Brazil Soybean Premiums Are an Effective Barometer For U.S.-China Trade Tensions

In the ebb and flow of United States and China trade negotiations, price premiums for Brazil’s soybeans appears to be an accurate barometer for the degree of tension surrounding the negotiations. When tensions rise, premiums emerge in Brazil for soybeans at Paranagua versus the U.S. Gulf. Similarly, when tensions ease, premiums slowly evaporate. These price premiums have risen and fallen within the framework of global price movements that have focused on the situation regarding the 2019 U.S. harvest. Prices rose in both the United States and Brazil as wet conditions hindered corn and soybean planting in the United States and high river levels raised the cost of moving soybeans to the U.S. Gulf. As conditions have improved, both Brazil and U.S. soybean prices have trended lower.

Where U.S. and Brazil prices deviate correlates directly with the rise and fall of trade tensions. In early May, the United States announced plans to raise tariffs from 10 to 25 percent on $200 billion of Chinese products. This resulted in a 7 percent premium for Brazilian soybeans. With premiums eventually falling to 1 percent by late July, a new round of tariff hikes that took effect on September 1 pushed Brazilian premiums to near 10 percent. In all cases, a rise in Brazilian prices, relative to the United States, accounted for nearly all of the premium as U.S. prices continued to trend lower on improving production prospects. The situation in September 2019 is similar to what was observed at the start of the trade engagement with China in 2018. Again, U.S. prices declined on improving crop prospects while Brazilian prices rose and stabilized leading to premiums that ultimately exceeded the 25 percent tariff level. These premiums evaporated when tensions eased in late November 2018 coinciding with the G20 meeting held in Argentina.

PROJECTION FOR 2019/20

Global oilseed production is forecast at 579.5 million tons, down 1.4 million tons from August and 3.5 percent below 2018/19. Soybean production is projected at 341.4 million tons, down 440,000 tons from August and 5.7 percent less than last year due to reductions in the United States, the European Union, and Ukraine and partially offset by larger forecasts for India, Canada, and China. Peanut production is forecast slightly higher, while rapeseed and cottonseed are reduced. Rapeseed production is projected 939,000 tons lower on reduced forecasts for Australia, the European Union, Ukraine and Chile. Soybean imports are forecast at 148.2 million, down 670,000 tons. Most of the decline is centered in Iran where a change in circumstances has made imports of soybean meal a better option. Brazil is projected to remain the leading soybean exporter in 2019/20 at 76.5 million tons. Global oilseed exports are up 550,000 tons from last month and represent 1.2 percent growth over 2018/19. Global ending stocks are down and 11.3 percent less than 2018/19. Soybean ending stocks are forecast down 2.6 million from August due to declines in the United States, Argentina, China, and the European Union, offset by larger stocks in Brazil, Iran, and India. Trade of soybean meal is higher on larger imports by Iran while global soybean oil is down marginally. The projected U.S. season-average farm price for soybeans is forecast at $8.50/bu., up 10 cents.

OVERVIEW FOR 2018/19

Global 2018/19 oilseed production is down by 1.5 million tons to 600.7 million this month due to minor reductions in soybeans, rapeseed, and sunflowerseed, partially offset by rises in peanut and cottonseed. Global oilseed exports are up 460,000 tons due to a rise in soybean and peanut exports. Brazil soybean exports are lowered by 1.1 million tons, and is more than offset by a rise in the United States and Argentina. Global soybean imports are down nearly 1 million tons due to reductions of about 500,000 tons each in Iran and the European Union. Global oilseed ending stocks are down 3.3 million tons due to reductions in rapeseed, soybean, and sunflowerseed. Rapeseed stocks are reduced by 1.3 million tons due almost entirely to lower Canada stocks. Soybean stocks are down 2.1 million tons due to large declines in the United States, Argentina, and China partially offset by a 1.1 million rise in Brazil. China’s stocks were reduced due to a data series revision from the National Bureau of Statistics. The U.S. season-average farm price for soybeans remains unchanged at $8.50 per bushel.

EXPORT PRICES

U.S. soybean export bids in August, FOB Gulf, averaged $337/ton, down $14 from July. Brazil Paranagua averaged $364/ton, up $6 from July. Argentina Up River FOB averaged $347/ton, up $6 from last month. U.S. soybean meal export bids (FOB Gulf) in August averaged $334/ton, down $14 from July. Brazil Paranagua FOB averaged $308/ton, down $10 from July, and Argentina Up River FOB averaged $305/ton, down $12 from the previous month. U.S. Gulf prices have been declining since mid-July on improving crop prospects and are nearly 7 percent lower year-to-year. South American prices, previously following U.S. prices lower, spiked higher in early August. Brazil prices are currently running at a 10 percent premium to U.S. prices as of September 10, 2019.

EXPORT SALES

For the final report ending September 5, 2019, 2018/19 accumulated U.S. soybean exports to China totaled 13.4 million tons and 33.4 to the rest of the world. For 2019/20, soybean export commitments (outstanding sales plus accumulated exports) to China totaled 1.1 million tons compared to 1.5 million a year ago. Total commitments to the world were 9.5 million tons, compared to 16.9 million for the same period last year. Outstanding sales were 864,300 tons to China and 8.2 million to the rest of the world. Last year at this time, outstanding sales were 1.4 million to China and 14.7 million to the rest of the world.