Another Round of Tariff Increase?

Donald Trump has won a second term as U.S president. Following his first term's tariffs on Chinese imports, including soybeans, he now plans to impose tariffs of up to 60% on Chinese goods and a 10% to 20% levy on all foreign imports. This move could significantly impact U.S. farmers, particularly soybean growers, by increasing costs and restricting market access. As a result, the trade conflict is intensifying.

Refresh on Some Historical Facts

To recap, the U.S.-China trade war started in July 2018, and the Phase One trade agreement was signed in January 2020, helping to ease trade tensions between the two countries. During the 2018- 2019 tariff period, China's adjustment in soybean imports and the consistent price trends in crude palm oil (CPO) highlighted that China's tariffs on U.S. soybeans did not result in a significant boost for palm oil imports as palm oil could not effectively replace soybeans in swine feed due to nutritional and functional differences. As a result, the anticipated shift towards palm oil as an alternative did not materialise, leaving palm oil imports largely unaffected by the tariffs on U.S. soybeans.

1) Soybean Imports to China (2018-2019)

i. 2018: China's total soybean imports fell to around 88mn tonnes (-8.5% YoY). U.S. soybean imports saw a significant decline, dropping from 32.9mn tonnes in 2017 to just 14.2mn tonnes in 2018. At the same time, China boosted its imports from Brazil, with Brazilian exports to China reaching nearly 66mn tonnes in 2018 (+29.8% YoY), helping to offset the reduction in U.S. soybean shipments.

ii. 2019: In 2019, China imported around 89mn tonnes of soybeans, with most of the supply still coming from Brazil. Argentina saw a small increase in its soybean exports to China, as China looked for new suppliers. Imports from the U.S. remained low, though there was a slight rise following trade talks. This trend shows how China has adapted its sources to maintain a steady soybean supply.

2) Palm Oil Imports to China (2018-2019)

i. 2018: China’s palm oil imports remained relatively steady, with only a slight increase that was largely unaffected by the soybean tariff situation. In 2018, CPO imports were around 5.3mn tonnes, largely driven by demand in the food and industrial sectors, not for animal feed.

ii. 2019: Palm oil imports in 2019 increased to around 7.6mn tonnes, reflecting an uptick in consumer demand for edible oils and industrial use rather than a substitution for soybeans. This increase was not significant enough to offset the decline in soybean imports, given CPO’s unsuitability as swine feed. However, palm oil has benefited as one of the potential edible oil substitutes as the outbreak of Asian Swine Fly (ASF) diseases has resulted in a drop in soybean crushing activities and subsequently the decline in soybean oil supply

3) Price Trends (2018-2019)

i. Soybean Prices: The U.S. soybean price dropped significantly due to the tariffs. In 2018, the average price fell from around USD382/tonne at the start of the year to about USD317/tonne by mid-year. Brazilian soybeans, on the other hand, saw price increases as China turned to Brazil, with prices remaining relatively high due to strong Chinese demand. This price divergence between U.S. and Brazilian soybeans shows that Chinese buyers chose to seek other soybean sources instead of switching to different products.

ii. CPO Prices: CPO prices did not see any significant rise due to the tariffs. In fact, global CPO prices fell in 2018, starting the year at roughly RM2,400/tonne and declining to around RM1,950/tonne by year end. In 2019, prices showed a modest recovery but were largely driven by factors such as production cuts and higher global demand for edible oils, not by a direct increase in Chinese demand due to the soybean tariffs.

Case Study: Potential Tariff Impact

A study has been conducted by the World Agricultural Economic and Environmental Services (WAEES) to evaluate impacts of another potential U.S. and China trade war would have on soybeans and corn today.

i. Significant Decline in U.S. Exports to China: If China revokes its current waiver under the 2020 Phase I agreement and reinstates the previously established tariffs, U.S. soybean exports to China could drop by 14mn to 16mn tonnes annually, representing an average decline of 51.8% from the expected baseline levels for those years, according to the study. Similarly, U.S. corn exports to China would decrease by around 2.2mn tonnes per year, a significant drop of 84.3% from the baseline expectation.

In Argentina and Brazil, comparative prices are rising, and farmers in these countries benefit from both higher prices and increased export opportunities. In contrast, U.S. farmers are facing further price declines, while costs remain at record levels and commodity prices continue to fall.

ii. Brazil and Argentina Would Benefit: Brazil and Argentina would increase exports and thus gain valuable global market share. Chinese tariffs on soybeans and corn from the U.S-but not Brazil-would provide incentive for Brazilian farmers to expand production area even more rapidly than baseline growth.

iii. No place to turn: Although it is possible to redirect exports to other countries, the global demand from other markets is not sufficient to make up for the significant loss of soybean exports to China.

In conclusion, the data from 2018 and 2019 revealed that the tariffs on U.S. soybeans prompted China to boost soybean imports from Brazil and Argentina, rather than turning to CPO, which does not provide the necessary protein for swine feed. The relatively stable or declining CPO prices, along with flat import volumes, suggest that palm oil did not gain from the reduction in U.S. soybean imports.

Maintain Neutral

We place our target price and recommendation for the companies under review, pending the release of 3QCY24 results performance by this month. We reiterate our Neutral recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000/tonne and RM3,800/tonne for 2025. Our assessment remains, but we would review our assumptions if: 1) South America's soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, 3) lower-than-expected palm oil production, and 4) significant reductions in production costs.

Source: TA Research - 8 Nov 2024