CHINA AND BRAZIL: FORGING A PERMANENT RELATIONSHIP IN SOYBEAN TRADE

The weekly Chinese trade delegation to Brazil is paying off for both Brazil and China. One agro product benefiting from the trade missions is soybeans. Since 1949 China and Brazil have enjoyed an informal trade relationship between the two. Both emerging economies saw a booming trade between each other as they formalized an agreement in which China would be supported for membership into the WTO in exchange for China’s reduction of some existing tariffs on imports from Brazil. An increase in trade with China was further promoted by Brazil with China through the adoption of a free-floating trade regime. By 2009, Brazil had replaced the US with China as its leading trading partner. Today, the two emerging economies enjoy mutual membership in the BRICS(Brazil, Russia, India, China, and South Africa) alliance. Because of their mutual alliance in the BRICS group, agricultural trade in foodstuffs has skyrocketed between the two economies in recent decades.

Since 2012 Brazil displaced the US as the largest soybean grower and its planting has expanded to meet the demand of China’s hunger for Brazil’s soybeans. In the past decade, soybean production in Brazil rose from 15 percent in 2000 to 53 percent in 2009, compared to 7 percent soybean production increase in the US. In 2012-2013, Brazil harvested 81 million tons, exceeding the U.S. crop of 77.84 million tons. Since 2000 Brazil’s share of China’s imports has jumped 10-fold since 2000 as the South American giant economy pushed to increase its soybean production. Brazil’s soybean production is expected to increase from 70 percent to 90 percent by 2020.

Each year soybeans play a larger role in Brazilian exports and has become the most important commodity in Brazilian agribusiness. The soybean industry is also one of Brazil’s main sources of foreign currency – representing about 10% of the country’s total exports. Currently, the Brazilian soybean industry consists of over 243,000 producers which generates about 1.4 million jobs. In addition, the soy industry promotes and redistributes the wealth beyond the country’s major cities and into the interior. From 2000-2010 Brazil’s soybean production continued to grow at an annual average rate of 8%. The primary contributing factors of the important role of soybeans in its economy are: 1)China’s increasing demand for Brazil’s soybean supply; 2) Brazil’s ability to offer new soybean varieties; 3) China’s financial ability to pay for soybean supplies in advance.

The Chinese soybean importers exercise strong market power on soybean exporters from the US, Brazil and Argentina due to market control. Chinese immense demand for soybeans combined with its strategy to buy soybeans from more than one country gives it monopsony power. China’s importers strategically use this power to cut the risk of price increases and maximize soybean import profits. Three soybean exporting nations of Argentina, Brazil, and the US compete with each for market share. Seasonal production differences between the US and the two South American soybean producers allow them to be complementary soybean suppliers to China. An example of this is South America’s seasonal production peak occurs from June through October while the US peak production period extends from November through May; therefore, resulting in less competition for the Chinese market between the three soybean suppliers. The demand for Brazil’s soybean supply is bound to grow given the strength of their economic partnership and intra-trade relationship as BRICS alliance members. This trade relationship is one to carefully watch in the future for it will surely continue to grow.

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One Comment

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