China's Sanctions Against U.S. Farmers May Be Everlasting
Kenneth Rapoza Senior Contributor
I write about business and investing in emerging markets.
China hasn't officially banned imports of U.S. farm commodities like soy and corn. But most American ... [+] farmers believe their China buyers are being told to abandon the U.S. and look elsewhere.
Daniel Acker / © 2017 Bloomberg Finance LP
Like a sucker punch to the eye, that's going to leave a mark. China's retaliatory tariffs against American commodity producers, mainly soybeans, may prove to be everlasting. Once that market goes, it's gone.
It's a fear many farmers from North Dakota to Mississippi have acknowledged for the past year. Their concerns are that they've invested millions in soybean expansion because of China. Now that Chinese demand has moved to Brazil instead, that market may be lost for good.
The less faith importers have in the U.S. as a stable supplier due to trade conflicts, the more necessary it becomes for them to hedge and further diversify sources.
The growing risk for American agribusiness today is that much of the market share lost over the year will be hard or impossible to win back anytime soon, the Boston Consulting Group said in a report released on Wednesday. This is mostly due to long-term contracts that are often signed between buyer and seller, depending on the commodity. The takeaway from the report is that U.S. farmers have to become less dependent on China and just hope for the best with regards to those clients staging a comeback at some point in the future.
For now, China is turning to Australia, Brazil, New Zealand, Russia and even their domestic producers as an alternative to American-grown crops and animal proteins.
"The threat that U.S. agribusinesses will permanently lose foreign market share is not merely theoretical. In previous trade scuffles, such as one with China involving beef, the US has not regained lost share. By making U.S. crops and foodstuffs more expensive than alternatives, high tariffs lower the cost to importers of diversification. And the less faith importers have in the US as a stable supplier, in view of the potential for future trade conflicts, the more necessary it becomes for them to hedge and further diversify. Over time, importers could completely unwind complex relationships with U.S. suppliers."
A machine loads soybeans into 'Stella Pearl' cargo ship headed to China at the Tiplam terminal in ... [+] Santos, Brazil. China has largely turned to Brazil for supply instead of the U.S.
Patricia Monteiro / © 2017 Bloomberg Finance LP
The negative impact of trade conflicts has contributed to weak economics across the agribusiness supply chain—from soybeans to John Deere harvest combines.
China's Zoomlion, makers of harvest combines, have seen its shares rise 73% this year in the local currency. By comparison, John Deere shares are up 10%.
How bad is it? That depends on who you ask. No one is happy, even as U.S. agriculture exports overall have not collapsed.
Agricultural exports rose 1% to $140 billion in 2018, but that is compared with a 3% increase in 2017. Exports were down 5% year-on-year during the first seven months of 2019. They would have been better if not for what has amounted to an embargo on American soy by Beijing.
Exports of all agricultural and agriculture-related products, including fish, animal feed, and fruits, fell by 6% during the first seven months. The knock-on effects have rippled through the entire supply chain.
Most blame China for the stress.
That's because China matters to American farmers. China bought $19.5 billion in U.S. agricultural products in 2017, accounting for 14% of farm exports, based on BCG findings. In July 2018, China imposed a 25% tariff on U.S. agricultural products. Exports then declined by a whopping 53% for the year. Exports to China are down again this year, on top of last year's free fall.
There is another reason why some China clients may not return to the U.S. China is expanding its own crop acreage, especially for soybeans. Over time, China will become more self-sufficient. Unless demand increases substantially, China will buy its own soybeans, keeping export growth in check anyway.
"People in the industry were in a state of hopefulness, thinking that a deal would come along," says Michael McAdoo, partner and associated director for BCG in Montreal. "Our research shows that even if there is a deal, there is concern that the same volume will not be coming back. They have to look at other markets," he says.
President Donald Trump with Japan's Prime Minister Shinzo Abe. Washington needs a trade deal with ... [+] Japan to supplement Trump's killing of the Transpacific Partnership. It will be good for American farmers, the Boston Consulting Group says. Photographer: Yuri Gripas/Pool via Bloomberg
© 2018 Bloomberg Finance LP
Under President Trump, the U.S. has been behind the eight ball in signing free trade agreements that would help farmers. Canada has a free trade accord with the European Union, and the EU is in the final stages of inking a deal with commodity superpowers Brazil, Argentina, Paraguay and Uruguay.
The old Trans-Pacific Partnership has been rebooted and excludes the United States. That means Japan can buy agricultural commodities from other member states at lower costs, depending on the product.
The U.S. and Japan are working on a trade deal currently that might be a positive for American farmers if it passes. The same holds for the new NAFTA. Both trade deals have to be approved by Congress, currently in the throes of an impeachment.
U.S. and China trade negotiators are supposed to meet in Washington on Thursday. Agriculture is on the menu, with China promising to buy more soy and pork. However, given the Department of Commerce's decision to add 28 China tech companies to a blacklist that bans them from buying certain U.S.-made computer components, that temporary deal is unlikely to hold.
Farmers have been getting aid money from Washington in order to make up for lost China sales. But on a positive note, last year saw many of them finding new markets anyway.
American farmers sold near record-breaking amounts of soy to Argentina due to a dry spell. The U.S. also increased soybean exports to Egypt, bringing in $1.16 billion in sales in 2018 versus a 2009-2017 average of $350 million. The Netherlands imported $1.3 billion worth of soybeans from the U.S. last year, up from $775 million in 2017. Some of that may have found its way to China. The same goes for Taiwan, which bought over $850 million worth of U.S. soybeans last year versus $586 million in 2017. Spain spent $592 million on U.S. soybeans in 2018, up from $229 million in 2017, based on data compiled by a draft research report provided by Deloitte.
Oddly enough, the world's third-largest soy producer, Argentina, may have saved American soy farms.
Between 2009 and 2017, China accounted for 55% to 62% of all U.S. agricultural exports. Argentina's 2018 drought countered some of the harm, and while the trade war impact has been substantial, the soybean market has experienced similar volatility before.
From 2012 to 2013, the global export soybean market declined from $24.8 billion to $21.6 billion, and from 2014 and 2015 it declined from $23.9 billion to $18.9 billion, for a roughly $5 billion shortfall between those two crop seasons.
The current 2017 to 2018 decline was $21.5 billion to $17.1 billion, or $4.4 billion less. Had it not been for Argentina's drought, there would have been a full drop of $9 billion in one year, and that would've been hard for farmers to recover from.
Lastly, U.S. meat exports to China, which includes beef, pork and poultry, were over $1 billion annually in 2012 and 2013 and then completely collapsed in 2015 to $335 million (HTC trade code 02). In 2018, the U.S. exported around $13.8 billion worth of meat products to its principal markets, down from $13.1 billion in 2017 but up from $11.8 billion in 2016, based on government export data compiled by Deloitte.
Although it is still a tiny portion of the agribusiness market, BCG says that farmers are looking at new plant-based protein products as exemplified by companies like Beyond Meat as a new growth driver.
"Certain industries along the supply chain can adapt to that trend," says McAdoo. "Some people can move through that quickly, but others cannot and will exit the business line. It's a bit like going from black-and-white TVs to color to flat screens. Some companies will do all three. Others will fold."
China may be adding more pressure to the pot. But other markets will let out the steam. That includes new domestic markets like meat alternatives, and numerous smaller countries who may find it harder to buy soy from Brazil now that the world's No. 1 soy exporter is selling most of it to China.
Kenneth Rapoza
I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big eme...