Soybeans: Deja Vu all over againCBOT: Micro Soybean Futures ( CBOT_MINI:MZS1! )
Let’s rewire the clock back for seven years. In 2018, trade tensions escalated between the US and China, resulting in a series of tariffs and retaliations.
On July 6, 2018, US imposed a 25% tariff on $34 billion of Chinese imports. On the same day, China immediately hit back with 25% tariff on equal value of US goods.
American soybeans were among the hardest hit by tariffs. The United States has been the largest soybean producer in the world. According to USDA data, American farmers produced 120 million metric tons of soybeans in 2017, contributing to 35.6% of the world production. About 48.2%, or 57.9 metric tons, were exported to the global market, making US the second largest soybean exporter after Brazil.
China is the largest soybean consumer and importer. In 2017, it imported 94 million metric tons of soybeans, accounting for 61.7% of the global imports. Brazil and the US were the largest sources of China’s imports, with 53% and 34% shares, respectively.
Tariffs on US soybeans punished American farmers. Total tariff level was raised from 5% to 30%. As a result, the FOB cost to Shenzhen harbor in southern China hiked up 700 yuan (=$110) per ton. This made US soybeans 300 yuan more expensive than imports from Brazil.
Tariffs priced American farmers out of the Chinese market. According to USDA Foreign Agricultural Service, China imported 1,164 million bushels of US soybeans in 2017. By 2018, China import dropped 74% to 303. While US exports recovered to 831 in 2019, it did not resume to the pre-tariff level until the signing of US-China trade agreement. CBOT soybean futures plummeted 15-20% in the months after the tariffs were imposed.
US farmers incurred huge losses from both reduced sales and lower prices. The following illustration is an exercise of our mind, not from actual export data.
• Without trade tensions, we assume exports of 1,164 million bushels each in 2018 and 2019, at an average price of $105 per bushel. This comes to a baseline export revenue of $244.4 billion for both years combined.
• Tariffs lowered export sales to 1,134 million bushels for the two-year total, at an average price of $87. Thus, the tariff-impacted revenue data comes to $98.6 billion.
• The total impact on soybean sales volume would be -51%, from 2,328 down to 1,134.
• The total impact on export revenue would be -60%, from $244.4 to $98.6 billion.
It is déjà vu all over again.
In February 2025, the Trump administration announced 10% additional tariffs on Chinese goods. This was raised by another 10% in March, setting the total to 20%.
To retaliate against US tariffs, China imposed import levies covering $21 billion worth of U.S. agricultural and food products, effective March 10th. These comprised a 15% tariff on U.S. chicken, wheat, corn and cotton and an extra levy of 10% on U.S. soybeans, sorghum, pork, beef, aquatic products, fruits and vegetables and dairy imports.
This is just the beginning. In the last trade conflict, average US tariff on Chinese imports was raised from 4% to 19%. Now we set the starting point at 39%. How high could it go? From history, we learnt that this could go for several rounds before it settles.
Trading with Micro Soybean Futures
On March 11th, USDA published its World Agricultural Supply and Demand Estimates (WASDE) report. Both the U.S. and global 2024/25 soybean supply and use projections are basically unchanged this month, meeting market expectations.
In the last week, soybean futures bounced back by about 2%, recovered most the lost ground since China first announced the retaliative measures.
The latest CFTC Commitments of Traders report shows that, as of March 11th, CBOT soybean futures have total open interest of 810,374 contracts.
• Managed Money has 101,927 in long, 109,849 in short, and 108,993 in spreading positions.
• It appears that the “Small Money” spreads their money evenly, not knowing which direction the soybean market would go.
In my opinion, the futures market so far has completely ignored the possibility of a pro-long trade conflict with China.
• Seriously, ten percent is just the start. What if the tariff goes to 30% like in 2018?
• How would soybean prices react to a 50% drop in US soybean exports?
Anyone with a bearish view on soybeans could express it by shorting the CBOT micro soybean futures (MZS). These are smaller-sized contracts at 1/10 of the benchmark CBOT soybean futures. At 500 bushels per contract, market opportunities are more accessible than ever with lower capital requirements, an initial margin of only $200.
Coincidently, Friday settlement price of $10.17 for May contract (MZSK5) is identical to the soybean futures price of $10.40 immediately prior to the 2018 tariff.
History may not repeat, but it echoes . At the last time, the tariff on soybeans saw futures prices plummeting 20% within a month. If we were to experience the same, soybeans could drop to $8.00. This is a likely scenario if tariffs were to rise higher.
Hypothetically, a decline of $2 per bushel would cause a short futures position to gain $1,000, given each micro contract has a notional of 500 bushels.
The risk of short futures is the continuous rise in soybean prices. The trader would be wise to set a stoploss at his sell order. For example, a stop loss at $10.50 would set the maximum loss to $165 (= (10.50-10.17) x 500), which is less than the $200 initial margin.
To learn more about all Micro Ag futures contracts traded on CME Group platform, you can check out the following site:
www.cmegroup.com
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
