The soy bean sales to China are down by 94% from last year. Is Trump’s trade war hurting China?

The answer is yes. Soy bean is a major protein source for not only humans but also pigs in China.

By looking at the inventory data, you will see that the inventory level of soy beans in China is down by about 10% within a very short period of time, meaning that buyers of soy beans in China are encountering difficulties trying to substitute US soy beans with soy beans from other parts of the world, say Brazil. But this is driving up soy bean prices for Brazilian soy beans. Meanwhile, buyers from all over the world are starting to consider U.S. soy beans because U.S. soy bean producers are starting to lower their prices.

The demand for soy bean at the global level is rather inelastic even in the medium run because it is hard to find a cheaper substitute for soy beans. So, it boils down to how much soy bean inventory decrease can China tolerate within the next couple of months. This reduction in inventory represents more or less the total reduction in global demand of soy beans. Whereas this global reduction is soy bean demand will drive up the level of U.S. soy bean inventory, its effect on soy bean prices can only be temporary.

The picture becomes more complicated when you consider the fact that there is a very active futures market for soy beans. Many large soy bean producers have already sold short soy beans in the futures market well before China imposed its 25% tariff on soy beans. Small soy bean farmers maybe hurt because of the 25% tariff, but they will not suffer a 25% profit reduction. Instead, you will have to look at the overall price drop of U.S. soybeans in the global market.

Unlike aluminum production, soy bean production is a lot of more flexible. Instead of growing soy beans, farmers can switch to cotton, sunflowers, corn, wheat, alfalfa, etc etc… But you cannot convert an aluminum production plant to a copper alloy production plant. So, a 25% tariff on China steel and aluminum is much more effective than a 25% tariff on U.S. soy bean. The ultimate result is not only a reduction in U.S. trade deficits against China, but also creation of a lot more jobs in American steel and aluminum industries!