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Don’t Blame China’s Tariffs for Soybeans’ 2018 Slump

So, if China’s 25% import tax didn’t cause the grain’s 20% crash, then what did? Our answer might shock you

by Nico Isaac
Updated: January 17, 2019

For the U.S. soybean industry, 2018 went from bumper year to slump-er year. Between spring and fall, soybean futures plunged 20% to end at their lowest levels in an entire decade.

And, according to the mainstream interpreters of market action, one main factor was to blame for soybeans' 2018 selloff: the 25% tariff imposed on U.S. soybean imports by China, the world's largest soybean buyer. These news items from mid-September 2018 connect the dots:

  • "Soybeans hit 10-year low on China woes" (CNBC)
  • "Soybeans continue to slump as traders continue to weigh ongoing trade tensions between the United States and China." (Farm Lead)
  • "This year, soybean farmers are contending with... a trade war between the U.S. and China that has already driven down the price of soybeans sharply." (NPR)

Okay, to be clear, we're not saying China's import tariff hasn't hit U.S. soybean farmers hard. Before the tariff, the U.S. was the world's second-largest supplier of soybeans to China. After the tariff, in November 2018, China imported exactly zero, nada, zilch soybeans from the U.S. farmers. Our hearts ache for their predicament.

But the idea that China's import tariff caused the 2018 crash in soybean prices -- well, that's where we beg to differ. Here's an article from the exact day China announced its 25% tax on U.S. soybeans:

11719soytariffimage

The article's announcement was clear: "Soybeans have finally entered the US-China trade war." But notice the date of the article: April 4, 2018.

The second date to know is July 6, 2018: That's "T"-Day, the day China's 25% soybean tariff went into effect.

The chart below shows exactly where both dates fall in soybeans' price trajectory:

11719jeffsoy

After the April 4 tariff announcement, soybean prices continued moving sideways into early June before succumbing to a precipitous slide to 9-year lows.

If you say tariffs were to blame, then why did it take two months after the announcement for soybean prices to fall?

What's more, wouldn't you expect prices to go even lower after the tariffs actually went into effect on July 6? But instead, prices rallied into mid-August before resuming a selloff to its final 10-year nadir.

And remember when we said China imported ZERO soybeans from the U.S. in November -- well, soybean prices rallied despite that very negative fact.

Which leads us to one conclusion: Something besides the tariffs caused soybean prices to turn down in early June. Our analysis shows that "something" to be investor psychology, which unfolds as Elliott wave patterns on market price charts.

In the June 7 Daily Commodity Junctures, editor Jeffrey Kennedy identified a specific Elliott wave pattern on soybean's price chart: a contracting triangle. This sideways moving pattern (labeled A-E) often occurs in the second-to-last leg of the larger wave sequence: i.e. wave 4 of a 5-wave impulse, or wave B of a 3-wave correction.

Once complete, contracting triangles "thrust" prices in the direction of the previous trend.

11719conttrianglesoy

In the June 7 Daily Commodity Junctures, Jeffrey positively ID'd a bearish contracting triangle in soybeans and set the stage for a powerful decline to "below the 2015 low of 862.6" with this long-term chart:

11719june7dcjsoy

The next chart comes from our September 20 Daily Commodity Junctures. There, Jeffrey honed in on the daily time frame in soybeans and shows the grain's precipitous June-September crash. Counting five wave down, Jeffrey prepped the upside:

11719sept20dcjsoy

Here, the final chart captures the full extent of soybeans' 2018 performance: its slump to a decade-low in mid-September followed by a rebound into early 2019.

11719jan18dcjsoy

Conspicuously absent from Jeffrey's analysis and price charts is any mention of the ongoing U.S.-China trade saga. News or no news, soybeans prices were going where the market psychology was taking them.

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