Swelling soybean stocks means futures are immune to trade talks

Despite signs this week from both US and Chinese negotiators that a resolution, or even a trade deal, to end a 12-month long trade spat between the world's two biggest economies could be reached very soon, soybean futures have actually fallen.

Weighed down by the biggest ending stocks in history - estimated at 900 million bushels (24.5 million mt) - it appears it would take a monumental commitment from China to buy US soybeans in order for futures to budge.

And even with a huge 5% cut in soybean acreage next year - as estimated by the USDA in March - US output would still reach 110-120 million mt based on typical yields.

With US crushing around 57 million mt, it will take a while to get those ending stocks down.

“There are ideas that a deal could be reached late next week. I do not believe this, but it sounds like they are getting closer. The outside markets are neutral to weaker. The globe won’t offer much influence,” Brian Henry from Benson Quinn Commodities said in a report published yesterday.

Exactly what form the trade talks will take remains to be seen, with earlier reports suggesting that the US will insist on keeping tariffs on goods in place to enforce the terms of a deal that is likely to include restrictions on intellectual property theft.

In this event it is also unclear whether China will remove the punishing additional 25% tariff on US soybeans, perhaps preferring to mandate purchases of soybeans to erode the trade deficit, which is also a key focus of Trump's.

With a Chinese delegation due in Washington next week to finalise details “supposedly the how and when of lifting tariffs will be the last thing negotiated,” Charlie Sernatinger from EDF Man Capital said.

Regardless, of whether the tariffs will disappear or not, in order to bring down US stocks to more traditional levels of 350-400 million bushels, China would need to buy its typical figure of 30 million mt of US soybeans as well as a further 12 million mt next year.

It boils down to this.

With African swine fever killing pigs and deterring breeding in China, any hope President Trump had for a pre-election rally in futures to shore up support among his key farmer support base may be dashed.

Furthermore, record harvest yields in Brazil and Argentina have put pressure on exporters to offload the crop as quickly as possible with a weaker real and peso against the US dollar aiding this. 

Oversupply is by no means limited to the US but with no tariffs on Brazilian and Argentinian beans, private Chinese crushers have more incentive to purchase from South America. 

“We’ll never get 100 percent of our exports back from our number one customer,” John Heisdorffer, Chairman of the American Soybean Association (ASA) said during a panel discussion in Iowa last week.

“We’ve got some real competition out there,” Heisdorffer added.