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Editorial: The Trump discount

If you follow markets, especially if you grow soybeans, you’ll know about the price debacle resulting from President Trump’s decision to start a trade war with China. In retaliation for his duty on manufactured goods, China slapped a 25 per cent tariff on U.S. soybeans.

That’s caused U.S. futures to plummet to a 10-year low in the mid-$8-per-bushel range.

Mr. Trump’s reaction has been predictably bizarre, tweeting that “Soybeans fell 50 per cent from 2012 to my election. Farmers have done poorly for 15 years. Other countries’ trade barriers and tariffs have been destroying their businesses. I will open things up, better than ever before, but it can’t go too quickly. I am fighting for a level playing field for our farmers, and will win!”

In fact, the playing field for U.S. farmers is now more tilted than ever. The Chinese tariff doesn’t mean they will buy fewer soybeans — it just means they will buy them somewhere else. That’s mainly Brazil, even though supplies there are relatively tight. So surprise — the free market works. Brazil is now importing cheaper U.S. soybeans for domestic use and selling its own at a higher price for export.

This is being well reported and analyzed, but it’s interesting how this higher Brazilian price is usually referred to as a “premium.” That’s an indication of why there needs to be a re-evaluation of not only how we think about grain markets, but how they work as well. Brazil now matches the U.S. in soybean production and is now the world’s largest exporter, so it’s not selling at a premium. The U.S. is selling at a discount.

That distinction is important, because despite changes to electronic round-the-clock trading, the world’s dominant futures markets still reside in the U.S., making them disproportionately subject to U.S. conditions. That might have made sense when the U.S. was the world’s largest producer and exporter of some of these crops. The U.S. now produces only eight per cent of the world’s wheat, and accounts for only 13 per cent of world exports. Last year Russia was the largest exporter with 41 million tonnes versus 23.2 million tonnes from the U.S. The U.S. still leads the world in corn production, but last year had only 40 per cent of exports and for next year USDA projects total exports from Brazil and Argentina will be five million tonnes higher.

As four economists wrote in the University of Illinois Farmdocdaily last week, this loss of export dominance is partly due to a series of U.S. foot-shooting incidents, of which the Trump tariffs may be the latest. In the 1970s, the U.S. placed embargoes on Japanese and Soviet grain and oilseed purchases in order to keep a lid on domestic prices during a perceived supply shortage. It put on another Soviet embargo after its invasion of Afghanistan in 1980.

These embargoes did not enhance the U.S.’s reputation as a reliable supplier, and the massive production in South America and elsewhere is partly the result of Japanese and Chinese investments to ensure supply from other countries.

While U.S. could not have supplied the growth in world demand on its own, the accompanying graph (see at top) of U.S. market share tells the tale. When it comes to domination of world grain trade, no one including Mr. Trump will ever be able to ‘Make the U.S. great again.’ If we were picking a location for futures markets today, we’d put wheat in Moscow (maybe Mr. Trump wouldn’t argue) and soybeans in Rio de Janiero. OK, we’ll let Chicago keep corn.

One way or another, this soybean schmozzle is just another example of how U.S. futures are far too influenced by conditions in one country, not by the world conditions that they are ostensibly supposed to reflect.

Maybe this will sort itself out sooner or later, but meanwhile, if there’s a “premium,” it’s being captured by giant trading houses that buy low in one country and sell high in another. Farmers, and not just in the U.S., are only getting the Trump discount.

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