July 15, 2018
Trade wars and beans, pigs and broken wallets: The impact of Chinese tariffs and US farm incomes
Impacting more than mere export volumes, China's market weight can deflate returns on domestic crops and herds. From trading floors to Midwestern farms, plunging widening spreads between North and South American soybeans are impacting bottom lines.
by Eric J. Brooks
An eFeedLink Hot Topic
China's impact on US agribusiness cannot be understated: At US$19.4 billion, it is the second largest buyer of US agricultural products after Canada (US$20.5 billion) and ahead of NAFTA partner Mexico (US$18.6 billion). But now all this is changing: From soybeans to tobacco, beef to nuts, wine or vegetables, countless US agricultural products are now being targeted by China. While the impact of China's tariffs is uneven and dependent on a given agricultural sector's market circumstances, the overall impact is HUGE.
In 2017, China provided 14.5% of US agricultural export revenues. Soybeans made up 63.9% or US$12.4 billion of this total sum, purchasing 25% to 30% of each year's harvest.
Together with soybeans, pork (3.6%, US$0.7 billion), dairy goods (3.1%, US$0.6 billion), coarse grains 4.1% (US$0.8 billion), and corn/DDGS (1%, US$1.0 billion) collectively make up 75% of US agricultural exports to China.
Among feed crop and livestock lines, USDA statistics show that China bought 57% of America's 2017 soybean exports and accounted for 29% of their overall income, making it the most trade sensitive agribusiness sector.
While China accounted for an even greater proportion of coarse grain exports (78%), particularly sorghum (but excluding corn) and 51% of their income, at US$0.8 billion, they represent a far smaller economic loss than soybeans. Moreover, most of these farmers can easily shift their acres to cultivating corn or other grain crops. Export-oriented pork and dairy producers cannot do the same as easily.
Nor can the impact of China's tariff be reduced to a linear, export numbers comparison: 10% (US$700 million) of pork exports by value and 11% of dairy exports (US$600 million) went to China. Those exports accounted for a far lower proportion of hog farming (4%) incomes and dairy farming (2%) than they do for soy farmers (29%) -yet their impact is being strongly felt in the case of pork, though not dairy.
It's not just because 22% of US pork production was exported in 2017, versus 14.7% for dairy: Beijing's impact extends far beyond a mere quantitative reduction in import volumes multiplied by their market price. This makes evaluating actual farming losses an ambiguous, tricky affair for several reasons
One must estimate proportion the revenues from each agricultural line that goes to farmers, versus the proportion that goes to crushers, processors, middlemen or shipping companies. Much depends on a crop or protein line's industry structure.
For example, with exports of US$0.70 billion, pork producers appear to have far less to lose than soybean farmers. When the 25% tariff on US pork was announced, some 2018 US pork exports had already made its way into China duty-free. China recently jacked up its tariff on US pork to 62%, but even so, 2019, will probably see expect US pork exports destined for Hong Kong to 'rise' by $100 million to $200 million -and be smuggled duty-free into China. Unfortunately, reduced pork export volumes are not the only way China impacts US pig farmers.
According to Iowa State University Economist Dermot Hayes: "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." -And this was said before China jacked up its import tariff on US pork from 25% to 62%
Consequently, when lower hog rearing prices arising from China's import taxes on US pork are factored in, US hog farming losses exceed US$2.5 billion. Losses may even approach US$3 billion when Mexico's more recent 20% import duty on US pork is taken into account.
-But there are other trade war targets whose industry structure make "lucky" by comparison. US dairy exports to China totaled US$0.60 billion last year, a level comparable to that of pork. However, with America's dairy market so domestically oriented, dairy commodity prices are impacted but not that of raw fluid milk or dairy cattle. Hence, China's dairy tariffs dent the revenues of milk processors that make and export dairy commodities and not so much the milk supplying farmers themselves. The latter's losses will amount to several hundred million, but not be in the billions.
Clearly, the swine sector's structure magnifies the income loss of China's import tariff. By contrast, US dairy's structure and domestic orientation protects milk suppliers at the expense of dairy processors. Soybeans unfortunately are a worst-case scenario: Soy is far export-oriented than most American agricultural lines. Like pork, their industry structure not protect them from import duties.
Unlike pork, China's international economic weight works against them too: This is because while China buys 20% of world pork exports, it's 63% share of world soybean exports gives it the power to create price spreads between rival bean suppliers.
As of mid-July, Brazilian soy FOB was being shipped at a US$60/tonne (US$1.64/bushel) price premium to US soy Gulf of Mexico FOB. The equilibrium price (if there were no China tariff) between Brazilian and American beans is US$0.80/bushel to US$1.00/bushel above current US cash prices
Superficially, while China's US soy import volume is nosediving from 33 million tonnes last year to around 8 million tonnes this year, the situation looks almost benign at first sight: With other nations taking advantage of China cheapened American beans, US soy export volumes are only falling 5.2% or 3.44 million tonnes over two years, from 2016-17's 58.96 million tonnes to 56.74 million tonnes this year and 55.52 million in 2018-19 (when today's US soy crop will harvest).
-- But look more closely: Before this trade crisis began, the USDA projected 62 million tonnes of US soy exports in 2017-18 and 64 million tonnes in 2018-19. Moreover, China's Latin buying spree pulls up Brazilian prices and depresses US prices at a time when soybeans are trading near US$8.55/bushel, their lowest level since the 2008-09 financial crisis. -The resulting lower US soybean price dents the entire harvest's revenue and not just the portion which is being exported.
When multiplied by a USDA estimated 117.9 million tonne soy harvest, US$0.80/bushel to US$1.00/bushel lower US bean prices caused by China's 25% import tariff is costing US soybean farmers US$3.46 billion to US$4.33 billion in lost farm income on the 2018-19 harvest.
To this must be added that 2018-19 US soybean exports were projected at 64 million tonnes before the trade crisis began and were revised down to 55 million tonnes. When multiplied by a US$0.80/bushel to US$1.00/bushel higher price US beans would have fetched without the tariff, losses from 9 million tonnes of canceled Chinese exports that were not replaced by that of other countries total US$3.09billion to 3.15 billion.
Consequently, based (i) previous and current USDA export projections (ii) current soybean prices and US-Brazil price spreads (iii) current USDA crop estimates, China's 25% tariff on US soy imports will cost US farmers US$6.55 billion to US$7.48 billion in lost income during the 2018-19 marketing year alone. Approximately $3.1 billion of this sum will be due to lower export volumes, with the rest of the losses due to the price discount caused by preferential Chinese buying of Brazilian and Argentine beans.
In conclusion, industries that are domestically oriented and structured such that processors capture a lot of export value will see US farmers suffer the least. Those like pork which are export-oriented will see their export losses multiplied by lower prices. Because the most export-oriented agribusiness sector is also one where China buys over 3/5th of world exports, the income losses suffered by US soy farmers will exceed that of all other trade-dependent agribusiness sectors combined.
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