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Chick-News.com Poultry Industry News, Comments and more by Simon M. Shane

The Trade War with China. Are we winning?

11/06/2018

As we go the polls there is concern in the Agricultural sector over the direct impact of the ongoing and escalating trade war with China. For the week ending November 4th eighty-three percent of the 2018 soybean crop was harvested with uncertainty over export volume and the price for the commodity. On November 6th the CME closed at 884 cents per bushel for soybeans, considered break-even for the most efficient farmers. Assuming a yield of 53.1 bushels per acre and 88.2 million acres harvested according to the October USDA-WASDE, the U.S. will have a near record crop of 4,690 bushels (127.6 million metric tons).

 In 2017 China imported 110 million metric tons of soybeans representing 87 percent of national requirements for hog and poultry feed.  Approximately 40 percent of the U.S. soybean crop is exported with more than half this quantity consigned to China in 2017. In 2018 exports have plummeted by over 90 percent as a result of a 25 percent retaliatory tariff placed on U.S. soybeans midyear. The last shipments of any size occurred in June following a temporary thaw in trade relations with China when Government-controlled SINOGRAIN and COFCO jointly purchased 10 million tons, coincident with the interruption in shipments occasioned by the truckers’ strike in Brazil.

As the 2018 harvest is filling elevators and being stored under tarpaulins farmers are questioning how long it will be before there is resolution of the conflict. An observer recently commented that “storage is not a marketing program” The Administration has flashed on-again-off-again messages concerning negotiations with China but threats of escalation appear to dominate the impasse. Those familiar with the factors motivating leaders in China do not see a quick resolution of the problem of tariffs since concessions by the Government would be contrary to the concept of “face’ and would fly in the face of prevailing anti-American sentiment.

At the outset it is acknowledged that China has proven to be a very contentious trade partner irrespective of membership in the WTO. Justified complaints include theft of intellectual property, coercive practices with joint-venture partners, extensive government support and funding for quasi-commercial companies representing unfair competition, possible currency manipulation and aggressive purchases of manufacturing and technology assets in the E.U. and the U.S.

Someone at some time had to stand up to China. We have precipitated a situation and only history will tell whether the correct decisions were made. What is evident is the plight of hog and soybean farmers who are bearing a disproportionate share of the trade war. The allocation of $3.6 billion to compensate soybean growers represents less than half of the losses they have endured and will sustain. Interruptions in supply whether through drought or political action have long-term repercussions. In 1979, then President Carter himself a farmer, imposed a wheat embargo on Russia with the result that cultivation in the Ukraine was intensified and Canada became a larger supplier. When normal trade relations were restored in 1981 Russia was no longer a customer for U.S. wheat. China will source soybeans from Brazil and Argentina in larger quantities. Poultry and swine producers are learning to use alternative vegetable proteins and are formulating least-cost diets. Current events have shattered the presumption that China would continue to purchase a quarter of our crop ad infinitum.

 The Law of Unintended consequences was ignored in implementing a bargaining strategy verging on brinkmanship which did not take into account the long-term effect of losing a major customer. These include erosion of land values, the social cost of displacing farmers from their acreage, loss of revenue and jobs at equipment, seed and fertilizer companies and a host of downstream impacts. Agricultural economists at Iowa State University have projected that farmers in Iowa who produced 562 million bushels of soybeans valued at $5.2 billion in 2017 will lose $620 million in 2018. This projection only relates to the current season for one producing state and considers only the direct farm level. 

Resolution of the trade and related issues with China should be expedited by balanced bilateral negotiations. This will involve diplomacy and concessions. Hopefully there is a reservoir of both these assets in Beijing and Washington. Right now no one seems to be talking or winning.

 


 
Copyright 2018 Simon M. Shane