Steel tariffs chill: Farmers fear Chinese retaliation
Over 60 years ago President Dwight D. Eisenhower uttered, “farming looks mighty easy when your plow is a pencil, and you’re a thousand miles from the corn field.”
While less publicized, Ike added “no farmer — no citizen — really believes in any theory of our nation divided into sealed compartments-so that a political promise made in one area is not supposed to be heard in another.” Political promises cannot truly be compartmentalized, so while no farmer seeks ill-will upon those in the domestic aluminum and steel industries, or those trying to protect intellectual property, the current Washington rhetoric sounds a bit like violin strains to ears in the Midwest.
In the 10 years prior to Eisenhower’s 1956 speech, production costs for U.S. farmers continued to increase while crop prices headed in the opposite direction. Fast-forward 60 years and the situation is remarkably similar, as the USDA net farm income forecast of $59.5 billion for 2018 is the lowest such level, in nominal terms, since 2006.
The stark downturn is especially evident when looking at the past five years as a $120 billion business has shrunk to less than half that figure since 2013.
The bright spot in the 12-year period since 2006 has been Chinese global soybean imports, which have grown more than three-fold from less than 29 million metric tons, or 1.065 billion bushels, to an expected 97 million metric tons this year. That equates to 65 percent of total global soybean imports. Now, U.S. farmers prepare to plant their crops under a cloud of potential Chinese retaliation.
Last year, Brazil and the United States dominated the global soybean export market, fulfilling 43 percent and 40 percent of global needs respectively, continuing a trend. However, while global demand for soybean imports is expected to increase by 3.2 percent in 2018, based almost entirely on more demand from China, U.S. farmers are expected to fulfill just 37 percent of the total bushels needed. Brazil will see its share increase to 45 percent of the larger year-over-year total of 152 million metric tons.
Providing China with 82 percent of its soybean imports is a seasonal business for Brazil and the United States. In a typical year China buys a majority of its soybeans from U.S. suppliers during the six-month post-harvest period from September through February. Brazil picks up the slack around this time of year, in early March, as farmers begin harvesting new supplies in the Southern Hemisphere.
However, this season the trend turned counter-seasonal as China stuck with Brazilian suppliers long after the typical September switch to U.S. supplies. Brazilian soybean farmers produced a record crop of 114 million metric tons last year, something they are looking to duplicate again this year, giving them adequate supplies to meet this additional demand from the world’s largest buyer.
Last year U.S. farmers supplied 2.174 billion bushels, more than half of their total production, to the export market to “feed the world” as the saying goes. This year that number was expected to increase by 3.5 percent, reflective of increased Chinese global demand, as recently as this past November.
However, total export sales, bushels that have been sold but not shipped yet, and total export shipments are currently running 13 percent behind last year’s pace, suggesting a similar cut to export demand versus the expected 3.5 percent gain. Drilling down into the China data, the number of bushels already shipped to China is down by 20 percent for the end of February as compared to last year while the number of sold, but not yet shipped, bushels is down by almost 50 percent. With China targeting 6.5 percent in domestic growth for the second year in a row, losing market share from the world’s largest buyer of soybeans is a topic of conversation in many coffee shops where President Trump’s constituency — farmers — gather.
For its part, the United States Department of Agriculture has “walked down” their critical monthly assessment of U.S. soybean exports. The 2.25 billion bushel export target posted late last year has shrunk by almost 7 percent to 2.1 billion bushels as reflected in the February World Agricultural Supply and Demand Estimates.
However, the current 2.1 billion bushel estimate is only 3.4 percent below last year’s total while overall demand is down the aforementioned 13 percent due in large part to China backing away from U.S. supplies. With the end of China’s seasonal buying period upon us, continued reductions in U.S. demand are all but a foregone conclusion at this point, along with severe financial ramifications for U.S. farmers. The only hope would seem to be counter-seasonal buying program from China, as it did with Brazil, but the possibility of such a program is extremely suspect given the timing of steel and aluminum tariffs announced by the president in an off-the-cuff manner last week.
While steel and aluminum tariffs will have a much more dramatic effect on a country like Canada, with some suggesting the slowness of current NAFTA negotiations as a possible reason, China is well aware that it is a target as well. The slow pace of Chinese soybean purchases has been already linked to retaliation, but that’s not entirely true as the quality of last year’s Brazilian harvest was superior to that of the U.S. proving to be the main reason behind the counter-seasonal purchases. However, the framework has been laid to rely more heavily on Brazilian supplies in the future.
The fragile U.S. farm economy cannot afford a trade war with China. Unlike the opinion that “trade wars are easy”, history tells us that it can take years to cultivate a single customer in agriculture and only a few months to permanently damage that relationship. Soybean exports were already in a precarious state before the latest blast of rhetoric from the shores of the Potomac. Any sort of misstep at this point will result in fewer cargoes of soybeans leaving our shores for Chinese ports. To paraphrase Eisenhower, no one should legitimately believe that political promises made in one area will not have an effect in another.
Peter Meyer is the senior director of Agricultural Analytics at S&P Global Platts.