If you’ve ever had the opportunity to travel with your family to a Disney Park, odds are you’ve been on the ride, “It’s a Small World.” A 10-minute ride where you’re slowly floating through the different “countries” of the world, and hearing the same song looped over and over and over again.
I can’t help but ponder at the ironies of the first verse of that song as it pertains to our agricultural world right now in terms of trade and tariffs: “It’s a world of laughter, a world of tears, it’s a world of hopes and a world of fears.”
Fear is what spooked the selloff in grain markets over the past month. Fear that the United States will lose a substantial portion of agricultural export demand. Fear that those potentially reduced exports will mean more supplies of U.S. grain will sit and be stored on domestic soil and provide an oversupply of product, which will make commodity prices drop further. It is this fear that made the investment money, “the funds,” bail on long futures positions. The funds then started to sell, which exploded into bigger fear selling, which has pushed the market price potentially lower than it needs to go. This was the unexpected “black swan.”
The deadline for tariff and trade negotiations comes to a head in the coming days. On July 1, China will drastically reduce tariffs on soybeans imported from India, South Korea, Bangladesh, Laos and Sri Lanka. This move is one of the latest in the ongoing soap opera drama between the two global economic superpowers as the trade war fully comes to a head on July 6, when the U.S. and China are each scheduled to impose tariffs on $34 billion worth of imports from the other.
How long can this trade war last? How long can China hold out and not buy grain from the U.S.? Who blinks first? Can India, South Korea, Bangladesh, Laos and Sri Lanka realistically supply China with the soybeans needed? We’re already hearing rumors of increased planted acres for Brazil. Will Russia now race to meet this potential need and start planting soybeans instead of wheat? No one knows. This is historic, unprecedented and changes the rules and balance of export/import trade life we know it.
What we do know is that people need to eat, and now that the emerging middle class in China has an appetite for a protein based diet; it’s hard to give that up. What we also know is that China uses close to 120 million metric tons of soybeans annually, and that they import 103 million metric tons of their needs, according to the U.S. Department of Agriculture. Can Brazil meet China’s needs? No.
Brazil produces a crop of 119 million metric tons. But Brazilian processors must crush at least 43 million metric tons of their soybeans domestically to supply the country’s livestock feed needs, leaving only 76 million metric tons of soybeans for export.
Seventy-six million metric tons does not meet the needs of what China needs to import, which is 103 million metric tons. That’s 27 million metric tons short. And Argentina’s crop was nearly cut in half this year due to drought, so they are not able to supply soybeans to China. South America’s next harvest starts in March 2019, so the reality is that over the next nine months, China needs the U.S.
There’s so much that we share that it’s time we’re aware.…It is a small world after all.
Editor’s note: Naomi Blohm is a marketing advisor with the Stewart-Peterson Inc. and she is a regular contributor to the Iowa Public Television series “Market to Market.” She can be reached at [email protected].
