Canadian soybean farmers are becoming collateral damage in the ongoing trade dispute between U.S. and China, as hefty tariffs imposed by Beijing highlight the tight cross-border ties between markets.
China slapped a 25 per cent retaliatory tariff on American soybeans last week after U.S. President Donald Trump followed through on threats to levy US$34 billion worth of Chinese imports. Current U.S. soybean prices — already beat up from months of trade uncertainty — have now plunged to around US$8.50 a bushel, down nearly 20 per cent since late May.
With Canadian prices driven by those set south of the border, the pain is being felt not just in Wisconsin and Iowa but in Manitoba and Ontario too, analysts say.
“Prices were $10.50 a bushel, now look at them,” said Ken Ball, a senior commodities future adviser at PI Financial Corporation in Winnipeg. “China has crashed the price. And the market reaction was very fast and much more aggressive than people thought it would be.”
Soybean futures were trading at 872 points on the Chicago Mercantile Exchange on Tuesday, down from a four-year high of 1,053.75 in April.
Though a weak Canadian dollar has softened the impact for Canadian producers — who receive payment in U.S. funds — that hasn’t been enough to completely offset the damage, said John Dreidger, senior marketing analyst at Winnipeg-based Farmlink Marketing Solutions.
“U.S. soybean farmers have certainly been suffering but Canadian farmers have been suffering too, even if it is in a smaller way,” he said. “We are closely connected.”
As the world’s largest consumer of soybeans, China is a crucial market for the U.S. At nearly 120 million tonnes, the U.S.’s annual production of soybeans is the world’s largest and is its top agricultural export to China, accounting for about 60 per cent of a total US$20 billion in agricultural products sent to the Asian nation.
Though Canada’s annual production of 7.7 million tonnes pales in comparison, the industry has been growing fast, nearly doubling in size over the last decade according to Soy Canada. Canadian producers also count China as their largest export market, taking nearly 40 per cent of the 4.96 million tonnes shipped to international destinations last year.
Yet analysts are skeptical that the newly formed gap in the Chinese market will present a significant opportunity for Canada. Even with Canadian production capacity projected to double again over the next 10 years, it can’t come close to replacing U.S. supply in the Chinese market.
China has crashed the price. And the market reaction was very fast and much more aggressive than people thought it would be
Ken Ball, senior commodities adviser
And ongoing tariffs could cause American soybeans to be diverted to Canada, harming domestic soybean production, according to a report by CIBC deputy chief economist Benjamin Tal and economist Katherine Judge.
“While the implementation of tariffs on American goods in China could divert demand towards Canadian goods in theory, displaced American exports could result in increased competition for Canadian goods elsewhere,” the economists wrote in a note to clients Tuesday.
A more likely scenario, according to Ball of PI Financial Corp., is that China will increasingly turn to Brazil, the world’s second largest soybean producer, to replace American supply. The price of Brazilian soybeans has already climbed as U.S. prices have tumbled, he said.
And though Brazil will eventually run out of soybeans – Ball estimates this will happen by November – U.S. and Canadian prices will be low enough by then that Chinese buyers can return to these markets, buying at prices so deeply depressed that they can also absorb the cost of tariffs.
“There’s no way China can avoid buying from the U.S. forever,” Ball said. “But this way, it still wins because it gets beans at lower prices, and Brazil wins because its prices rise with the demand.”
Canada, its fortunes tied to that of its southern neighbour, won’t be so lucky, analysts say. Some have speculated that China will turn to canola as a replacement for soybeans – used primarily as a cheap feed for livestock. Canada is the world’s largest producer of the crop, and though prices have softened in the last month, falling 5 per cent to US$510 per tonne, they have been markedly resilient in comparison to soybeans.
Yet, here again, there are doubts that Canadian farmers will find an opportunity amid the market upheaval. For one thing, at 45 per cent, the protein content in canola is well below that of soybeans at 80 per cent – a key consideration given its use as animal feed. And though Canada exported 4.5 million of a total 21.3 million tonnes of canola to China last year, early data suggests that export figure isn’t rising.
“It’s a substitute but it’s not a perfect substitute,” said JP Gervais, chief economist at Farm Credit Canada. “It’s possible we’ll see China buy more but the question is to what extent and we’ll know that in the next months.”
In the meantime, “at the moment it’s hard to find a good news story in this for Canada,” Gervais said.
Though there may be some upside for canola in the U.S.-China trade spat, most producers would prefer a stable trade environment in which to do business, said Jim Everson, president of the Canola Council of Canada.
“A volatile tariff environment is not a good tariff environment,” Everson said. “The environment we want is one where we have trade agreements that eliminate tariffs across the board and that are lasting.”
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