Trade War Or Not, Threatened Soybean Tariffs Having An Impact
Soren Schroder, the CEO of agribusiness Bunge BG -0.18%, recently said China has stopped buying U.S. soybeans. Many of the conclusions drawn from this statement were that in some way, shape or form this activity was the result of a strategic, well-orchestrated plan to create trade pain for U.S. farmers. This report came nearly a month after China released plans to impose a 25% tariff on soybeans. While China’s switch away from U.S. soybeans might seem like an organized response, closer consideration reveals a logical reason for the behavior. A prisoner’s dilemma, of sorts.
Threat Of Tariffs
After China listed U.S. soybeans as potentially facing a 25% tariff in early April, Ken Morrison, with Morrison on the Markets, noted “the threat of a tariff has nearly the same effect as a tariff.” This is to say those who buy goods potentially facing a tariff will behave as if the tariff is in effect.
To explain this further, Ken recent shared that soybean crushers in China are actually careful managing their risks. He has calculated that the threatened tariff represents a potential risk of $100+ per ton for soybeans purchased from the U.S., or more than $5 million per cargo ship. On the other hand, they could instead buy non-U.S. soybeans, from Brazil or Argentina, for a $0 to $15-per-ton premium over U.S. soybean prices. The non-U.S. soybean premium has recently fallen, after being $15 to $30 per ton in April.
Would buyers prefer to pay a small premium for non-U.S. soybeans upfront, or face the potential risk of a much larger tariff down the road?
Concerns of threatened tariffs becoming actual tariffs are not unwarranted as China levied a 179% tariff on sorghum imports in late April. Two ships loaded with sorghum bound for China found themselves suddenly changing course and looking for new buyers.
Consider the classic game theory example of the prisoner’s dilemma. For two prisoners being separately questioned for a crime, their punishment depends on:
1. what they independently decide to do (remain silent or betray their partner); and
2. what their partner-in-crime chooses to do.
Ultimately, each prisoner must consider how steep the “costs” of each outcome are, and the likelihood of their partner betraying them.
Similarly, buyers of soybeans in China face a dilemma. Currently, they could buy cheaper-priced U.S. soybeans today but potentially face a significant tariff. Alternatively, they could pay a small premium for non-U.S. soybeans and avoid the tariff-risk.
Given Schroder’s comments, it seems Chinese soybean buyers–based on revealed behavior–believe there is a reasonable risk of a soybean tariff being implemented. Furthermore, any recent premium for non-U.S. soybeans has not been enough “cost” to forgo the tariff-risk.
Ultimately, the most relevant question about tariffs–and the threat of tariffs–is what happens with U.S. agricultural exports over the next five or ten years. Several factors will impact exports over the long-run, including the current trade environment. Today, buyers of soybeans in China face a dilemma as the threat of a tariff impacts their day-to-day decisions. In recent weeks, this dilemma has resulted in fewer U.S. soybean sales to China and canceled orders.