THE BIG READ: US-China soybean brinkmanship has echoes of the past

14 Sep 2018 | Andy Allan

In the Hollywood melodrama Rebel Without A Cause, the film’s hero Jimmie – played by James Dean – is challenged to a game of "Chickie Run" to end a dispute with Buzz, the leader of a local gang.

A form of game theory, the challenge involves both angst-ridden teenagers driving cars at speed towards a cliff edge with one simple rule: the first one to bail out of his vehicle is a “chickie”.

The winner proves his masculinity and wins the prize – inevitably that's a girl.

The film has parallels with the ongoing trade dispute between China and the US, and not least of all because it involves chickens.

Neither side is willing to blink first in a trade war that has rolled on for months and has seen China slap a 25% tax on US soybeans that most actors think will cause economic pain on both sides of the Pacific.

That’s because analysts predict that neither side can do without each other when it comes to trade in soybeans without severe economic damage: US farmers are the biggest producers and Chinese feed manufacturers are the biggest consumers of the world’s main source of animal protein.

Last year China imported 96 million mt of soybeans worth $42 billion and the US farmer supplied a third of it.

After aviation it is China’s biggest US import.

Who else?

While simple maths suggests China could cut US supply without cutting muscle-building protein in 1.4 billion people's diets, it would certainly require some drastic rerouting of international trade.

And at a much greater cost.

Indeed, in an unthinkable development just months ago, reports this week suggest that traders in Brazil, which supplies half of the world's traded soybeans, is considering importing US beans to displace local supply. 

That alone will add $40/mt, or 10%, to the cost of purchasing soybeans for China.

So, in all likelihood, if soybean trade breaks down between the two world’s largest economies, two things emerge – US soybean prices collapse and farmers are hit hard at a time when they have a record crop.

Meanwhile, China would be producing thin animals due to a lack of protein in their diet at a time that China's population is increasingly carnivorous as incomes rise.

Like Buzz and Jimmie, neither side is willing to concede defeat yet.

Information war

In a well-timed statement just hours ahead of a widely-anticipated series of bearish forecasts for soybean prices, US Treasury Secretary Steven Mnuchin reportedly invited Chinese officials to restart talks in a bid to end the trade war.

In a market where even the slightest hope of a resolution has spiked futures prices over the past few weeks, the Board of Trade in Chicago failed to react.

Weary of tweets traded between the Trump White House and China, the market for once appeared not to know what to believe.

The same picture is emerging around fundamentals too, as politics plays a role in official government forecasts.

In what is increasingly being viewed as an information war, this week the Chinese and US agriculture ministries pushed out very different projections of how many soybeans China will import in the next 12 months.

The Chinese estimates were 84 million mt, down 10 million mt on the year due to a virtual boycott of US soybeans.

The US estimate was 94 million mt, down only marginally.

That's presumably under the assumption that faced with a difficult choice of food inflation amid slowing growth in their economy, or conceding in a trade war, the Chinese authorities will opt for the latter and buy American soy.

We’ll soon find out as the cliff edge is approaching.

Brazilian supply of soybeans, which has almost exclusively fed China’s army of pigs and chickens for months now, is beginning to run dry and won’t return until February at the earliest when the new harvest starts.

That has already started to put pressure on Chinese soybean stocks with crush rates now exceeding imports of beans.

Most analysts expect that without US beans China will run out of stocks before the end of the year.

That's bad news if you are a Chinese fish, pig or chicken.

Hence, official US export sales published on a weekly basis over the next six weeks will be closely watched.

According to attendees at the Global Grain conference in Sao Paulo this week, any hint of Chinese purchasing will likely propel futures 10-15% higher.

Russian grain

The concept of food being used as a weapon between two economies vying for status and influence as the world’s most powerful nation has echoes of the past.

In response to the Soviet invasion of Afghanistan, in January 1980 US President Jimmy Carter tried to flex economic muscle and banned grain sales to Russia.

It was to have a profound impact on the US farmer and an innocuous one on Russia. The latter simply sourced grain from elsewhere.

While it is in dispute as to whether China can avoid buying US beans, the real lesson from almost 40 years ago was that Russia never came back to buy US wheat in any substantial volume again.

In fact, last year it became the world’s biggest exporter of wheat.

In the Oscar-winning classic of 1955, Jimmie was the first to jump out of the vehicle and lost the challenge.

Buzz won, but had his jacket caught in the door handle and couldn’t get out. He was ultimately undone by his hubris and faced a much grimmer fate than losing.

Farmers in the Midwest will be hoping the US can avoid Buzz's fate by winning the trade war, but without having to face the consequences of an eventual loss of markets.