• Bloomberg quoted CCTV as saying that China will levy 25% reciprocal tariffs on 106 US products including soybeans.

• There are a few outcomes here. First, China's tariffs may result in a drop in imports of US soybeans as soybean processors switch to soybeans from Brazil. This will result in a drop in US soybean prices and an increase in soybean prices in South America.

• China imported about 32.9mil tonnes of soybeans from the USA in 2017. China's biggest supplier was Brazil, which exported 50.9mil tonnes of soybeans to China in 2017. In total, China imported about 95.5mil tonnes of soybeans in 2017. According to the USDA, Brazil and Argentina are forecast to produce about 160mil tonnes of soybeans in 2017/2018F.

• Second, China may buy soymeal from processors in the USA, Brazil and Argentina. China did not impose tariffs on soymeal from the USA. This would benefit agribusiness companies like Archer Daniels or Cargill. The USA is forecast to produce about 42mil tonnes of soymeal in 2017/2018F while Brazil and Argentina are estimated to produce roughly 66.7mil tonnes.

• Third, palm oil may benefit to a certain extent. This is because soybeans are crushed to be used as feedmeal in the poultry and hog industry in China and the oil is only a by-product. Rapeseed is an alternative that feed millers may use to replace soybean meal.

• Assuming China's imports of US soybeans fall by 10% due to the tariff and these are not replaced by other suppliers, this would mean a decline of 3.29mil tonnes.

• The loss of soybean oil would be about 592,200 tonnes as the oil component of the bean is 18%. Hence, CPO could potentially benefit by replacing the 592,200 tonnes of soybean oil. Assuming Malaysia gets a 50% share of the 592,200 tonnes while Indonesia gets the balance 50% share, this would translate into additional palm exports of 296,100 tonnes for Malaysia.

• Malaysia's palm exports amounted to 16.6mil tonnes in 2017. Malaysia's palm exports to China amounted to 1.9mil tonnes in 2017.

• CPO prices did not react to the news of China's tariff yesterday. Price of CPO for Maydelivery rose by RM18/tonne to RM2,455/tonne.

• In contrast, US soybean price declined by 2.2% to US$10.1525/bushel yesterday while soybean oil price slid by 2% to US$0.3168/pound.

• Based on yesterday's prices, the discount between CPO and soybean oil price is now 9.2% or US$64/tonne vs. the six-year average of 15%.

• Maintain NEUTRAL on the plantation sector.

Source: AmInvest Research - 5 Apr 2018