No group of US farmers has more to lose from a trade war with China than soybean growers. But as Beijing adjusts to new trade realities, Chinese farmers also have a lot on their plates.
China's 25-percent tariff, slapped on US soybean imports this week in retaliation against tariffs imposed by US President Donald Trump on Chinese imports, has accelerated Beijing's push to cut soymeal costs.
But the impact of the tariffs on a key sector for both of the world's two largest economies goes deeper. In 2017, China imported 95.5 million tons of soybeans, 32.9 million of which came from the US, in trade worth $41 billion (€36 billion). Almost two-thirds of US soybean exports go to China, where they are used in animal feed and cooking oil.
So, who gains and who loses?
"On the US side, farmers will suffer the most from the imposition of Chinese tariffs on US soybeans," Loren Puette, director of Taiwan-based research firm ChinaAg, told DW.
"To have the Chinese market shut down for these farmers would be a major financial blow," Puette says.
Beijing has already agreed to cut soymeal content in pig feed as part of a wider strategy that includes finding alternative protein sources such as rapeseed or cotton seed, tapping surplus soybean stocks and domestically grown soybeans and boosting soybean imports from Brazil and Argentina.
And if China, the world's largest pork-producing nation, can wean itself off US soy imports this could cripple US producers. Purdue University estimated that a Chinese tariff on US soybeans could mean economic losses of between $1.7 billion and $3.3 billion a year. US farm incomes are projected to drop this year to the lowest level since 2002 and soybean prices are down.
Cutting the soy ration for pigs from the typical 20 percent to 12 percent would equate to a demand reduction of up to 27 million tons of soybeans per year, equal to 82 percent of Chinese soy imports from the United States in 2017. US farmers sold over $12 billion worth of soybeans to China in 2017.
But if the domestic cost adjustments don't come in time, or at all, China may struggle to find alternative suppliers, Puette says. "It has alternative sources [Brazil and Argentina], but it can't buy enough from those countries to replace what it would have imported from the US," Puette believes, adding that Chinese importers may have to return to US soybeans later in the year.
"This would hit China's economy, with higher costs of importing beans from the US passed on to Chinese pig farmers and then to consumers, pushing up inflation and raising living costs."
"On the Chinese side, animal feed processors and consumers will suffer the most from Chinese tariffs on US soybean exports," Puette says. "First and foremost, China needs a large supply of soybeans to process into soymeal and China's livestock and aquaculture industries rely on cheap and high quality soybeans from the US to feed its hogs, chickens, cattle and fish."
Lack of alternatives
China doesn't have sufficient domestic soybean output to supply its own market. "During the months of October and November, the US is able to supply the equivalent of China's total soybean crop (14 million metric tons). We're almost through September and animal feed processors will begin to feel the pinch as US soybean supply slows to a trickle in comparison to previous years."
US farms typically export about half of their soybean crop to China in October and November. If the US soybeans are deemed too expensive, China could find itself with a big shortfall.
Soybeans are a seasonal business: South American farmers grow and harvest their crops at a different time of year to the US. Brazil can't grow enough to meet Chinese demand either and Brazilian soybeans now cost significantly more than US supplies. Other sources like Canada and Russia only account for a tiny percentage of global soybean supply.
"Chinese consumers will lose as everyday food items will become more expensive. The lack of US soybeans on the Chinese market will cause a surge of price increases across the country's livestock industry and supply chain," Puette says, pointing to Chinese pig farmers, already under pressure from African swine fever outbreaks and recent government backed environmental and modernization initiatives.
An increase in animal feed prices would translate into higher pork prices, while higher pork prices would push up the country's inflation rate as pork is a key product in the country's Consumer Price Index (CPI). "Since the beginning of 2018, the US dollar to yuan exchange rate has steadily risen to historic highs and these tariffs will likely fuel China's inflation rate, eroding the value of the yuan," Puette adds.