US Tariff Consequences

The ramp-up of US tariffs has led to Chinese retaliations on imports, including agriculture. Key for the dry bulk market are the 15% levies on wheat and corn alongside 10% on sorghum and soybeans that began on 10 March. Uncertainty still looms as we await Trump’s tariffs on Mexico to enter into force and any potential retaliation.

The standout impact is on US soybeans, with China importing 22.1 Mt from the US last year. In the previous US-China trade war in 2018, China’s total soybean imports took a hit. With limited importers that can match Chinese demand, US volumes will likely struggle to find a replacement buyer as China typically receives more than half of exports. While Brazil may partially fill the gap, with an expected strong year for production, replacing the entirety of US volumes is unlikely, which means we could ultimately see lower total seaborne volumes.

China is still very reliant on soybean imports, at over 85% of consumption. However, the country has gone into this round better prepared, in part through increasing stockpiles. Since the end of the 2018 market year, China nearly doubled its domestic stockpiles of soybeans to 43 Mt, lifting them to 36% of domestic consumption from 21%. Longer term, China also strives to alter its domestic market to be less reliant on imports, for instance by reaffirming efforts to lower the use of soymeal in its livestock feed. Additionally, indicating the country’s long term views, it recently announced the expansion of coverage of full-cost and production insurance for beans to encourage farmers to plant the oilseed and raised its budget for further stockpiling.

Meanwhile, in the US, farmers are struggling, faced with a myriad of problems that will discourage future production. Trump’s freezing of agricultural grants and loans while federal spending is reviewed is putting farmers under pressure, all while US grain prices take a hit from tariffs. Additionally, cuts to US international aid spending threaten the sizeable grain exports to developing countries. Trump’s recent announcement for US farmers to prepare to sell more domestically appears unsubstantiated and difficult to fulfil unless there’s a shift in government policy to boost consumption, such as lifting biofuel mandates.

 

US corn may also soon have fewer markets, with looming tariffs on Mexico and the potential for retaliation from the country. Mexico imports 40% of US corn exports, with 12.6 Mt transported via rail last year. If levies prevent US railings, they would need substituting from the seaborne market. However, due to Mexico’s reliance on US supplies and growing consumption, they will be reluctant to enforce levies at a high level. Hard-hit US agricultural prices and a weakened dollar may also be sufficient to support a continuation of this trade.

Corn that could replace US supplies also appears under pressure. While Brazilian exports have fallen in the market year so far (-14 Mt y-o-y Jul-Feb) due to waning Chinese demand, exports are increasingly needing to compete with the country’s growing ethanol sector. High food inflation in Brazil has already resulted in the government increasing food stocks, with Conab to have an extra budget of $60.4 million this year to buy grains, Reuters reports. Barriers to trade for US supplies, in both Mexico and China, could lead to a significant discount, potentially leading Brazil to import US corn while shipping its own.

Of course, with US soybean exports not seasonally ramping up until q4, there is plenty of time for policy to change. However, longer term, tariff wars only serve to focus China’s attempts to be self-reliant and encourage other countries to consider diversifying their supply chains away from the US. US investment in agriculture and production will also suffer, lacking government support and with heightened trade barriers. All told, a more isolationist US policy does little good to dry bulk demand.

By Cara Hatton, Dry Bulk Analyst, Research, SSY