Trade War: China will face difficulties in replacing US soybean supplies

Soybeans are one of the strongest weapons in Beijing's trade arsenal.

China will face difficulties in replacing US soybean supplies after imposing a 25 percent surcharge on US shipments, potentially causing serious damage to local firms, analysts and executives said on Friday.

China, the world's largest importer of oilseeds, will charge soybeans and 105 other US products in a predictable response to tough trade measures from Washington, state-run China Broadcasting Corporation said on Wednesday.

Soybeans are one of the strongest weapons in Beijing's trade arsenal because a drop in exports to China would hurt Iowa and other US agricultural states that support President Donald Trump. Soybeans were the largest US agricultural producer exported to China last year at a value of USD 12 billion.

China consumes about 60 percent of the world's soybeans to feed its livestock sector, the largest in the world. Factories are grinding oilseeds to produce a major component in animal feed.

"There are simply not enough quantities of soybeans outside the US to meet China's needs," said Mark Williams, Asia's chief economist at Capital Economics.

"With regard to reducing dependence on imports, there are few options, but none of them is a magic bullet that could harm farmers in the United States without having to cost them at home."

Half of China's imports came last year from Brazil, while the United States shipped about 33 million tons to it, about a third of its total imports. Replacing those American shipments of soybeans will not be easy.

Crops in Argentina, the world's third-largest producer of soybeans, have been hit by drought, cutting exports from there to less than 7 million tonnes in the 2017-2018 season, the lowest level in 10 years, according to data from the US Department of Agriculture.

Outside Brazil, the United States and Argentina, about 17 million tonnes of soybeans come from a few countries.

China is growing about 14 million tons of soybeans, mainly used in the food industry for human consumption.

Inside options

Analysts, experts, traders and buyers at feed mills say there are options at home, including the use of government emergency reserves and changing feed ingredients.

"Some people say they can withdraw from government reserves, but it's possible," said Paul Burke, Asia director at the US Soybean Export Board.

Some feed manufacturers are quietly developing contingency plans such as alternative ingredients.

Feed mills may add more maize, an abundant harvest at home, and dry distilled grains, a byproduct of ethanol manufacturing, rapeseed and cotton.

But maintaining protein levels is a complex process. The maximum amount of dry distilled grains in feed is about 20 percent, and the presence of toxic ingredients in rapeseed means that they can not exceed 5 percent of the pig feed, and are not usually placed in the food of pigs and young females.

Feed mills also worry that additional demand and scarcity of supplies will add to the burden and rise in pork prices, a key component of Chinese food and the rising cost of living for citizens.

China charges already high tariffs on imports of dry distillate grains and is considering charging dumping duties on its US maize imports.

Brazil's export price hikes have risen to record highs and fueled gains in local soybeans and soybean futures.

"I do not want China to escalate trade tension," said a procurement manager at a feed manufacturer, expressing concern over rising prices and lack of alternative sources of soybean protein equivalent.

"Brazil's exports usually end around September and it is normal to receive US shipments between October and March," he said.

"Where do we get soybeans during that period if we buy from Brazil alone?"

(With inputs from Reuters)