The days of the American farmer growing crops and selling them in the local marketplace are a thing of nostalgia. Today’s farmers must contend with global forces and the potential for a trade war with China and other external forces have American soybean growers on edge.
The Asian superpower has emerged as one of the top trading partners for the U.S. agricultural sector. According to the U.S. Department of Agriculture, China represents the top soybean importer and buys more than half of all soybean grown by Americans. The figure for 2016 was a whopping $14.2 billion, with American grown coarse grain hitting $1 billion.
Since the 2016 election cycle, President Donald Trump has crowed about reining in the trade disparity that exists on other sectors. The U.S. trade deficit with China topped $375 billion in 2017 and even with the high volume of soybean finding Chinese markets, the Asian nation reportedly imported only $130 billion from the United States. Although electronics and clothing led U.S. imports, countering the low wages and manufacturing costs China takes advantage of with tariffs could result in push back against American soybean. The American farmer appears to be caught between a rock and a hard place.
“If there were increased trade tensions, soybeans could likely be a potential target in any Chinese retaliation,” Paul Burke of the US Soybean Export Council reportedly said.
The Trump Administration has already leveled tariffs on Chinese-made solar panels and U.S. Commerce Secretary Wilbur Ross has touted targeting Chinese steel, aluminum and other imports should the Asian country not work toward reducing the trade deficit. The China’s Commerce Ministry responded with the usual bravado that they would “take necessary measures to defend our rights.”
This type of top-level governmental push and pull has left American farmers in a seemingly powerless position to determine the value of soybean in the marketplace. Compounding the politics of trade are potential additional costs on U.S. farmers.
While American farmers already bear a higher cost of labor and other expenses to produce quality soybean, the Chinese government plans to make U.S. shippers jump through additional hoops. Soybean shipments will be divided into two groups when they arrive in China’s ports.
Those shipments carrying less than 1 percent of foreign materials will enjoy an expedited arrival and unloading process. Soybean arrivals with greater than 1 percent of foreign materials may require testing. Heading into 2018, U.S. export contracts for No. 2 yellow soybeans had been adopted at 2 percent. This is also the most common U.S. soybean export.
The move to toughen up on American soy is likely to cut into profit margins. It remains to be seen whether this is a preemptive political strike by the Chinese government or a reaction to difficulties U.S. farmers have had eradicating herbicide-resistant weeds. The weed problem already had China looking toward South American growers as an alternative.
As American farmers are struggling with enhanced quality regulations being imposed by China, Brazil has been quick to capitalize. The South American country’s low wage scale and costs have allowed it to undercut U.S. growers and get a leg up. The Brazilian soybean is also touted as higher in protein, and growers haven’t had to contend with resistant weeds in recent years.
As a result of these factors, China has upped its Brazilian soybean buy to 50.93 million tonnes, an astonishing 53.3 percent of all its imports. U.S. soybean garner 34.4 percent of China’s imports in 2017, a more than 10-year low.
The Brazilian incursion into China’s soybean demand is not, however, a recent occurrence. Brazil leapt ahead of the United States in 2012 and has remained ahead ever since. Although China’s soybean imports are trending upward for 2018, American growers could fall further behind other exporters if the Trump Administration backs China into a trade war corner.
Experts on China have stated clearly that neither side wants a trade war, but political and economic forces need satisfying. Chinese officials have sought solutions to calm the situation, but these do not necessarily reduce the existing trade deficit. Caught in the middle is the American farmer who has the most to lose.
Regards,
Ethan Warrick
Editor
Wealth Authority
