The effects of trade restrictions on basis

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Date

2021

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Montana State University - Bozeman, College of Agriculture

Abstract

After accusing China of stealing intellectual property and engaging in unfair trade practices, the United States announced a $46.2 billion tariff on Chinese imports in April 2018. Immediately, China announced a retaliatory 25 percent tariff on soybean imports from the United States. Both tariffs went into effect on July 6, 2018. Due to China historically buying 60 percent of total U.S. soybean exports the tariff had a major effect on the soybean market as 2018 exports dropped by 74 percent compared to 2017 exports (Ward, 2018; Adjemian et al., 2019). While the soybean futures contract price dropped nearly two dollars, research has not studied the consequences on prices in local markets where almost all marketing transactions occur. Using a difference-in-differences model with corn basis as a counterfactual, I measure the relative change in soybean basis between the announcement period and after the tariff went into effect across 3,222 cash markets. The results suggest that basis for soybeans weakened five cents per bushel relative to its expected relationship with corn basis during the intermediate period, and after the tariff went into effect in July, soybean basis weakened an additional 14 cents per bushel and remained relatively weaker throughout the rest of 2018. The tariff caused basis to weaken in every state, Minnesota and Oklahoma soybean farmers faced the largest effects, with soybean basis weakening 25 cents and 23 cents per bushel relative to corn, respectively. Missouri and Nebraska faced the lowest impact, with soybean basis weakening 12 and 15 cents per bushel relative to corn basis, respectively.

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