Odds on a Trade Truce: Soybean Edition

The gap between US and Brazil soybean prices is (finally) shrinking:

Source: CNBC.

CNBC notes:

“Narrowing US-Brazil soybean price differentials imply greater market optimism on the potential for a Trump-Xi trade deal or at least a de-escalation of US-Sino trade tensions in advance of the G20. This positive sentiment stands somewhat in contrast to other asset markets, including equities,” the Citi strategists wrote.

The gap last week was 13-15% while the tariff implies a wedge of 25%, given durable tariffs and no tariff evasion.

Is the market justified in its optimism? This account from BI made me wonder.

[A]s soybean prices plummeted in August, and Trump threatened to hit China with more tariffs, Aistrope dropped his chores and jumped on a plane to China for a trade mission arranged by the US Grains Council, a industry group financed in part with taxpayer money.
He spent 10 days traveling with other farmers, visiting two dairy farms and meeting importers at a large feed maker.

They struck no deals; Chinese importers said they saw buying US soybeans as politically untenable even if their prices continue to fall. Aistrope was left to hope his visit might make a difference in winning buyers back if the trade war ends.

That indicates to me that despite price discounts that have been and might be offered in the future, the Chinese government would exert tremendous “moral suasion” to dissuade importers from buying US soybeans. Further, the Chinese government is unlikely in my view (based on my untutored view of what “losing face” means) to capitulate in the absence of substantial concessions, concessions I do not see Mr. Trump offering.

In any case, we will see. It is an interesting experiment. Too bad some people have to suffer.

32 thoughts on “Odds on a Trade Truce: Soybean Edition

  1. Moses Herzog

    Does a white dude of slightly above average intelligence (at best) who spent about 7 years in China know what a mainland Chinese means when they say “losing face”?? Hmmmm, it’s so tough sometimes stepping outside of yourself and seeing if you’re looking at things in their truest form. Well kids, I had some dark moments here and there during my time in the northeast sections of China. And seemingly one thing that didn’t change for me in the two polar opposite (culturally) societies is the innate ability to make people angry at me (even people I felt strong affection to) without trying very hard. I’ll let you decide. I’ll say this much, Menzie has a knack for making me chuckle (the driest realities of life are sometimes the most humorous), and I may have emitted a couple quiet chuckles at the phrase “moral suasion”. Maybe, there was no one here to witness and I refuse to confirm it. Subtle turns of phrase can sometimes communicate the most vicious ideas/visualizations. And I generally mean it as a solid compliment when I say Chinese are Masters of that—-saying very blunt realities/consequences in subtle words. Menzie’s use of the phrase “moral suasion” indicates to me his parents did a stellar job in “copy/pasting” that particular part of Menzie’s genetic coding.

    P.S. As Menzie well knows, the consequence that “some people have to suffer” from trump’s actions is never a variable in trump’s equation. Aside from maybe trump viewing people suffering as a bonus, like when trump celebrated Republicans losing their races.

  2. pgl

    Two questions and a comment:

    (1) If the Brazilian price/mt = $400 and the U.S. price is $325, that’s a 23% differential so how does CNBC get 15%?

    (2) How does this translate to price per metric ton? I thought 1 metric ton = 60 bushels but that conversion rate puts prices lower than what other reports suggest.

    Brazil is in a severe recession in part because of falling commodity prices. Maybe the Trump trade war is just a grand design to help Brazilian exports out. The man is such a nice genius! Make Brazil Great Again!

    1. Moses Herzog

      @ pgl
      I’m getting 18.75% using your numbers. I’m assuming that’s actually a little off from the graph which maybe makes up for the difference—or maybe they are quoting Menzie’s favorite little stat—-using the log, or maybe the ever popular moving average. Just a guess on my part (no sarcasm there). That 3.75% (18.75-15) could be the difference in the actual most recent numbers than from just “eye-balling” the graph.

        1. Moses Herzog

          I think, although I am not certain, you’re supposed to take the difference, 75, and divide it by the larger number if it is a decrease. That’s my understanding of calculating percentage decreases. If Menzie or someone knowledgeable knows definitively the answer to that I’m happy to learn. I am not 100% certain. Citi has some sharp cats, so we can bet they probably got it right, but Citi charges for those market advisory dilly-muh-boppers, so I don’t know how they did the math. Again, happy to learn from whoever knows the proper way to do that in this particular instance.

          1. pgl

            The tax is imposed on the price paid by the importer which is the 325 – not the price the consumer ultimately paid (400). If they did it using the larger number, we need to tell them how tariffs actually work.

          2. Moses Herzog

            @ pgl
            I’m not trying to argue this, as I don’t feel it’s worth arguing. I think if there was an issue with the Citi numbers I feel confident Menzie would have “spotlighted” it. But I think the main part they are accounting for is the change of the price (the effects on supply and demand) due to the increase in tariffs, not the tariff itself. And I also wanna say, just for clarification to anyone reading, the reason I view it (and I kinda assumed others viewed it the same) as a “decrease” is the main mover is the U.S. export prices have dropped, a much more “violent” move than say the price on Brazil exports. So I was thinking using a “decrease” way of figuring the % gap was the proper way. Again, I DO NOT KNOW the proper way to figure that out. And in this particular case, if someone out there reading this is certain they know the proper way to figure the number Citi is quoting, feel free to tell me what an idiot I am,tell me I’m a dumb-dumb, as in this case I would be happy to know what an idiot I am and LEARN what is the proper protocol (academic or “market makers” way) to tabulate that exact percentage. I’d like to know. So, pgl you asked a very intelligent/good question, and I would like to know the answer from someone with certainty who knows.

  3. CoREv

    This phrase is important to understand: “… Chinese importers said they saw buying US soybeans as politically untenable…”. This indicates to me that until Father Xi says it is OK for us to pay the lower US prices we will continue to use higher priced sources and products for out feed formulas and continue to charge higher prices for it.

    Until the export market realizes Chinese livestock is more expensive than others and shops else where, then Chinese growers will continue producing following using these Xi politically driven policies.

    These agricultural cycles are longer than the periods Menzie and others have been concentrating their studies. Time will tell if economic logic exceeds political demands, but that cyclical time is measured in seasons, not weeks and months.

    Someone here in an earlier article suggested that the Chinese soybean buying season would be delayed by several months this year. Is that season beginning?

    1. 2slugbaits

      CoRev Your mistake was in not understanding Menzie’s payoff matrix that he posted several months ago. You admitted that your Nov CBOT soybean price estimate was off because the tariffs lasted longer than you expected. Fine. But if you understood the payoff matrix than it would have been painfully obvious why those tariffs would persist long after the summer season. The political fact is that Xi can outwait and outlast Trump. Trump is playing a losing hand and doesn’t know it, just as Theresa May is playing a losing hand with the EU and doesn’t know it.

      … Chinese growers will continue producing following using these Xi politically driven policies.

      DUH! That’s exactly why Trump is playing a losing hand.

      Time will tell if economic logic exceeds political demands, but that cyclical time is measured in seasons, not weeks and months.

      Meanwhile American farmers have to start making planting decisions right now.

      1. pgl

        I was wondering who this “Father Xi” is? Oh wait – Mitch McConnell’s father-in-law who likely works for Wilbur Ross. I doubt anyone cares what old Father Xi thinks if he is a Wilbur Ross stooge.

      2. noneconomist

        Replanting decisions? Well, not many California growers, like those in “My Kevin” McCarthy’s Kern County district. The main export commodities there are almonds, citrus, pistachios, table grapes, and dairy. Neither replanting nor repurposing are profitable are probable. But not to worry. “My Kevin” has it under control. He knows whose boots he has to lick.
        As the former director of the Kern County Farm Bureau (leftist radical organization?) wrote in August, “…a lot is at stake in Kern County. Less income from exports means fewer jobs. And when agriculture provides one in three jobs in Kern County, unemployment will rise. It’s a trickle down effect no one wants to embrace for the sake for international politics.”

        1. Moses Herzog

          @ noneconomist
          Your comment hit the nail on the head, dead on straight. And it’s worded perfectly. But “My Kevin” is not so good at words as you, as the last two words in his quote he should have worded “for the sake for Trump/MAGA politics”. Kevin is very dumb in general though so, what can we expect?

          I might add, for a man who IDs himself as “noneconomist”, you seem to have a better grip of the subject than many, and I’m not just comparing you to the LCDs, CoRevs/EdHansons either.

    2. pgl

      “These agricultural cycles are longer than the periods Menzie and others have been concentrating their studies.”

      Oh the arrogance. Yes – those who have published academic research in peer reviewed journals are so stoooopid. OK Mr. Expert – do tell us when your AER paper will be published!

      1. pgl

        The thing that is the most annoying about CoRev’s rants is that he thinks he has come with some new view of markets that we stupid economists never realized. His latest has to do with planting seasons in soybeans. Of course our know nothing know it all has never read the seminal 1961 paper by John Muth on Rational Expectations:


        The third page lays out a model that has been used and extended for agricultural markets many many times. Note there is a production lag. Yea – the simple model ignores storage but as Muth notes other papers can allow for storage. And over the past 50 plus years – the literature on these issues has exploded.

        Now we have asked many times that CoRev study up on things like Rational Expectations but to date he appears not to have done so. No – he spends his days bashing economists who actually take such things seriously. Go figure.

  4. pgl

    Business Insider led with these 3 bullet points:

    US soybean farmers are losing China, their biggest customer, to Trump’s global trade war.
    Chinese importers said they see buying US soybeans as politically untenable even if their prices continue to fall.
    While farmers are turning to other buyers like Sri Lanka, they would need about 11,000 markets the size of Sri Lanka to replace Chinese soybean purchases.

    I bet our Usual Suspects of Trump Minnie Me’s will just hate this socialist dogma from Business Insider!

  5. baffling

    “Chinese importers said they saw buying US soybeans as politically untenable even if their prices continue to fall.”
    this was my argument against corev since we started this conversation. he was of the view that the low volume of soybean sales was the result of us farmers sitting out the market until prices returned to normal. but i argued the low volume may not be a result of our farmers waiting out for better prices. they may be the result of chinese importers refusing to purchase-at any price. if this is the case, then our strategy is very problematic, because we are waiting for a market correction to occur. but if the supply demand curve is being distorted politically, then waiting for a market correction is a fools errand. unfortunately, that seems to be the case, and all these farmers sitting on slowly rotting supplies will continue to see downward pressure on soybeans, unless a political (ie tariff) solution is found by the us and china. chinese importers can find less efficient substitutes for us soy. but us exporters don’t have the same luxury-they need to sell the soybeans they have.

    1. pgl

      Exactly but remember what CoRev just said:

      “These agricultural cycles are longer than the periods Menzie and others have been concentrating their studies. ”

      Yes – he is THE EXPERT on all things and the rest of us are just ignorant little fools. CoRev must be taking arrogance lessons from this fearless leader (Trump).

  6. don

    The question to me is whether arbitrage (through changes in trade patterns) will eliminate the difference in price between Brazilian and U.S. soybeans.

    1. pgl

      This idea was proposed a while back. Grumpy Economist (John Cochrane) posed a story where the US sells soybeans to Brazil who in turn sells them to China duty free. Of course the reasons why such arbitrage is going to be far from perfect has been heavily noted. Which is why the price differential persists.

      1. don

        There are other arbitrage possibilities. Brazil, Argentina, etc. sell more to China while U.S. exporters sell more to former South American customers. Differences in transport costs are and time it takes to make new trade arrangements are the main barriers. I also think the speculation by CNBC as to the reason for the narrowing in price is off the mark – I think it is just the arbitrage flows working, and I expect them to close the gap by substantially more than they have so far. This is a case where events may show who is right (unless China ends its tariffs on U.S. exports). Care to wager something?

        1. pgl

          If China wanted to really hit soybean prices, the tariffs would be on all imported soybeans regardless of export nation.

          Of course the same logic applied to Trump’s tariffs on goods made in China. Take an example from the aluminum sector. We hit Chinese aluminum exports with a 25% tariff and somehow magically we see Vietnam selling us a lot of aluminum. But wait – Vietnam does not make that much aluminum. Hmmm?

  7. don

    Also, I think I posted the diverted-trade-flows argument on this site before the Grumpy economist’s post, and was a bit miffed that our host cited only the better-known economist.

  8. Moses Herzog

    First I wanna say, that I am very leery and/or wary, pick your red flag descriptor, about anything posted by ZeroHedge. That being said, they are implying that Russian soybean exports are gaining a lot from this, and could gain even more if they make the efforts:

    This story from NYT is also very interesting, although with NYT being part of the “Great Cabal Conspiracy”, no doubt “headquartered in Tel Aviv”, CoRev, PeakIgnorance, and Ed Hanson will be afraid to click on this link, out of sheer terror they might be “brainwashed”.

    Since CoRev will be afraid to click on an NYT link (due of course to “the Great Cabal Conspiracy” “located in Tel Aviv”), I will bring CoRev some of the highlights, lifted in segments, verbatim from Binyamin Appelbaum’s story in the NYT:
    “Mr. Karel, the general manager of the Arthur Companies, which operates six grain elevators in eastern North Dakota, has started to pile one million bushels of soybeans on a clear patch of ground behind some of his grain silos. The big mound of yellowish-white beans, already one of the taller hills in this flat part of the world, will then be covered with tarps.
    The hope is that prices will rise before the beans rot.”

    ……. Others are less enthused. Greg Gebeke, who farms 5,000 acres outside Arthur (North Dakota) with two of his brothers, said he struggled to understand the administration’s goals. “I’m trying to follow and figure out who the winners are in this tariff war,” Mr. Gebeke said. “I know who one of the losers are and that’s us. And that’s painful.”

    Soybean farmers also spent millions of dollars cultivating the Chinese market. Farmers in North Dakota and other states contribute a fixed percentage of revenue to a federal fund called the “soybean checkoff” that pays for marketing programs like trade missions to China and research intended to convince Chinese farmers that pigs raised on American soybeans grow faster and fatter. In 2015, North Dakota soybean farmers footed the bill for an event in Shanghai honoring the 10 “most loyal” buyers of American soybeans.

    “I’ve been to China 25 times in the last decade talking about the dependability of U.S. soybeans,” said Kirk Leeds, the chief executive of the Iowa Soybean Association. By undermining that reputation, he said, “we have done long-term damage to the industry.”

    But the mood is souring quickly. Mr. Gebeke’s wife, Debra, a retired psychologist, has returned to work at North Dakota State University, to counsel distraught farmers. Public health officials in North Dakota, already confronting a recent rise in suicides, are concerned about the impact of falling prices, particularly on younger farmers with high levels of debt.

    But waiting carries risks. Soybeans can spoil, and Brazil harvests its crop in the spring, creating fresh competition for American beans. “Hope is unfortunately a terrible marketing plan,” said Nancy Johnson, executive director of the North Dakota Soybean Growers Association.

    Brandon Hokana, whose family farms 3,500 acres near Ellendale, N.D., estimates that they need a price of $8.75 per bushel of soybeans to break even. Last year at this time, soybeans could be sold for almost $10 per bushel. Now, local elevators are offering prices below $7.”

    The Binyamin Appelbaum authored article also states that the Trump Government subsidies (“big government” welfare for farmers who can’t “pull themselves up by their bootstraps”) cover less than half of the losses faced by North Dakota farmers as a direct result of Trump’s trade policy.

    Hey, no worries for CoRev and Peakignorance, Or no worries even for Mitch McConnell, James Lankford, or Lindsey Graham—->>a large increase in U.S. Midwestern farmer suicides is “all part of the MAGA plan”. Rock on MAGA!!!!!!

    1. baffling

      “Hope is unfortunately a terrible marketing plan,” said Nancy Johnson, executive director of the North Dakota Soybean Growers Association.

      and that is exactly the plan put forward by trump and his minions.

      saw an interesting article in cnbc today. their on air talent sucks, but occasionally they have reasonable online talent
      what a surprise. trump’s soybean farmers are getting clobbered, and they STILL voted for trump! makes you wonder how functional our democracy really is.

      1. Moses Herzog

        @ baffling
        That is the part that kills me. But we had that going back to Mondale vs Reagan. They can’t wait to sign the consent form to be [defecated] on by the wealthy. It’s like a school child getting beat up by the 200 pound neighborhood bully and then showing up to the scene of the crime 2 hours later and saying “More Bubba!!! PLEASE give me more pummeling Bubba!!!!! There’s a part in the back of my cranium you have’t bashed in yet, Please!!! Please!!! FINISH the job!!!!” It’s like a pastime for these rural idiots. They make satire skits about these rural sh*t-heads on “The Family Guy” cartoon and they laugh it, absolutely unaware they are watching themselves roasted in running cartoon gag.

    2. pgl

      “And in addition to Brazil, which has seen exports to China rise as it surpasses the US as the world’s largest producer of soybeans, Russia’s nascent soybean industry is undergoing a boomlet at the expense of American producers.:

      Tyler Durden cannot be bothered to tell us how much this “nascent” industry is producing during its “boomlet” and yet we are to believe that the Russians will totally displace US exports. This is so dumb it is PeakTrader speak.

  9. Erik Poole

    MC wrote: “Further, the Chinese government is unlikely in my view (based on my untutored view of what “losing face” means) to capitulate in the absence of substantial concessions, concessions I do not see Mr. Trump offering.”

    I agree strongly with this untutored view of the importance of “losing face”. Untutored is a good term as we are getting into social psychology for which most of us lack training or instructive models.

    Pay attention to the rhetoric of First Nations in Canada, aboriginal peoples elsewhere as well as some developing country leaders. The term ‘respect’ pops up often. In effect, what the term respect symbolizes are secure, well-defined and enforceable economic property rights — the opposite of boot heel economics.

    For the moment, the USA is an unreliable business partner that appears most unwilling to respect basic contracts, be they implicit conventions or otherwise. The USA elected a President who made his fortune by ripping up contracts and stealing from suppliers.

    1. baffling

      one should wonder why it is so easy to steal important trade secrets from us companies? perhaps we should invest more in our own cybersecurity? also, one must wonder why corporate espionage from china decreased under obama and increased under trump?
      “China remains a pariah nation” such statements make you lose credibility on blog sites like this, bruce.

    2. 2slugbaits

      Bruce Hall China remains a pariah nation…

      Wasn’t that the point of TPP; i.e., to establish a trade zone around China without including China?

      it is not in our long term interests to do anything that facilitates its growth.

      You mean doing things like manufacturing Trump trademarked items and Trump 2020 reelection paraphernalia?

      You should read Adam Tooze’s new book “Crashed.” It will give you a whole new appreciation for the extent to which the US, the EU and China are all economically and politically entangled. It’s this season’s “must read” book.

  10. William Dittl

    This is a very short-run graph. Tariffs on US soybeans are increasing demand for Brazilian beans as the gap has emerged. An emerging gap signals not only a major change in sentiment but also means more Brazilian rainforest loss and market distortions create a deadweight loss in the US and create an overproduction of soybeans in Brazil. This is not likely to go away and the focus on GMO soybeans will likely only exacerbate the move away from US beans.

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