Photo credit: United Soybean Board

By Summer Allen and Máximo Torero

On July 6, U.S. President Donald Trump imposed a 25% tariff on a range of Chinese goods worth $34 billion. China retaliated immediately with 25% tariff on U.S. goods, including agricultural products. While the goal of the tariff, according to the U.S. President, is to protect jobs and intellectual property, the impacts to U.S. producers has been and may continue to be substantial. Less than a week later, on July 19, U.S. soy prices hit a ten-year low, with the August futures for the price of a bushel at $8.39 and November futures at only $8.55.

Source: Bloomburg

China is the largest market for soybeans from the U.S, purchasing around a third of the U.S. production; soybeans make up almost half of the $20 billion per year exports to China from the U.S. However, more than 830,000 metric tons of soybean exports to China have been cancelled since April. Soybeans are used as a protein source for feeding livestock and for cooking oil but despite subsidies to Chinese farmers to grow soy, the farmers are not growing enough to keep up with local demand.

As mentioned by Senior Research Fellow Joe Glauber in April, restrictions on trade can be costly. Already, competitors are stepping in to fill the void as after the announcement of the tariffs, the soybean premiums increased greatly in Brazil, but the country does not export enough to meet demand alone. As of July 18, the Financial Times reported Brazilian soybean prices were at a four-year high compared to those in the U.S. as China seeks other sources for their imports. Looking at futures for the past few years, we see that the 2018 decline in soy prices has been substantial and does not appear to be uniquely associated with the average seasonal variability that is normally seen.

Soybean Futures Prices

Source: Author’s calculations using Chicago exchange market

Currently, these actions have also resulted in an increase of excessive price volatility*(see rectangle area in graph below representing the number of realizations of price volatility exceeding the 95th percentile of the predicted historical volatility) potentially creating future problems in the soybean market by increasing more uncertainty to producers and potentially affecting consumers (for further reference, see Kalkuhl, von Braun, and Torero, 2016)**.

*A time period of excessive price volatility: A period of time characterized by extreme price variation (volatility) is a period of time in which we observe a large number of extreme positive returns. An extreme positive return is defined to be a return that exceeds a certain pre-established threshold. This threshold is normally taken to be a high order (95 or 99%) conditional quantile, (i.e. a value of return that is exceeded with low probability: 5 or 1%). In this model, we are using the 95% quantile and look at time in 60-day increments.
** Food Price Volatility and Its Implications for Food Security and Policy. Springer International. ISBN: 978-3-319-28199-5. http://www.ifpri.org/publication/food-price-volatility-and-its-implicati...

Summer Allen is a Senior Research Coordinator in the Markets, Trade, and Institutions Division and Máximo Torero is Executive Director for Argentina, Bolivia, Chile, Paraguay, Perú and Uruguay at the World Bank.

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