding these tariffs recognize that soybeans are still cheaper to plant, and if they have a solid crop insurance policy, they can still lock-in over $10/bu. for fall delivery in many areas of the US bean-belt. Producers are also very much aware that the ability of China to source soybeans from our competitors as a substitute has probably been diminished due to the poor production potential in Argentina this year,” Mr. Zuzolo stated.

Soybean Trading

It appears that buyers of US soybeans are eager to lock in prices after the news. On Friday, April 6th, the USDA confirmed 458,000 tons of US soybeans were sold to undisclosed locations in the EU, making it the largest one off sale in 15 years; a short term positive for the industry through this volatile time in history.

Traders will have another chance to review crop decisions once the USDA’s June 29, 2018 Acreage report is released. Some are speculating that the best opportunity for a possible dip in futures prices would be in May as the deadline to implement tariffs comes closer. While tariffs are not expected to be implemented until early June, traders and farmers have a lot of tangible risk on the table while the US and China decide how to move forward.

Futures Trading

Straits Financial LLC, the US location of Straits Financial Group has immense experience in the agricultural space and has catered to American agriculture since the company was formed. We believe our understanding of agriculture is second to none in the futures industry and we can accommodate hedging exposure to soybeans, corn and many other agricultural products. Straits Financial LLC is proud clearing member of CME, CBOT, Comex, and Nymex, amongst its other memberships, and is dedicated to providing a full range of services to our client groups across the world which include physical producers, commodities processors, professional traders, expert farmers, hedgers and international agricultural companies. We pride ourselves in high touch relationships with our clients, allowing for constant monitoring of the markets, exclusive news and daily market commentaries. Please feel free to contact us at +1 312-462-4499 or info@straitsfinancial.com  for further information or with any questions you may have.

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