China’s Tofu Tariff Tantrum

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As the China trade war rhetoric in 2018 finally shifts toward intensifying negotiations in late May, the clueless global audience are pawns in a tit-for-tat public relations (PR) campaign by the US and China. The US is demanding the elimination of over half of its $375 Billion trade deficit with its largest trading partner.

Such threats are part of the gamesmanship in Trump’s DNA. In return, China has thrown a tofu tantrum that could restrict US soybeans and other agricultural products. Combined with a 25% tariff on Kentucky Bourbon, it sounds like China is forcing sobriety and an anti-flatulence diet upon its citizens – despite the fact that China can’t hurt bean production and they already own our Jim Beam whiskey.

China relies on the US for almost all of its sorghum and a large portion of soybeans. Twenty ships of US agricultural supplies in route to China were rerouted in May for other countries, costing US exporters a few bucks at the margins while depriving high-quality feedstock for the burgeoning Chinese animal protein market.

The world will still consume more grains and animals each year and the US and Brazil are the only reliable suppliers. China may still end up buying US soybeans, but through other countries to save face. Don’t be fooled by the show that Trump and President Xi are putting on. Behind the curtains, both sides will find a way to claim victory or else a real trade war would tank financial markets and impede global growth that neither country can afford.

China is the largest consumer of bean curd on the planet, accounting for 60% of global soybean trade and will find it hard to avoid US crops.

The US and Brazil produce 80% of the world’s beans and supply 88% of China’s needs. China has been steadily shifting its reliance upon Brazil for soy yet the US still supplies a third of China’s growing needs, so it’s unlikely they can eliminate the US from their consumption. With the growing animal herds and protein needs of China, soybean needs form China will continue to grow with an increasingly risky dependence on a single source – Brazil.

US production is quite healthy, but in the long run, Brazil will continue to endear itself as the co-breadbasket along with the US feeding China. This is a low-quality race for the US and makes China vulnerable to Brazil’s weather as a solo provider.

It’s almost humorous that the most exacting punishment the Chinese have to retaliate against the US are + Billion in low tech staples such as sorghum, soybeans and Jack Daniels, while the US has a 7 Billion deficit with China in just computers and electronics. While trade deficits and US tofu output may or may not change much longer term, this is a game of poker where both sides need to pretend to be winners. While the players carry some big weapons, we continue to expect both sides to save face with the US gaining the most in reducing China’s trade barriers and boosting intellectual property protection.

Managed money funds in March and April reached overbought commitment levels rivaling past price peaks in soybeans. This supports further price deflation in beans beyond the recent 7% drop. Soybean prices are currently tethered to the China-US trade talk progress and along with stock prices, they should move higher in unison as optimism grows over rumors of a China-US-European trade agreement.

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