We are (hopefully) just days away from removing one of the greater unknowns we’ve had in the market in quite some time. As is generally the case ahead of any election, talk about the outcome can feel hyperbolic and divisive—though this year’s results definitely have the ability to take us in two very different directions as a country.
I hate discussing politics but, in this role, it can’t really be avoided right now as the potential for tariffs and other changes to trade flow will impact prices as we look ahead.
Does The Trade War Come Back?
Having traded physical grain through the trade war, I remember certain aspects well. The sharp drop in beans going to China from 2017 to 2018 was jaw dropping, as losing 800 million bushels of Chinese bean demand from one year to the next was nothing anyone could have been properly prepared for. The drop to contract lows in 2018 was just as swift, with November 2018 beans trading in the mid $10s ahead of the initial tariff announcements, down to $9.90 the day the first round was announced, before sinking to a contract low of $8.12 later that September.
When looking back on the timeline of the trade war and its impact on trade, many forget the added help in limiting demand that China had received from an uncontrolled outbreak of African Swine Fever. The disease decimated their hog herd and subsequent feed demand, taking their overall soybean imports down 300 million bushels from the year prior.
The drop in demand everyone remembers was generally isolated to 2018, as the increase in their hog herd drove an increase in import demand. Purchases from the US recovered slightly in 2019, up 500 million bushels from the year prior, aided in part by a smaller South American crop.
2020 started slow, especially as Covid created logistical headaches and incredible uncertainty over demand. However, the signing of the Phase One trade deal was seen as a potential positive. While mostly forgotten now, Phase One signed in mid-January 2020, outlined a specific amount of money would be spent by China on the purchases of US food, agricultural and seafood products annually over the following two years.
Initially, most analysts felt the agreement was fluff and very unlikely to be met. However, whether it was China discovering much of its perceived grain supply was missing, the fact that markets had hit multiyear lows because of Covid, the phase one deal, or a combination of all three, grain purchases from the US by China soared that following fall, eventually setting records.
To me, while a Trump victory does likely lead to a rekindling of old trade spats, it seems important to remember that the Biden administration has not rolled back Trump’s tariffs, having added a slew of their own tariffs and trade restrictions over the last four years. Candidate Harris supports continued economic pressure on China as well, planning to follow some of the trade policies initially started by Trump and kept in place by Biden.What Would Happen if it Did?
While the concern over a return to the volatility and uncertainty that came with the first trade war is valid, it feels like there are a few different points that may be important to consider before we start penciling in a zero for bean demand in the US balance sheets.
First, as mentioned above, the trade war never ended. Neither party has been great for Chinese relations, something that is mostly supported by their constituents. One of the bigger differences between the two candidates being that Trump has already negotiated a resolution with Phase One. Do we see Trump use that agreement and the threat of increased tariffs to push China further? It is possible. Either way, under either administration China will be looking to deepen trade ties with other partners.
Secondly, the world oilseed balance sheet looks very different now than it did when the trade war was first announced. While China remains the top destination for US soybean exports, we have cultivated relationships with other countries looking to expand their imports as global crush capacity continues to grow. World soybean consumption has grown over 20 million metric tons or 735 million bushels since 2018, with consumption for all oilseeds on an uptrend for both food and fuel.
In the US alone, domestic demand has grown 370 million bushels since the 2017/18 crop year and is expected to make up over half of our demand in the marketing year ahead at 2.425 billion bushels. The uptick in demand for both fuel and food is not just a US thing, with the entire world looking to increase the use of their domestic supplies in fuel production.
Changes in biofuel blends and sourcing rules would likely benefit the US as we move forward as well. Major swings in blending mandates coming from traditionally large vegetable oil or oilseed exporters like Indonesia, India and Brazil, just to name a few, will likely push more customers to look to the US for supplies than seen during the previous spat.
In addition, China is not what we would call as economically stable now as they were then--or at the very least, they are on the cusp of a correction that could be upset if trade were to be severely disrupted. When it comes to allies, they are not as well connected it seems either, having lost Canada, the EU and others over the past few years, with even the leaders of Brazil questioning their trade practices and opening anti-dumping investigations.
A Trump trade war with China now would likely look very different than what it looked like the first go around. While yes, the risk is there that we could lose a chunk of Chinese bean buying once again, there are several factors at play that would likely limit the influence a reduction in Chinese bean buying would have on prices once any type of initial market shock wore off.
What About Other Countries?
Our relationship with Mexico is of greater focus for me now than our relationship with China, as the threat of trade between us if rhetoric were to get heated enough is real. Mexico has always been somewhat of a captive trade partner with logistics alone letting the US get the business most years. Trump has threatened tariffs on several different products out of Mexico several different times, with continued talk of those tariffs helping to pay for border security. Purchases of corn by Mexico have helped to drive our early season corn export books to one of its best starts in history, something that many say is being driven by concern over potential trade disruptions. Whether the surge in buying is because of worries over changes in trade or because it is supported by economics, it is likely we will see a continuation of strong buying after the election because they need the grain, and the US is the only supplier of consequence until new crop supplies flow out of South America next spring.
How Will Biofuels Be Impacted?
I feel like for both candidates, the lowest hanging fruit post-election is clarifying some of the biofuel feedstocks rules causing issues in the industry. Most will agree that imported feedstocks should not receive tax credits, with the US not the only country looking to possibly change how imported feedstocks are able to qualify for government money. Lobbyists in both the US and the EU are pushing to limit credits imported used cooking oil or other imported vegetable oils will receive, something that could drastically change the outlook for domestic demand nearly overnight.
If Trump were to win, it is likely the tariffs applied to Chinese imports would impact used cooking oil imports, though it is unclear whether he will support the development of biofuels. Some of the biggest bears in the industry believe a Trump administration would work to roll back the recent demand expansion that we’ve seen, though I struggle with this as much of this expansion has already been invested in and built—with crude oil and energy industry backing.
A Harris win would likely create a relatively rosy outlook for biofuels, especially with Walz’s background in Minnesota—one of the country’s leaders in biofuel expansion. However, an adjustment in the use of feedstocks, or anything of consequence to the industry for that matter, could be delayed or put off entirely as the administration would have its hands full from the start with a slew of other issues.
In The End
While it is easy to assume market direction if one candidate or the other were to win, I must ask if much of the assumed risk to overall demand is being priced in. We have seen incredibly stout foreign demand and signs of positive price direction driven by cash almost entirely ignored by traders as their focus remains on the “what ifs” more than what is actually taking place.
While it is impossible to predict the future outcome at any level, I can feel certain that the cash market will continue to tell us the truth, probably even more so once we get the election and the unknowns that come with it out of the way. As always, please don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
