The war of the soybean

The war of the soybean

06 August 2018 from Anna Svahn
Recently, a potential trade war may not have shaken the market as much as we thought from the beginning, but at least many investors have raised eyebrows. What began with China's overcapacity in steel led to the United States introducing steel tariffs - across the world - has now led countries and regions to impose sanctions on the self-proclaimed best country in the world.

A few months later, we find ourselves in the middle of a trade dispute, which many investors are worried about will end up in a trade war. But how does it affect the entire markets and individual assets - and how can hedge against the risks of a trade war?

My householder Howard Marks writes in the investor bible The Most Important Thing that a good investor does not just prepare for the scenario most likely to occur without having to be prepared for many different ones, even those who may not seem likely. Translated into more easy-to-understand terms, it is therefore about controlling its risk in all situations.

However, in order to map how the trade war can affect entire markets and individual assets, we need to chart the situation in order to make a reasonable conclusion. Since the media have already focused a lot on the stock market and metals, we shift our focus on soft commodities. Just like any other investment investigation, it's completely impossible to cover all assets and markets, so we will only look at the soft commodity soybean.

Soybean war

In response to US steel tariffs, China decided to raise tariffs on, among other things, soybeans from the United States by 25 percent from the previous 13 to today 38 percent. Since 68 percent of the soybean produced by the United States is exported to China annually, it is not strange that the price of US soybeans has been adversely affected. Less demand than expected leads to imbalance in the relationship between supply and demand which, of course, affects the price.

However, the consumption of soybeans will not decrease significantly (although the estimate for the first time in 15 years is lower than the previous year, but more about this later), which means that China will import them from elsewhere. As it appears now, from Brazil, which is the world's largest exporter of soybeans in the world, will increase its exports to China. However, we must remember that it is not only for Brazil to expand its production with as much as China will want to import. Instead, there will be a move. Yes, Brazil will have higher demand than before but capacity is still about the same. If they are to prioritize China, they will have to surrender other markets to the United States. In addition, as the country of import most soybean in the world, it does not seem that the rest of the world's exporting countries will be able to meet China's needs.

This means that China will still need to import some beans from the United States, to meet the country's demand, just not as much as before. This also partly explains why the estimates for China's imports of soybeans for 2018 are lower first for the first time in 15 years.

Thus, the United States will not lose 68 percent of total exports, it will not just go to China. Wallace Tyner, professor of Purdue University, estimates that US exports of soybeans will fall by 29 percent rather than 68. 29 percent is still a lot, but it is less than 68 percent of soybean exports would be lost for the United States. Both China and the United States actually lose their duties on just soybeans, while Brazil draws the winch and can increase both production and exports.

Trade war hedge

How do you create a hedge against a trade war that affects the price of agricultural commodities? How does Howard Marks devise this kind of situation? Simple answer - you rarely do that. On the other hand, it becomes more important than ever to diversify your portfolio to different markets and assets, which are both positive and negative in different scenarios.

At times such like this you wish certain companies were public. One that would interesting to look at is Louis Dreyfus Company, which one of the world's largest companies when it comes to exporting agricultural raw materials, including Brazil. Unfortunately, the stock market in Brazil in this case leaves quite a lot to be desired, which means that instead you can choose alternative ways to expose on the upside downside to the agricultural raw material market.

How will the trade-war between East and West affect the price of agricultural commodities - especially soybeans - in the long run and how does it affect companies in the stock market dealing with these goods? Will American food lovers sell a lot of soybeans to buy them cheaper and sell for the same price, which will have a positive impact on the margins by the end of the year? Will farmers need to raise prices for other crops to survive the suites of lost soybean income? Will this affect future year's supply of soybeans when farmers choose to grow another? "No one knows, but this might be the right time to take action.

Anna Svahn

Hitta Produkter

Important legal information

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

27/01/2021 05:12:01


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