June 20, 2018
How trade wars impact US pork, soybean and dairy exports
Mexican and Chinese and tariffs will profoundly alter world trade in beans, dairy products and swine meat.
By Eric J. Brooks
An eFeedLink Hot Topic
Threats of a trade war between America and China have materialized into a grim reality: America intends to tax at least 45% of its Chinese imports and even many products sourced from NAFTA partner Mexico. –But China and Mexico collectively import 61% of US soybean exports, half its pork exports and a third of its dairy exports. Having imposed retaliatory tariffs on many US agricultural goods, we examine how this trade war impacts America's swine, soybean and dairy sectors.
Soy damage limited by China's own market weight
Soybeans are America's largest agribusiness export, generating over US$12 billion of revenue in 2017. US$7.5 billion of this sum was earned by exporting soy to China. China bought 33 million tonnes or 55.7% of America's 59.2 million tonnes of soybean exports to China.
Beijing holds unrivaled power over the world soy market. China imported 97 million tonnes of soybeans in 2017-18, of which approximately 64 million tonnes were sourced from Latin America, 33 million from America. For 2018-19 the USDA expects China to buy 103 million tonnes or 65% of 159.5 million tonnes of soybeans that the world will import this year.
Chinese traders anticipated impending US protectionism and gave the market an early warning: Rabobank reports that during the August to December period when China normally relies on US supplies "Soybean purchases from Brazil's record harvest continued at higher levels".
Instead of falling to around 100,000 tonnes/month in Q3 2017, Brazil's soybean exports stayed in the 1.5 to 2.5 million tonnes/month range right through the end of 2017. Consequently, Q1 2018 US soybean shipments peaked at 9.4 million tonnes/month, 18.3% below the 11.5 million tonnes/month average of the previous two marketing years
Chinese traders avoided US soybeans right up to June when it announced its tariffs: America exported 31.13 million tonnes of soy to China from October 2016 to April 2017. For October 2017 to April 2018 it shipped 24.27 million tonnes of soybean to China, 22% less on-year. From January to May, America exported 40.3 million metric tons of soybeans, down 16.3% from the 48.15 million tonnes exported in the same period of 2017. The 8 million tonne drop in shipments would have been even steeper had not other countries bought the discounted surplus US beans.
Beijing's new 25% tariff implies that China will henceforth buy almost all its soybeans from Latin America. Now Here's The Irony: China's very own market weight will prevent US soy producers from suffering too much damage. In fact, it could even move US soy exports higher up the value chain!
An 8 April2018 Reuters report states "Accelerated buying of Brazilian beans by Chinese importers, weary of potentially paying steep tariffs on US purchases sent Brazilian export premiums to historic highs." Even two months before China's 25% tariff was announced, Brazilian soybeans sold at a US$0.80/bushel to US$1.10/bushel premium to US soy. When China's 25% tariff is in place, we can expect US soy to sell at a discount of 15% or more to Brazilian soy.
A Rabobank report (US-China Trade Threats Make South American Soybeans More Expensive", June 2018), notes that China's increasingly heavy reliance on Brazilian beans resulted in "Brazilian FOB prices remaining at a level where they are not competitive with US origin soybeans for many destinations." It has also pulled up the cost of Argentine soybeans, which had an unusually small, drought shriveled harvest.
With Chinese buying power inflating the cost of South American beans, rising European and Asian imports of low-cost US soy will offset most of the decline in American exports to China. Bean exports will only fall from last year's 64 million tonnes to around 56 million tonnes this year –nowhere near the 30 million tonne drop that a China boycott of US soy could theoretically induce. Similarly, China was responsible for US$7.5 billion of earnings but export revenues will probably fall about US$1.5 billion.
Expensive Latin bean prices will also inflate the cost of Brazilian and Argentine soymeal by 15% relative to US soymeal –and this comes at an excellent time for American soymeal exporters. According to a Reuters report ("US soy processors build new capacity at fastest rate in 20 years", 11 Dec 2017), 3.27 million tonnes of new bean crushing capacity will become operational by 2019. They will boost annual US soymeal making capacity by 5%, from 41 million tonnes in 2017 to 43.6 million tonnes by early next year.
With American soymeal demand flat at 32 million tonnes, 2.6 million tonnes of new soymeal making capacity will boost exports.
European and Asian importers will eagerly replace Latin soymeal with cheaper US supplies –and soymeal enjoys significantly higher returns than raw beans.
With lower bean exports to China mostly offset by higher shipments to other nations, US soy farms will not suffer a catastrophic drop in revenues.
Crushers will enjoy additional earnings from higher soymeal exports. Hence, China's tariff could spur America into exporting more of its soy in the form of value-added soymeal.
Pork: You couldn't pick 2 worse trading enemies!
With top importer China and third-ranked Mexico both imposing tariffs, US pork's situation is less fortunate and more complicated than that of soybeans. In 2017, Mexico bought 802,000 tonnes of US pork out of 1.03 million tonnes imported; China 495,000 tonnes.
The 1.30 million tonnes of US pork shipped to China and Mexico accounted for 50% of exports and 11% of pork production. While America is the world's leading pork exporter and from 2007 through 2017, exports to China and Mexico jumped 217%: Exports to all other countries were 14.6% lower in 2017 (1.258 million tonnes) than they were in 2012 (1.437 million tonnes). Total pork exports to China including Hong Kong (US$1.07 billion) and Mexico (US$1.51 billion) amounted to US$2.58 billion. –For US hog farmers, America could not have picked two worse countries to engage in a trade war.
Prior to China imposing a 25% duty on all US pork imports, the US Meat Exporters Federation (USMEF) estimated 2017 US pork exports to China (including Hong Kong) at 495,637 tonnes and earned US$1.087 billion. On an annualized basis, Rabobank projects this will cause total US pork export destined for China (including Hong Kong) to fall 60% or 300,000 tonnes. Export revenues will decline to US$652 million or US$435 million less than what was earned in 2017.
Similarly, Mexico imposed a 10% tariff on unprocessed pork cuts including boneless pork, legs, shoulders and ham, which will rise to 20% in July. It coincides with a new 350,000-tonne quota for duty-free imports of pork legs and shoulders from non-NAFTA countries. This puts US pork in Mexico at a 20% price disadvantage to Canadian pork and (due to the 350,000-tonne duty-free quota) and at a 25% to 30% disadvantage to pork from nations such as Brazil, Australia, Spain or Denmark.
Of the US$1.51 billion and 802,000 tonnes exported to Mexico, approximately 650,000 tonnes or US$1.07 billion was accounted for by pork legs and shoulders –the same cuts that Mexico will allow up to 350,000 tonnes/yr from other countries duty-free. The full impact will not be felt until 2019 but the US is on track for its Mexican pork exports to decline 325,000 tonnes or US$535 million –and that doesn't even include cuts which Mexico already buys duty-free from NAFTA partner Canada.
Even before Mexico took action, Iowa State University Economist Dermot Hayes stated "Hog futures have dropped by US$18 per animal, translating to a US$2.2 billion loss on an annualized basis. While not all of this lost value can be attributed to trade friction with China, it is certainly the main factor."
To this must be added around US$970 million in lower yearly export revenues from China and Mexico. When lower domestic hog prices and lower export volumes to China and Mexico are added together, this trade war could cost America's swine sector over US$3 billion in lost revenue.
An aborted dairy export recovery
Mexico and China are also top importers of US dairy goods. Valued at US$391 million, cheese accounts for 30% of the US$1.3 billion of dairy goods Mexico imported from America in 2017. Mexican purchases
accounted for 28% of 2017 US cheese exports by volume (96,413 tonnes). 75% of its cheese imports come from the United States.
In early June Mexico imposed a 15% import duty on US fresh Cheese, which rises to 20% in July. US imports of shredded cheese, powdered cheese and European styles such as Parmesan, Reggiano, Gouda, Havarti, and Fontina will be initially taxed at 10%, with the tariff duty rising to 20% in early July. All other cheese types imported from America were taxed at 15% from immediate effect and at 25% from early July onwards.
After lowering tariffs on many US dairy goods in 2017, China retaliated against US protectionism. From July, Beijing will impose a 25% tariff on a wide American WMP, SMP, fluid milk, cream, milk powder, butter, cheese yogurt, and whey.
China and Mexico absorb approximately third of US dairy exports by volume and 34.6% by value. Should policymakers fail to find a negotiated solution, US dairy exports could fall by 5% to 10% or US$275 million to US$550 million. That would give the industry its worst performance since 2015 when the world dairy market crash's full impact was felt.
On one hand, with only 14% of US dairy output exported and with a domestic market that is the largest in the world by value, the dairy industry will suffer far less than America's swine sector. On the other hand, after several years of depressed international dairy demand, 2017 saw exports rebound 6% by volume and 14% by value over 2016 figures.
Sadly US dairy's rebound was led by China. After liberalizing US dairy imports in 2017, export revenues from China jumped 49% while those from Mexico increased 8%. Rising Mexican and Chinese demand made US dairy exports exceed their 2014 peak volume and total 1.94 million tonnes. 2018's dairy export revenues were also expected to break their 2014 records –but this trade war has jettisoned the industry's nascent export recovery.
To the lost revenues from foregone exports of pork (US$3 billion+), soybeans (US$1.0 to 1.5 billion) and dairy products (US$275 to 550 million) must be added billions caused by new tariffs on American exports of beef, nuts, fruits, and vegetables. US agribusiness may indeed be this trade war's biggest casualty.
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