Why Soybeans Are A Proxy For The Trade War

At a Glance

  • The U.S. is the world's largest producer of soybeans, China the largest consumer
  • China is increasingly looking to Brazil for soybeans, while the U.S. seeks new trade partners

Soybeans have hit the news recently after becoming caught up in the U.S.-China trade tensions. The tit-for-tat tariffs imposed by the two economic powerhouses have sent U.S. soybean prices plunging to a near 10-year low, creating issues for producers and importers alike.

The Perfect Proxy

In many ways, soybeans are the perfect proxy for the current trade tensions: the U.S. is the world’s largest producer, while China is its biggest consumer. Although the end products of soybeans are as diverse as tofu, biofuels and industrial lubricants, their prime commercial use is as soybean meal, which makes up two-thirds of their economic value. Soybean meal accounts for 60 percent of world meal production and is used mainly as animal feed, the majority of which ends up in China. A further third of soybean’s economic value comes from soybean oil, which after palm oil, is considered to be the second most important vegetable oil.

The U.S. has long been the world’s largest soybean producer, and a key player in global supply, accounting for around a third of the global crop, closely followed by Brazil. The two countries dominate production, with Argentina coming a distant third, accounting for just one-tenth of supply. Brazil is expected to overtake the U.S. as the world’s biggest producer of soybeans in 2018/19, with a harvest of 120.5 million tons to the U.S.’s 117.3 million tons. Even so, the U.S. remains a key player in the global supply.

On the demand side, China is the world’s largest soybean importer by some distance, buying more than 60 percent of world exports in 2016/2017. Other significant consumers are the EU, Mexico, Japan, Taiwan, Thailand and Indonesia, but their demand is dwarfed by that of China. The net result is a market that is highly concentrated with two dominant suppliers and one dominant consumer.

Demand, Weather and Volatility

Over the years rising demand, driven by a combination of increased applications for soybean products and growing consumption, provided some support to prices. Globally, soybean meal and oil consumption has been rising at a steady rate of around 5 to 6 percent per year for the past 15 years. Much of this increase was driven by China, with the U.S. Department of Agriculture previously forecasting China’s import volumes to hit 110 million tons by 2021. Other Asian countries have also played a role, with economic growth, expanding populations and an increasingly meat-heavy diet all leading to higher consumption of soybean products.

Rising demand is just one factor that contributes to price volatility. Other factors include the high concentration of soybean production amongst only a few producing countries, the weather, and the unpredictability of what farmers will choose to sow each year at the start of the planting season. Given these variables, the USDA’s World Agricultural Supply and Demand Estimates report typically has a big impact on prices when it is published.

U.S.-China Trade Tensions

Unsurprisingly, the current political situation has added to soybean price volatility. China first warned it would impose a 25 percent tariff on U.S. soybean imports in April 2018, in response to existing and planned tariffs by the U.S. on Chinese goods, setting soybean prices on a downward trend.

The tariff was imposed on July 6, hours after the U.S. confirmed 25 percent tariffs on $34 billion of Chinese imports, triggering further price falls. The tariff has already impacted export patterns, with China increasing imports from other countries, such as Brazil, with U.S. soybean producers having to explore new markets.

Going forward, it is difficult to say if and when the current tensions will be resolved, with both sides recently announcing plans for further tariffs. It is worth noting, however, that the Peterson Institute for International Economics has warned many of the U.S. tariffs on Chinese imports are for parts that are used in assembly by U.S. firms, meaning the tariffs adversely affect U.S. businesses and raise prices for domestic consumers. Until there is a resolution, price volatility is likely to remain.

A Significant Price Slump

The tariffs have already hit U.S. soybean prices hard, triggering a 20 percent fall since April to put prices at their lowest level in nearly a decade. A reversal in the current trend looks unlikely, with China warning higher prices, once the tariff is factored in, will curb demand and cause farmers to switch to alternatives for animal feed. The U.S. government has also forecast purchases by China will drop to 6.8 million tons, down from 32.9m tons in 2018/19. As a result, it expects end-of-season stocks will be the highest on record, which is likely to put further downward pressure on U.S. soybean prices.


The low U.S. soybean price is leading to higher U.S. sales to non-traditional markets such as Europe, the Middle East and North Africa. Brazil is also buying U.S. stocks for its domestic market. Furthermore, more soybeans are being sold and crushed in the U.S. than ever before. But these sales are unlikely to take up all of the slack caused by the sharp fall in exports to China.

Managing Price Volatility

Investors and hedgers can trade soybean futures on the Chicago Board of Trade to manage their exposure to price risks. At the same time, derivatives on a number of soybean-related contracts, such as soybean oil and soybean meal can also be traded as a proxy on soybeans, offering various ways of profiting from price movements or hedging risk. While 12 billion bushels of soybeans were produced in 2017/18, more than 20 times this volume was traded on derivatives exchanges alone, suggesting that the market for soybeans was deep and liquid.

Producers are predicting November 2018 soybean futures could trade below $8 per bushel by the autumn, according to the Purdue University/CME Group Ag Economy Barometer, and with global trade tensions showing no signs of abating, investors and traders of soybean derivatives, as well as other soybean-related products, could look to the derivatives marketplace to manage their price risks or to profit by accepting risks.

Nelson Low is Executive Director of Commodity Products, Asia for CME Group.

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