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June 19, 2019

Tariff Dispute between U.S. and China could benefit Brazil

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Contrary to President's Trump contention that "trade wars are easy to win", trade wars are usually a losing proposition for all the parties involved. In contrast, the winners in a trade dispute can be countries not involved in the dispute itself, but are able to increase market share as a result of the dispute. That could be exactly the position Brazilian soybean farmers could find themselves if the dispute between the U.S. and China continues to heat up.

Brazil is in a unique position this year because of the lack of competition from Argentina due to its drought-reduced soybean production in 2017/18 and the fact that Paraguay will export most of their soybeans to neighboring Argentina.

The expectation is that China will have to import more than 100 million tons of soybeans with 35 million coming from the U.S. and 65 million or more coming from Brazil. It looks like Brazil is already increasing its market share of China's soybean imports and if the U.S. does not have a record large soybean crop in 2018 and Brazilian farmers increase their soybean acreage in 2018/19, then Brazil will continue to increase its share of China's soybean imports.

Soybean prices in Chicago have declined sharply in recent weeks due to the trade dispute between the U.S. and China and the good start to the 2018 soybean crop in the U.S. The domestic prices of soybeans in the Brazilian interior have remained relatively stable in spite of the truck driver strike and freight rate dispute in Brazil. Interior soybean prices in Brazil are generally in the range of R$ 70 to R$ 80 per sack or $8.60 to $9.85 per bushel.

Even though premiums at Brazilian ports surged last week in response to the increased demand for soybeans and logistical problems caused by the ongoing dispute over freight rates, they did not increase enough to compensate entirely for the decline in soybean prices in Chicago. Brazilian analysts are expecting the premiums to remain strong or even to move higher as China increases its purchases and the dispute over freight rates is resolved.

As a result, marketing of Brazilian soybeans has been very slow for about a month. Prior to last week, farmers did not want to sell their soybeans because of the weaker prices and grain companies did not want to buy soybeans because of price uncertainty and the ongoing dispute over freight rates.

Market analysts in Brazil were advising their clients last week to hold off on future sales until the market starts a correction, which they anticipate will start in the coming weeks. Farmers have sold their old crop at generally good prices and forward contracting of new crop has been good as well due to the improved prices of several weeks ago and the weaker Brazilian currency.