TURF WAR:
How do you solve a problem like soya?
US soybean, and Canada’s canola, exports are a microcosm of the broader disruption caused by the new trade policy context.
Turf War: How do you solve a problem like soya?
- Oilseed markets worry that China’s tariffs on US soybeans and Canadian canola might leave heavy inventories.
- Trade deals with China are the easier solution but look less likely in the geopolitical and trade context.
- Oilseeds are, therefore, a microcosm of that broader context’s disruption and diversion.
- Diversion is a more difficult solution but it could feasibly avoid large inventories.
- Non-China imports of soybeans and canola well exceed the US and Canada’s export availability.
- More crushing is also likely a material part of the diversion.
- Policy measures, such as a larger biodiesel mandate, might also contribute in the US case.
- Markets are already supporting diversion via low prices, weak basis, and steep carry spreads.
How do you solve a problem like soya?
Oilseed markets continue to fret about China’s tariffs on oilseed imports. Markets are wondering where all that US soybeans and Canada canola will go if not to China. And fear the consequences of very large inventories. This worry has markets zigzagging on rumours of China purchases and trade deal portents. Hopes for trade deals are somewhat optimistic, in our view. No trade deal, though, does not mean no resolution. Oilseed supply and demand are roughly balanced. So, trade can be rearranged: China’s buying outside North America displaces other buyers to North America. The rearrangement means those soybeans and canola will eventually find alternative destinations. “Eventually”, though, means the rearrangement is not cost-free.
HOW BAD IS IT?
Markets are understandably worried about US soybean and Canada canola exports. China, recently, has been the destination for more than half of these exports. And, both exporters account for a hefty share of the global trade in each oilseed. Therefore, diverting those oilseeds elsewhere is also a hefty task. We outline just how hefty in this section.
The Sticker Shock
US Soybeans
The scale of the US soybean problem is very large (see the two charts below). China will typically buy about 56% of US soybean exports in ‘normal’ seasons. So, with total US export availability of about 45mmt, ‘default’ exports to China would be around 25mmt. To date, export commitments to China are zero. If that remains zero, then the markets needs to find another use for that 25mmt needs to find another use.
So far, US export commitments to other destinations are 11mmt or so. Thus near 34mmt of the 2025 US crop remains available for export.
Canada Canola
We estimate Canada’s canola export availability at about 7.7mmt in season 2025. Based on an assumed 50-50 split, China’s share would be about 3.85mmt. Therefore the market needs to find another use for that canola. Importantly, Canada’s canola problem is much smaller that the US’ soybean problem in global market terms. We have little data on forward commitments for Canada’s canola exports. We will presume though that there are zero export commitments to China. No doubt, some of Canada’s 2025 canola has already been committed elsewhere.
The metric
Another SnD metric summarises the task. The two charts below show the stocks-to-use ratio consequences for the US and Canada. The differences between the nil and full diversion cases are stark. Success will be measured by how close the realised stocks-to-use ratio is to the full diversion case.
Hard to believe
Clearly, replacing China as an export destination is a difficult task. Diversion at this scale is unprecedented, so there is no historical template. So, understandably, it is difficult to conceive of how all of that oilseed will find alternative destinations. However, we should not conflate ‘has not’ with ‘cannot’. Difficult does not mean impossible. Therefore, the US and Canada will not necessarily be stuck with disastrous inventories.
THE EASY WAY: TRADE ‘DEAL’
The easiest solution is, obviously, for Canada and the US to each reach a trade agreement with China. We reckon that solution, in a world that is changing, is more hope than expectation.
Deal or no-deal?
Among the casualties of Russia’s second invasion of Ukraine was an idea. The idea, ‘The End of History’, emerged from the surging optimism that followed the fall of the Berlin Wall. In this post-history world, a trio of engagement, cooperation, and time would result in Russia, China and others becoming more like The West. The fall of the wall, though, is now a long time ago. And, time has been unkind to the post-history idea. Indeed, the idea was already badly wounded even before Russia’s 2022 invasion. That invasion was the coup de grâce. Afterwards, any pretence that we are still at ‘The End of History’ has dissolved. History has restarted. And probably quite some time ago. There are adversaries again, not just partners. The West’s strategic and political establishment is still calibrating to this history-restarted world. That calibration is changing politics and policy to fit a different world. Those changes have many intertwined dimensions – strategic, military – as well as economic.
Most importantly here, The West’s tolerance for China’s subsidise-export-dominate (SED) economic model has ended. A giant neo-mercantilist economy is unsustainable in an otherwise substantially free-trade world. The consequence is that China’s access to The West is being curtailed. China, unsurprisingly, is reluctant to give up SED. And China’s response, so far, has been to curtail access to itself. The tariffs on oilseeds are but one example. That response, though, does not deal with The West’s grievance. And, as such, the conflict is not currently on a path to resolution. Thus a reversion to a pre-2018 trade world is unlikely any time soon.
However, much of the conversation about the Trade War ‘then what’ seems to carry on as if history has not restarted. Understandably so. People take time to adjust their thinking to changes. Most of us have never worked in anything other than a post-history world. So, many will assume that post-history is the default state of the world. Thus, the Trade War is viewed as a temporary glitch that will be resolved sooner or later by agreements. And those agreements will return the global trade system to something like its pre-2018 state. We think that framing ignores the reality of history restarting. And, in doing so, overstates the chances of resolution via trade agreements.
A messy outcome
We should not expect anything close to pure disengagement from China. China is too integral to the world economy, and the world economy too integral to China, for that to happen anyway. Moreover, the nature of politics rarely produces policy purity. Those important caveats, though, do not prevent The West from substantially raising the cost to China of its SED model. One result is relatively high tariff rates for China and any conduit countries. Those, and other, policies make a mess of existing trade, supply chains and other integrations. Oilseed markets are a microcosm of that mess and the required adjustments.
How the trade issues evolve from here is an open question. For oilseeds, any deals need not be major steps in the major strategic and economic issues. China can reach agreements with the US or Canada that deal with more immediate, but minor, issues. And these minor agreements might, somehow, result in China importing more soybeans/canola from the US/Canada. This US President has a penchant for deals anyway. And all politicians’ pragmatism recognises the need for some ‘wins’ along the way. Therefore, there is a greater chance of minor trade agreements that contribute to resolving these issues. However, the hurdle to those agreements reverting us to a pre-2018 world is high.
THE HARD WAY: DIVERSION
Finding another use for the canola and soybeans that would otherwise go to China is a more difficult task. That task, though, is not impossible because of two important features of the context.
Context dependence
Firstly, China’s demand will be very similar. China will not import fewer soybeans and canola (or substitutes) because of their tariffs. The high tariffs apply only to US soybeans and Canada canola. Other origins do not face such high tariffs. So, China is instead buying oilseeds from elsewhere.
Secondly, global oilseed supply and demand are roughly balanced. And inventory levels are approximately neutral. In that context, one buyer switching from seller A to seller B does not mean seller A misses out. Seller A can find a different buyer.
Reimagineering
Therefore, while the worry is understandable, the potential for diversion is substantial. Part of that worry is that we have no template for the required diversion. Comparison with past seasonal patterns will provide much less guidance than usual.
The experience of 2018 is of limited use. The episode is too short: China was back buying US soybeans by February 2019. If The West is now controlling its economic engagement with China, then this Trade War is not the seeming glitch of 2018. The disengagement scenario, to some degree, is permanent and, therefore, novel. The market, thus, must substantially reimagine oilseed trade patterns.
Can that reimagining be done quickly? Commodity markets’ ability to reshape never fails to impress. Prices and, more importantly, price differences, drive that flexibility. So, a lot can change quickly. How quickly, of course, also matters. Whether or not markets can achieve a complete diversion of US soybeans and Canada canola within season 2025 is less clear. Some changes, to do with timing and storage, may take somewhat longer.
A schematic representation of the potential diversions is shown below for soybeans. The US diversion profile largely mirrors the diversion profile for Argentina and Brazil. Argentina’s profile is somewhat more complicated because it is a net importer of soybeans. This feature means that Argentina might possibly import substantial quantities of US soybeans. In season 2018, Argentina imported 1.8mmt of US soybeans. Perhaps the most important feature is price basis. The schematic presumes that South American soybeans will remain at a price premium to US soybeans during 2025 season. And that premium will flow through to the meal and oil products.
Export diversion
China is a very important oilseed importer. China accounts for about 60% of the world soybean imports. And, about 25% of world canola imports. While large, those numbers also show that there is a lot of canola and soybeans going to other destinations.
A full-season picture for soybeans is shown in the charts below. Two features are very clear. One, even if China imports zero US soybeans, import demand from rest of the world far exceeds US export availability. Two, China can meet its import needs from South American suppliers. So, at the aggregate level, there is no reason why the US cannot export the 45mmt it has available. And, so, divert the 25mmt that would ‘normally’ go to China.
A similar picture for canola is below. Here, the same two features are clearer still. One, even if China imports zero Canada canola, import demand from rest of the world far exceeds Canada’s export availability. Two, China can very easily meet its import needs from other origins. So again, at the aggregate level, Canada can export the 7mmt it has available. And, so, divert the 3.5mmt that would ‘normally’ go to China.
While full diversion is possible in aggregate, there can be practicalities that might prevent it. Whether US soybeans and Canada canola are acceptable in all of these non-China markets is uncertain. Another practicality is that these oilseeds will need to be stored for longer and/or potentially travel longer distances. The storage and distance issues are largely a question of price.
Crush diversion
Crushing more oilseeds is also a potential diversion path. Extra crush requires a combination more consumption or more exports of meal and oil.
In the US case, the crush path looks challenging from the meal side. The US biodiesel mandate can likely absorb any extra soy oil. US soymeal prices were already very low, in part because the biodiesel mandate, for now, generates excess meal. Again, though, challenging is not the same as impossible. That context has some helpful features for crush diversion.
Firstly, the US market is already acting to use excess meal supply, so it is not at the starting point. Obviously, having already started, the easier solutions are implemented. But, solutions that take several years are still developing to full fruition. Moreover, there is no market reluctance to make business commitments to those solutions.
Secondly, US beef prices are rising, likely prompting consumers to switch to more meal-intensive pork and chicken.
Finally, Argentina and Brazil are likely to produce less meal because of higher soybean prices.
Canada, with only a nascent biodiesel mandate, has a somewhat more difficult crush diversion task. However, Canada is no newbie to exporting both canola meal and canola oil. Canada already exports several million tonnes of both. Also, China absorbing canola from elsewhere not only diverts seed, but potentially opens up meal and oil opportunities too. And, we note again, that Canada’s canola diversion task is modest in global oilseed market terms.
THE FALLBACK: POLICY SUPPORT
The US soybean and Canada canola issues have drawn a much wider focus than just their markets. Both issues are the subject of significant political attention in both Canada and the US. That attention means policy will be part of how these issues are resolved. Some of these policies will directly affect the 2025 oilseed balance sheet.
The direct impacts can come from policies that divert oilseed products into domestic consumption. The major channel is to boost local veg oil consumption via biodiesel mandates. For season 2025, the likely boosts are modest. The US has more latitude here. Raising the US biofuel mandate is possible, but it would be a stretch this late in the year. A small contribution might come from a tweak that adds previous years’ exemptions to next year’s mandate. Canada has less latitude in biodiesel. Canada’s biodiesel mandate is still in its infancy, so production capacity is modest. Canada’s government has allocated substantial funding to fast-track biodiesel use. The season 2025 impact, however, will likely be limited.
Other policies might involve financial support for growers. In the US, some financial support seems likely, given comments from the US President and several members of the US Congress. In Canada, the government has also announced some direct assistance measures. In both cases, these policies likely have little impact on season 2025 balance sheets. Now is too late in the year to reduce production materially. These policies might influence 2026 planting decisions – but that is another story. Growers’ willingness to sell oilseed may depend on the size and timing of this financial support.
PRICES ALREADY FACILITATE DIVERSION
Markets are already setting prices to facilitate the diversion. Soybean and canola price levels are on the low side. And soymeal prices are very low. Low price levels help with diversion. Basis and carry spreads, though, are more important to diversion.
On basis, South American soybeans have been trading at a substantial premium to US soybeans for some time. China aggressively buying South American soybeans, and not buying US soybeans, has driven a wedge between the two markets. We expect that wedge will be sustained, because China’s importers will want to avoid the tariff on US soybeans. Other importers do not face a tariff on US soybeans. So, they will buy cheaper US soybeans and pass on those pricey South American soybeans. Internal US soybean basis is also very weak (versus futures), further supporting the basis (and carry) signals.
Carry spreads are another important pricing mechanism to affect diversion. US soybean futures and Canada canola futures both have steep carry, i.e. nearer-date futures are at a substantial discount to later-date futures. The carry spreads will ‘pay’ for canola and soybean storage while awaiting sale. The term structure of prices for South American soybeans is likely much less steep, or is possibly inverted (i.e. near > far).
