Todd's Take

27 Dec 2016

By Todd Hultman
DTN Analyst

Nothing draws attention like a showdown of titans and the coming Trump versus China battle royal is setting up to be a doozy, bigger than any WWE smack down. In the blue corner, President-elect Trump has been taunting China for months, calling the world's second largest economy a currency manipulator and pledging to slap them with tariffs, left and right.

Trump's rhetoric may once have been written off as campaign hyperbole, but the anti-China tweets have continued, even after November's election. Trump's willingness to take a post-election phone call from Taiwan's President Tsai Ing-wen was seen by China as the political equivalent of Roberto Duran insulting Sugar Ray Leonard's wife. The gloves have come off.

Those hoping cooler heads will prevail point to the appointments of Iowa Governor Terry Branstad as U.S. ambassador to China and billionaire Wilbur Ross as U.S. Secretary of Commerce. China's state-owned China Daily called Branstad "China-friendly" and Ross "a sensible businessman."*

Last week's appointment of Peter Navarro to head the National Trade Council however, fanned the flames further. Navarro is an economics professor at the University of California, Irvine, and has earned a reputation for being a China-hawk. His three books, including "Death by China: Confronting the Dragon," view China as both an economic and military threat.

China is not going to take all this lying down and is said to be preparing its responses. According to U.K.'s Guardian, China's state-run Global Times described possible changes new tariffs from the U.S. would trigger. "A batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted."**

It's that final sentence that has soybean traders concerned as China is well known as the world's largest buyer of soybeans. In 2015-16, more than a billion bushels of U.S. soybeans were exported to China, roughly 28% of the U.S. crop. So far in 2016-17, total U.S. soybean exports are up 23% from a year ago and 76% of those (823 million bushels) are destined to China.

Pondering the math of how a possible trade war with China might play out becomes an interesting exercise. According to USDA, China is expected to import 3.2 billion bushels (86.0 million metric tons) of soybeans in 2016-17. The way things are going, China's soybean needs will be down to roughly 2.0 bb by the time Trump takes office in January, and of course, they are counting on another big crop from Brazil.

If all goes well with South America's crops, Brazil should be able to supply China with 1.5 bb by the end of August and another 300 mb could come from Argentina. If South America's crops fall short of their estimates, China will be in a much needier position in 2017 and also be less likely to use soybeans as a trade weapon.

It may be close, but as long as Brazil and Argentina meet their crop estimates early in 2017, China could conceivably squeak by without any U.S. soybeans from February until August. After August however, Brazil's exports typically fall off and China will need U.S. soybeans once again.

So far, Brazil's weather has been good for crops and they may come up with a little more than the 3.75 bb at harvest that USDA currently expects. But with USDA estimating Brazil's ending soybean stocks at 131 mb for 2016-17, there is not much cushion for China to take more.

Argentina is expected to have 518 mb of ending soybean supplies in 2016-17 and China could negotiate more from them, but they have to get past Argentina's 30% export tax -- a steep price to pay.

If there is a trade war ahead, how will it play out? In spite of the Ali-like taunting described above, the complex details are more apt to unfold like a Bobby Fischer chess match. According to Chess.com, the number of possible chess moves increases to 400 after each person takes one turn and jumps to over 9 million after each player makes three moves.*** My guess is that a trade conflict with China will be even more complicated, meaning that early predictions are futile and all bets are off.

Longer-term, China's growing population and U.S. soybean producers need each other and there should be plenty of room to find middle ground. Shorter term however, the price risk for soybeans is extremely high in 2017 as the talk could get tough and trade could suffer.

I hate to say it, but it is possible that we will wake up one morning to read that China is no longer importing U.S. soybeans. Even if it is a temporary move, I shudder to think how prices might respond and producers should consider some kind of protective action now. We can't say we didn't see it coming.

* "Navarro another blow to U.S.-China ties" by Chen Weihua of China Daily, Dec. 24, 2016 at:

http://bit.ly/…

** "China threatens to cut sales of iPhones and US cars if 'naïve' Trump pursues trade war," by Tom Phillips of TheGuardian, Nov. 14, 2016 at:

http://bit.ly/…

*** "Mathematics and Chess" on Chess.com at:

http://bit.ly/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

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