Trade War

The price of soybeans, already decreased due to record yields in 2018, dropped further after China imposed a 25 percent duty on U.S. soybeans in retaliation for tariffs on Chinese exports to the United States.

PHOTO BY JIRI REZAC

TRADE WAR

A Short- and Long-term Outlook for U.S. Producers

BY CRAIG COLLINS

President Donald Trump’s 2016 election victory was attributed in part to his denouncement of other nations’ unfair trading practices – particularly China’s – and his pledge to do something about them. So it surprised few when, in February and March 2018, he fired the first volleys in what has become an escalating – and widening – trade war, slapping tariffs on U.S. imports of solar panels and washing machines, followed by across-the-board tariffs on steel and aluminum.

Canada, Mexico, and the European Union, all of whom imposed retaliatory tariffs on a variety of U.S. goods. China was among the first to respond, with tariffs aimed at 128 U.S. products, including wine, fruits, nuts, and pork; within weeks, it had tacked an additional 25percent tariff on imports of 106 U.S. products, including soybeans. After its first tariffs on the United States went into effect in July, China’s list of taxed imports expanded by more than 500 U.S. goods. By the fall, the United States and China were running out of imports from each other to tax, and their dispute overshadowed other trade negotiations in which the United States was involved since Trump took office.

These tariffs, along with levies on foreign tech goods and other consumer products, provoked countermoves from major trade partners, including China, Turkey,

After its first tariffs on the United States went into effect in July, China’s list of taxed imports expanded by more than 500 U.S. goods.

The price of soybeans, already decreased due to record yields in 2018, dropped further after China imposed a 25 percent duty on U.S. soybeans in retaliation for tariffs on Chinese exports to the United States.

USDA PHOTO BY LANCE CHEUNG

These retaliatory tariffs have stung, particularly among Trump’s political base. China’s 25 percent duty on soybeans, the nation’s top American agricultural import in 2017, for example, struck hard at red-state farmers. According to the Center for Agricultural Policy Review at Iowa State University, about 60 percent of U.S. soybean exports – or about 25 percent of the total U.S. soybean crop – is shipped to China in a typical year. In January 2018, American soybean farmers, after harvesting the largest U.S. crop in history, exported $1.2 billion in soybeans to China. By April, those exports had taken a nosedive, dropping a staggering 98 percent.

The short- and likely long-term effects of the trade wars on U.S. producers have been complex, varying by sector, region, production volume, and other considerations. While the outcome of the trade wars for American producers is still a question mark, there are nevertheless several emerging trends.

THE NEAR TERM: LOWER PRICES, SMALLER MARKETS

For many U.S. producers, the immediate effect of retaliatory tariffs was a precipitous drop in prices they expected to receive for their produce. Eric Johannsen, a South Dakota farmer who raises about 1,800 acres of soybeans on his family’s 5,000- acre farm, estimated that “the trade war has taken a solid $2 off a bushel of our beans, if not more.” The impact on Johannsen wasn’t as bad as for some of his neighbors; he’d already sold more than a third of his crop before the tariffs were implemented.

Soybean prices dropped about 22 percent from April to July, darkening an already bleak picture painted by the law of supply and demand. The year 2018 saw record yields not only for several commodity crops, such as corn and soybeans, but also for specialty crops, including tree nuts. It also saw record yields of California almonds and walnuts, both of which are exported to China in significant quantities. This abundance had already softened prices, and the tariffs triggered a sudden demand slump that ratcheted them down further. Meanwhile, some farmers reported that tariffs on U.S. steel imports had driven up prices they paid for machinery and equipment.

These grim circumstances were punctuated by some brightness in September, with the Trump administration’s announcement of a $12 billion bailout program aimed at bringing relief to farmers adversely affected by tariffs, much of it through USDA’s Market Facilitation Program. The first $6 billion was made available in September; by mid-November, $830 million had been paid out. But through the rest of the fall, there wasn’t much good news to make ag producers feel hopeful: China imported zero U.S. soybeans in November, the first time since the trade war began that the country brought in no U.S. supplies. The U.S. Department of Agriculture’s (USDA) Farm Income Forecast, issued in November 2018, projected a net decrease in U.S. farm income of 12 percent, and a study by the Federal Reserve Bank of Minneapolis documented an increase in farm bankruptcies in the Upper Midwest. In December, the Nebraska Farm Bureau estimated that the trade wars had cost the state’s producers more than $1 billion in revenues.

World leaders at the G20 Summit in Buenos Aires, Argentina, photographed on Nov. 30, 2018. At a dinner the following day, President Donald Trump and Chinese President Xi Jinping announced a 90-day “truce” in the U.S.-China trade war.

PHOTO VIA G20 ARGENTINA FLICKR

But December did bring some heartening developments. Trump and Chinese President Xi Jinping, during a Dec. 1 dinner meeting at the G20 summit in Buenos Aires, announced a 90-day “truce,” during which they planned to work on negotiating a trade deal and pledged not to add additional tariffs. Farmers experienced some small relief when, in a show of good will, China followed up the announcement with relatively modest purchases of U.S. soybeans: A Dec. 20, 2018 report from Reuters estimated that China had bought approximately 3 million metric tons (MT). In 2017, China imported more than 31 million MT of U.S. soybeans, valued at $12.25 billion.

Also in December, the farm bill – the Agriculture Improvement Act of 2018 – was passed, and the second $6 billion of the $12 billion bailout program was made available. The partial government shutdown disrupted payments for a time, but by Feb. 22, $7.7 billion had made its way to farmers, according to the USDA.

The “trade aid” payments have helped. Johannsen has taken advantage of them, and said they’ve been particularly helpful to some of his friends: “If it wasn’t for the Market Facilitation Program, it [wouldn’t] look good for a lot of producers,” he said. “I’ve been talking to my banker here, and he says that’s pretty much saved some guys.”

John Heisdorffer, an Iowa soybean farmer and chairman of the American Soybean Association, agrees that bailout subsidies have helped farmers, even if they’ve been relatively modest: $1.65 per bushel for soybean growers, for example. “It’s not making them whole by any means,” he said. “But it is offering enough relief that it’s helping them with their lenders, that they have a decent price now for their soybeans, or at least closer to a normal price.”

In early November 2018, Ambassador of the United States to the People’s Republic of China Terry Branstad, right, had meetings in Washington, D.C., with President Donald Trump, U.S. Trade Representative Robert Lighthizer, and Treasury Secretary Steve Mnuchin and with USDA Secretary Sonny Perdue (pictured at left) to discuss trade negotiations with China in preparation for the G20 meeting in Argentina.

USDA PHOTO BY KEN HAMMOND

With his colleagues at Purdue University’s Center for Commercial Agriculture, professor James Mintert, Ph.D., tracks the economic outlook of crop and livestock farmers nationwide in the center’s monthly Ag Economy Barometer. One indicator on which they survey producers is agricultural exports. The farmers’ near-term outlook on this point was fairly optimistic for the first few months of the trade war, but it hit a low at the end of 2018. “In December, we had 26 percent of the people say they think ag exports will actually decline in the next five years,” he said. “That’s actually the worst number we’ve had with respect to that question since we first started asking it back in 2017.” However, outlook in January was markedly more positive: Just 7 percent said they expected agricultural exports to decrease in the next five years, and 63 percent said they expected them to increase, whereas in December, 59 percent expected an increase. In February, 6 percent said they expected exports to decrease, and 67 percent expected them to increase.

Mintert’s Ag Economy Barometer has also documented changes in farmers’ thinking about soybean inputs for the next growing season; by November 2018, about 30 percent of the soybean growers in the survey planned to reduce their soybean acreage in 2019. “A month earlier, it was 19 percent,” he said. “And of the people [in the November survey] who said they were going to reduce their soybean acreage, almost 7 out of 10 – 69 percent of them – said they planned to reduce their acreage by more than 10 percent.” In February, 23 percent of soybean farmers surveyed said they planned to reduce acreage, and of those, 66 percent planned to reduce their acreage by more than 10 percent. As of late February, the USDA predicted that farmers would plant 85 million acres of soybeans in 2019, down 4.7 percent – 4.2 million acres – from 2018.

Brazil’s Port of Santos, through which much of the country’s exported soybeans pass on their way to China.

PHOTO BY A. DAVEY

What’s happened to the American soybeans that would have gone to China? Many U.S. producers have either tried to find somewhere else to send them, or simply elected to store them, hoping to wait out adverse market conditions and sell them later at a better price. “Some of the soybeans went to other countries,” said Heisdorffer. “Egypt has been a big buyer. The EU has been a big buyer, and several other countries. But you’ve got to understand, it’s not like we’re gaining a lot of new exports. It’s that these folks used to buy from Brazil – and Brazil is sending everything to China, so Brazil doesn’t have any.” Brazil, where China turned for soybeans after the plunge in U.S. imports, overtook the United States in 2018 as the world’s largest soybean producer. Russia has emerged as a supplier of soybeans to China as well; the country’s exports to China doubled in 2018.

THE FUTURE OF U.S. AGRICULTURE EXPORTS

The easy opinion to have, in light of shifts in U.S. exports, is that the long-term outlook for American agricultural exports is grim, and that the trade war will wreak lasting damage. But that’s also too simple a conclusion, largely because it neglects to look at how the trade war is affecting U.S. trading partners. Economic analysts from Forbes, the BBC, and the Asia Times, among others, pointed out that China’s economy was losing steam at the end of 2018, reporting its weakest quarterly growth in a decade, and a 3.7 percent decline in exports to the United States. How these changes would play out remains uncertain, however; the trade war has also played a role in slowing the U.S. economy. Reuters’ quarterly polls of economists have revealed that a majority expect the trade war to harm the U.S. economy as well. In August 2018, CNBC reported that the U.S. trade deficit continued to increase, up 8.6 percent from a year earlier.

U.S. Trade Representative Robert Lighthizer, senior staff, and Cabinet members meet with Chinese Vice Premier Liu He and members of his delegation for U.S.-China trade talks on Jan. 30, 2019, in the Diplomatic Reception Room in the Eisenhower Executive Office Building. Trade negotiations with China are ongoing as of early March.

OFFICIAL WHITE HOUSE PHOTO BY ANDREA HANKS

On March 6, the Commerce Department said the U.S. trade deficit for 2018 reached $621 billion, the highest it’s been since 2008.

U.S. farmers comprise a large, diverse sample of Americans, and many remain cautiously optimistic for the future of agricultural exports. “Long term, if we can get China to play a little more fair, it would be good,” said Johannsen. “You don’t have to be smart at all to realize there’s been serious market manipulation going on, for a number of years.”

The Trump administration resumed trade talks with China after the truce was declared in December with the aim of getting China to “play a little more fair.” The 90-day détente saw no new tariffs imposed and ongoing negotiations between China and the United States. On Feb. 24, Trump announced that a tariff increase set to take effect on March 1 (the end of the 90 days) would be delayed, because of “substantial progress” made toward a trade agreement; a commitment made by the Chinese to purchase 10 million MT of U.S. soybeans announced two days earlier would appear to support that claim. In talks, the United States has reportedly pushed for China to make substantial changes to better protect U.S. intellectual property, to open the domestic market to U.S. companies, and to increase purchases of U.S. goods, among other demands. According to a Bloomberg News report, China has proposed that it could purchase an additional $30 billion per year in U.S. agricultural products, and the New York Times reported that the country is “rewriting some of its laws and regulations to better protect foreign intellectual property, ban the forced transfer of foreign technology to Chinese business partners and codify equal treatment of foreign companies.” It has agreed to drop the tariffs it imposed in response to Trump’s levies on Chinese goods, and it has asked that the United States drop all the tariffs imposed over the course of the last year.

As of early March, negotiations were still underway. And while Trump has described the talks as “moving along well,” he has also said he’s prepared to walk away from a deal “if it didn’t work out.” So for now, farmers remain at the mercy of global dealings outside of their control and must weather the difficult circumstances as best they can until an agreement is reached and conditions improve.

“I think in agriculture, there tends to be this longer-run perspective that we’ve got a growing world population,” Mintert said. “We’re going to need to feed that population, and the demand for food is going to remain strong over the next several decades, which provides a good opportunity for the U.S. to continue to grow and to improve its export situation. But in the short run, what we’ve done is helped encourage some additional competition from major competitors.”

Whether that short-run outcome ends up being a net negative remains to be seen, but it seems likely it will, at least, be a factor in shifting global export markets. In China, for example, the replacement of U.S. soybeans with beans from Brazil is unlikely to be entirely reversed. “Once you lose a customer,” said Heisdorffer, “you never get all those exports back. It just ain’t going to happen.”

Brazil’s rise to soybean-growing prominence was spurred in part by President Richard Nixon’s 1973 export embargo on all grains, including soybeans, a protectionist move designed to drive down domestic prices of agricultural products. The embargo shook the confidence of Japan, for one, in the reliability of the United States as a trading partner; at the time, Japan imported about 92 percent of its soybeans from the United States. Japan soon launched an economic partnership with Brazil that included significant investments in its soybean industry.

As long as U.S. trading partners have questions about its reliability, said Mintert, American exporters will continue to suffer. The 4.2 million acres of soybeans that won’t be planted in the United States next year, for example, will certainly be planted somewhere else – most likely Brazil, and maybe Argentina. “Once those acres are in production,” he said, “they’re going to stay in production. It [the trade war] is helping to create stronger competitors for U.S. producers, and I think at least a portion of that damage has already taken place – and the longer this goes on, the more damage is going to take place.”