Thanks to an escalating trade dispute between the United States and China, Minnesota-grown soybeans are about to get a lot more expensive for Chinese buyers, as a steep retaliatory tariff increase still appears set to go into effect.

Minnesota soybean farmers have a problem, but it’s not easy to tell just how big it is. Soybeans are an almost perfect commodity, so putting up a barrier between two countries should be a little like tossing a big rock in the stream, not building a dam. The soybeans should flow somewhere else.

That’s not what the market here is telling us. The price of soybeans has declined nearly 20 percent since the middle of April.

The market, as always, is worth paying attention to. It turns out a single tariff can disrupt markets even for a commodity that is produced and sold all over the world.

To call something a commodity in the farm business, by the way, isn’t an insult like it would be in smartphone manufacturing. All the term means is that the products are basically the same, no matter where they come from.

In soybeans there’s a difference in protein content between products of different regions, but it seems doubtful anyone can eyeball two buckets of soybeans and confidently call which came from Iowa. That means that potential buyers of soybeans, often called simply “beans” in Minnesota farm country, can’t really be persuaded by anything other than a lower price.

Slapping an additional 25 percent tariff on American soybeans entering China doesn’t make them more expensive, of course, to buyers anyplace else.

Brazilian and other producers can sell more to China, and Americans can sell more elsewhere. A hedge-fund manager quoted in the Financial Times this week even noted that Brazil might someday need to import American soybeans, as so much of its huge crop goes to Asia.

So why is this such a setback for American farmers?

One point analysts make is that the scale of the soybean trade with China is massive, making it an awfully big challenge to line up other buyers of American soybeans to replace the Chinese.

Americans sold a lot of other agricultural products in China last year, including cotton, animal hides and skins, pork, dairy products and even hay, but altogether they didn’t come close to matching the $12.4 billion worth of soybeans sold. Soybeans accounted for about 63 percent of all U.S. ag exports last year to China, according to a recent summary by economists at the University of Illinois.

China turns out to easily be the largest consumer of soybeans in the world, maybe twice as big as the next biggest, the United States. China needs them mostly for its vast livestock industry and has to import by far most of what it needs.

Analysts looking ahead have concluded that China will have to buy at least some American soybeans after the new tariff hike kicks in. U.S. producers would now be the so-called residual suppliers, the last people to call after all the cheaper options are exhausted.

But because the overall cost of soybeans to the Chinese users is higher, thanks to a fat tariff on the beans purchased from the Americans, Chinese customers will be looking to buy more soybean substitutes. In this scenario, the total amount of soybeans used worldwide seems likely to slip, taking down the market price.

Another feature of the global market is that the Americans, unlike big exporters such as Argentina and Brazil, have a lot of storage capacity. Here is where the inventory will build if China slows its buying, said economist Michael Boland of the University of Minnesota’s department of applied economics.

He added that it’s very difficult right now to determine what the Chinese needs really will be. Of late it’s been difficult to even find out what Chinese customers have already bought.

What’s easy to predict, though, is what a swelling American stockpile of unsold soybeans will do to American soybean prices.

“The soybeans are going to find a home,” said Boland. “Somebody is going to get them. Price is going to move that crop,” meaning lower prices for American soybeans eventually attract buyers.

There is more than a short-term disruption coming, too, as economists from Purdue University tried to show.

If the proposed tariff on American soybeans sticks, annual U.S. soybean exports to China in about five years will have declined by almost two-thirds as overall U.S. soybean exports drop by more than a third. Prices would be lower, too.

American farmers are going to respond, of course, principally by switching to different crops. In the same analysis the Purdue economists concluded that American soybean production would decline by 15 percent as farmers switch some land over to growing something else.

In Minnesota and other Midwestern soybean-growing regions, a big increase in land used for corn production may not tank the selling price of that commodity, but it sure won’t help push corn prices higher.

“And don’t overlook dairy in all this,” Boland said, noting that unlike dairy and some other categories of ag exports to China, at least soybeans can be easily stored with hopes the market stabilizes. He suspects the U.S. dairy industry may have an even bigger problem.

It’s worth noting that peace could yet break out between the United States and its major trading partners, the hikes in tariffs could get canceled and much of this fall’s Minnesota soybean crop could end up in China after all.

In a fluid situation it’s worth checking every day, and it was eye-catching to read a website headline that the Chinese just decided to reduce tariffs on soybeans.

Unfortunately, it took just a second to realize the Chinese government is dropping tariffs just on imports coming from South Korea, India and other Asian nations.

Nothing good in that news for Minnesotans.

 

lee.schafer@startribune.com 612-673-4302