Trade Conflict Hits Agriculture Commodities

Agricultural commodities sold off Friday as investors anticipated escalating trade tensions would hit Chinese demand for U.S. exports like soybeans and corn. The Trump administration said it would impose tariffs on tens of billions of dollars of Chinese imports on top of duties on steel and aluminum imports. China’s commerce ministry responded Friday by announcing it would levy tariffs against $3 billion worth of U.S. goods including pork and recycled aluminum.

The price of soybeans fell 1.7% to $10.12 a bushel—paring some heavier losses—and corn prices fell 1.5% to $3.71 a bushel, with both more than 3% down so far this week on the prospect of less demand from China. Though China’s initial response to tariffs hasn’t included soybeans, investors are concerned that if tensions escalate further they could extend to include oilseed, a key component in animal feed. China is by far the world’s largest importer of soybeans and by far the largest buyer of U.S. beans. Chinese product was trading higher, with the price of the front month Dalian Commodity Exchange soybean meal contract was trading up around 1%. Its Chicago-traded counterpart was down 1.6%, though. “If somebody imposes a trade war on China, we’ll fight to the end,” China’s Ambassador to the U.S., Cui Tiankai said on state television.

Elsewhere, natural rubber prices on the Shanghai Futures Exchange fell steeply, hitting their maximum 7% daily move in early trading, with the market now concerned that tires will be one of the products targeted by the U.S., given bus and truck tires were a focus of an investigation last year. The U.S. Department of Commerce opted not to issue anti-dumping and countervailing duty orders then. The decline in commodities hit the companies that produce or sell them. The world’s largest pork producer WH Group, which own Smithfield Foods Inc., fell around 8% as the market worried that tariffs levied by China s on pork from the U.S. would hurt company earnings.

Because the duties imposed by China have so far been on relatively minor imports, investors fear Beijing is leaving itself room for more punitive measures, should the U.S. escalate its protectionist trade policy. Analysts say that retaliation from China may be aimed at U.S. agricultural exports, which often originate in areas with some of the president’s staunchest supporters, such as the rural Mid-West. “The Chinese have essentially found a vulnerability in the U.S. political system,” said Erik Norland, executive director and senior economist at CME Group. “The U.S. is an enormous producer of corn, wheat, and soy, all of which come from a variety of states in the Mid-West where the Chinese can exert pressure on their political system.”

In 2017-18, the U.S. will produce 36% of the world’s corn and 35% of its soybeans, according to the U.S. Department of Agriculture’s most recent estimates. Given the size of Chinese imports of U.S. soybeans, even a small reduction would sting U.S. farmers who are struggling with low prices from oversupply. Should China introduce its own levies on soy, it would likely turn to Latin America to fill the gap, like Argentina and Brazil.

Still, a potentially damaging drought in Argentina means “China’s options are limited when it comes to finding alternative soybean suppliers,” Commerzbank analysts said in a note on Friday. China also has to be careful. Boycotting U.S. soy would also push food-price inflation in China “through the roof,“ said Michael Every, senior Asia-Pacific strategist at Rabobank. China has been trying to curb reliance on foreign food imports in order to minimize its sensitivity to inflation. Chinese demand for foreign pork, a key component of the country’s inflation, has fallen recently as large scale pig farms have ramped up production domestically.

Corn imports are easier to limit, however, and China has already been stepping up its imports from other sources. With China reducing its dependence on U.S. corn in recent months, “China had to look somewhere else for corn, and that somewhere else was Ukraine,” said Andrey Sizov Jr. , managing director of agricultural consultancy SovEcon. Other commodities were also hit by the trade spat. China steel rebar and iron ore futures sank 5% to their lowest levels in nearly six months due to fears that trade tensions could impact Chinese shipments to other nations. In Australia, BHP Billiton and Rio Tinto each fell about 4%.

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