Several months ago, our sad soybean saga was a play with two acts. Today we move onward to a third.
In Act 1, we had a ship called the Pegasus racing to China. Loaded soybeans, it was trying to beat a 25% retaliatory tariff that would hit at noon on July 7, 2018. Sadly, the ship arrived at 5:30.
We said that Act 2 could be called “Gloom in Iowa, Boom in Brazil.” U.S. soybean exports to China were plunging as was their price. Meanwhile, Brazil became the world’s largest soybean producer with its soybean exports to China soaring by 22% (January to September, 2018 compared to 2017).
April appears to have been the turning point:
That takes us to Act 3.
Act 3: The Soybean Tariff and Soybean Subsidy
The First Aid Package
During an interview with the The Indicator from Planet Money, a farmer in northwest Ohio said his soybean prices “tanked” when the trade war began. Bringing his $10 a bushel price down by $1.50, the trade war wiped out Brian Watkins’s profits. But then, the President said he would give a $12 billion aid package to farmers. The $1.65 that Mr. Watkins received for every bushel he grew in 2018 entirely covered his losses. But still he told us that, “China as a market is gone.”
The Second Aid Package
Last week, the President announced he was creating a new $16 billion aid package. Because of an unusually wet spring, Mr. Watkins has planted only 10% of his acres. So this time, the subsidy will influence a planting decision. He can plant corn late, he can stick with soybeans, or he can plant nothing and take his crop insurance.
With its new aid package, the U.S. government just changed #2. Farmers have an incentive to plant the soybeans. The government said it wants to encourage market-based decisions. I wonder how an aid package permits that.
Our Bottom Line: Market Distortions
Tariffs and subsidies create a bit of a boomerang. With a tariff, the supply curve should shift to the left. But a subsidy moves it to the right.
The Chinese soybean tariff results in a higher price with less quantity demanded and supplied:
The U.S. soybean subsidy results in a lower price with more quantity demanded and supplied:
On May 11, Reuters reported that U.S. farmers were expected to reduce their soybean crop. That was before the President promised them the second aid package. Let’s wait and see what Act 4 brings.
My sources and more: I recommend listening to the Indicator interview and reading this Reuters article. Then, for more on the second aid package (actually $14.5 billion for farmers), Agweek and The Washington Post had the details.