Projects Funded for Shuo Yu

2020-2021

Short-Term Impact of the Trade War on U.S. Soybean Futures Prices and Spreads

  • Shuo Yu
  • Jeffrey Perloff

Abstract

Specific Objectives of the Project:
We quantified the short-term impact of tariffs and the corresponding relief payments on soybean futures prices.

Project Report/Summary of Results:
Due to the 2018–2019 trade wars, U.S. agricultural and food products have suffered eight waves of retaliatory tariffs from Canada, China, Mexico, the EU, and Turkey. The COVID-19 pandemic further isolated the economies in 2020. We studied the futures market effects of these tariffs on various U.S. crops, particularly soybeans.

We estimated reduced-form regressions of real futures prices or spreads on retaliatory tariffs and a set of event indicators to quantify the short-term impact of retaliatory tariffs and the corresponding relief payments on soybean prices. We controlled for the COVID-19 epidemic, related U.S. government direct payments, weather shocks, and information from USDA reports. Our analysis used price data from the Barchart website, tariff data from official documents published by the tax bureaus of each country and the World Trade Organization (WTO) Tariff Download Facility (TDF) database, USDA World Agriculture Supply and Demand Estimation Reports, and weather data from the Google earth engine from 2004 to 2020.

We found that a 25% increase in a retaliatory tariff, holding projections and weather variables constant, decreased the real futures price by 14.25% while the tariff was in place. The effect on the futures price spread grew with the length of the spread. It reached its peak at a one-year spread. Thus, the price pass-through of the tariff increase was large, and farmers suffered from the retaliatory tariff in the short run.