POINTERS: Global Soybean Outlook - Special Focus US/China Trade Conflict

Trade tension between the United States and China in the form of escalating import tariffs had been the dominating theme enveloping global trade outlook for most of the 2018 and look set to extend into 2019. Soybeans export from the world largest producer, the U.S; and the world largest buyer, China been at the center of this tension. The mutual dependence of both these countries on the soybean commodity is central to maintaining global supply and demand balance. However since the implementation of the additional 25% tariffs by China on U.S origin beans from July of last year exports slowed down, global ending-stock increased, soybean meal consumption declined and soy complex prices dwindled. However, the expectation of a downgrade in Brazilian soybean crop size against strong domestic demand and the prospect of willingness of the U.S and China to negotiate to resolve the trade issues are offering hope for recovery in prices underpinned by pent-up demand and lower global supply. This paper will explore the above themes with reference to soy complex price outlook in 2019 and its implication to palm complex.

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Questions & Answers (4) :

Tey Poh Leng

5 years ago

Hi Dr Sathia, Thanks for the reply. My question is referring soybean oil price outlook not soybeans.

Sathia Varqa:
Dear Poh Leng, My apology. Soybean oil prices have legs to rise higher. We think prices can up to 31.20 to 31.80 US$ cents/pound by June, supported by the assumption of U.S-China negotiates a smooth trade deal, U.S domestic soybean crush demand does not drop drastically (see NOPA numbers for references) and soybean-oil based biodiesel shipment from the U.S to E.U is not interrupted by the U.S igniting a trade war with the E.U by imposing tariffs on E.U auto exports.
5 years ago

Tey Poh Leng

5 years ago

Hi Dr Sathia, What is your Price outlook of soybean oils (based on 2nd month of CBOT contract) for 2019?

Sathia Varqa:
Dear Poh Leng, Thank you for your question. I think soybeans have the potential to rise$9.50 - $9.80/bushels from current $9.14/bushels Assumption: -China - U.S trade problem will be ironed out and U.S beans will resume shipment to China. -Brazilian crop damage of 4-5 million tons will squeeze global supplies -Greater demand for soybean oil for biodiesel will push soybean prices higher.
5 years ago

Saurabh Data

5 years ago

Dear Sathia How do you see CME Soy oil price going forward? Thanks SD

Sathia Varqa:
Dear SD, Thank you for your question. I think soybean oil will do well in 2019, supported by strong biodiesel demand in Brazil and the increase in demand from the U.S domestic market. Not forgetting help from adverse weather reports. Soybean oil has done well in Jan & Feb moving above 30 U.S cents/pound. Prices have legs to go higher to 32 points by Apr/May. The higher soybean oil prices helped to lift palm oil in Jan & Feb. The biggest risk now is how the U.S threat on E.U auto tariffs will play out. If the U.S does impose the tariffs on vehicles made in the E.U, then the E.U will retaliate by halting or increasing tariffs on soybean oil imports from the U.S. This would be negative for prices. Soybean oil is a feedstock for the E.U biodiesel.
5 years ago

Melody Loke

5 years ago

Can China plug the soybean void left by the US arising from the trade war. What is your view? Your slide shows that spread between future and spot palm oil price increase when Indonesia removed its export levy. Can you explain where prices behaviour this way. With Indonesia announcing that a USD25/MT levy may be imposed in March, how do you think it is going to affect CPO price. You expect US production will increase in 2019 although soybean stocks are high as trade is affected by US-China trade war. How do you justify your expectation. Can you comment on Malaysia export tax. So far is it effective?

Sathia Varqa:
Dear Melody, Thank you for the questions. You have a series of questions. I will try to answer them separately. 1. Can China plug the soybean void left by the US arising from the trade war? - Domestically China cannot plug the gap. The void left by the U.S is 25-30 mmt per-annum. China domestic production is only 15-16mmt. China can plug the gap by importing more from Brazil, but there is problem with Brazilian crop size this year, so likely they have to turn to Argentina and others. 2. Your slide shows that spread between future and spot palm oil price increase when Indonesia removed its export levy. Can you explain where prices behaviour this way? When Indonesia removed the export levy of US$ 50 on CPO, this virtually gave Indonesian export price a US$ 50 advantage, which also means Malaysian CPO is now US$ 50 more expensive, therefore for Malaysia to retain the market share, Malaysian CPO price must fall by US$ 50 and this is what has happened, while the Futures did not fall as fast, so there is an increase in the disparity between the two prices 3. With Indonesia announcing that a USD25/MT levy may be imposed in March, how do you think it is going to affect CPO price. If Indonesia goes ahead and imposes the levy of US$ 25, it will make CPO export price difference between Malaysia and Indonesia zero. Malaysia CPO Futures is likely to rise, as it gives Malaysian sellers a price advantage compared to Indonesian. 4. You expect US production will increase in 2019 although soybean stocks are high as trade is affected by US-China trade war. Production has been rising year-on-year, so 2019 will see another round of rise from the previous marketing year. The rise is based on higher yields. But you are right stocks are already high, so will the U.S crush the beans adding to more SBO? Will the farmers there switch to corn in the next planting in April? 6. Can you comment on Malaysia export tax? Taxes are alway revenue generating instruments. Depends on what you are trying to assess. Certainly, the removal of tax has kept CPO export price lower by RM 102 or US$ 25, which has been helpful in increasing CPO exports. Hope the answers above help. SV
5 years ago