Tariffs: A Challenging Balancing Act for Growers and Crop Protection Suppliers
As tariffs levied against China press on, growers are walking a tightrope. In my observation, many farmers (and in fact, many providers to those farmers) agree that it’s time the U.S. sees a more level playing field in international trade.
On the other hand, the longer it takes to come to some kind of understanding with China, the more it will affect agribusiness – in terms of everything from delays in loan paybacks to reduction in crop protection inputs.
A protracted tariff battle will cause real pain for agribusiness. Unfortunately, businesses and nations are going to do what they are going to do – especially when there are hundreds of millions of dollars in potential advantages.
Nevertheless, in bottom-line terms, there will be some considerable impact.
Soybeans and Corn
The largest crops in the U.S. are soybean and corn. According to USDA statistics for 2018, that translates into approximately 90 million acres of soybeans and 89 million acres of corn agriculture – the lion’s share of the U.S. market.
Approximately half of U.S. soybean production is exported. Of that half, China has been the largest customer of exported U.S. soybeans.
The country is a considerably smaller consumer of U.S. exported corn, however. According to Farm Policy News from the University of Illinois, China did not begin to significantly import corn until 2011, with 5.2 million metric tons. Since then, China has only averaged 3.8 million tons per year.
Especially with the newly minted U.S.-Mexico-Canada Agreement (USMCA), it appears that tariffs will be less of an issue for corn growers.
Soybean growers will likely bear more of the burden. Because of the current tariffs, China is not taking as much of the U.S. production as it had before, and may not make up lost ground any time soon.
There is a ready competitor to U.S. agricultural export in South America — Brazil and Argentina can certainly fill the gap with soybeans. In fact, in December 2018, Reuters reported (based on General Administration of Customs data), that to replace American soybeans, China bought more than five million metric tons of beans from Brazil in late 2018 alone – almost double the 2.76 million metric tons it purchased from that country only one year earlier.
So we are already up against China buying less from the U.S., with other countries filling the export gap. That means commodity prices for soybeans will be affected. U.S. growers will earn less from their crops, which they will feel immediately in their pocketbooks.
How much has yet to be determined. The University of Illinois again cited statistics that soybean prices have declined $2.50 per bushel – down to $7.84 in July 2018 from a high of $10.34. For a moderately sized commercial grower, that reduction could mean as much as $300,000 in lost profits in a single season.
And that downturn hurts farmers’ ability to pay back loans. Loan paybacks were already slowing in 2018. According to the Federal Reserve Bank of St. Louis, the rate of loan repayment slowed during the second quarter of 2018 on a comparative basis as reported by a majority of bankers.
Impact on Suppliers
From a supplier’s standpoint, our businesses are also likely to feel the pinch. Companies that don’t currently sell to soybean farmers may escape the impact, obviously, but any business that does have soybean famers as one of their core customers will not only suffer some fallout now, but in the future as well.
In the near term, growers may see some impact in the form of increased prices from companies providing crop protection inputs and other chemicals. The suppliers that dodge that bullet will be those with contracts already in place, and those who had the foresight to diversify production, sourcing materials from areas outside of the tariff regions.
We could see rising prices coming from countries impacted by the tariffs – mainly China – which would put pressure on the margins for both growers and suppliers. Some growers may simply purchase less of the products they’re currently using, accepting the fact that they may have lower yields. Some of the rest may turn to other chemical companies for crop treatments.
Stay the Course – and Keep Moving Forward
It’s clear that everyone wants a level playing field in international trade. If that is accomplished, American growers will be more prosperous than they ever have been before.
In my view, assuming progress can be made in reaching agreement between China and the U.S., we may still see at least 18 months of impact from the trade wars. Long term impact may be significant if the trade war is protracted, so we will all have to work through this together with the growers.
Opinions are divided as to what that work should look like. As far back as the fall of 2018, the American Farm Bureau Federation, in a statement to the Senate Agriculture Committee, already stressed that, “For the growth and renewed prosperity of agriculture, particularly with farm income on a downward slope, current trading relationships must be preserved and new opportunities for agricultural trade must be secured.”
There are some good signs on the horizon that trading may begin to right itself. After the recent G20 economic summit in Argentina, some preliminary indications were that China would be buying more U.S. soybeans, although that impact has yet to be measured. And late last year, China announced that it would open its doors to rice imports from the U.S. As China is one of the largest rice producers in the world, buying U.S. rice is a very good sign that frosty relations between our two countries may be starting to thaw.
As of this writing, Chinese President Xi Jinping and U.S. President Donald Trump are considering a meeting in Da Nang, Vietnam on February 27 and 28, in an effort to resolve the trade dispute between the two nations – another favorable sign.
In the meantime, as far back as July 2018, the Trump administration announced its $12 billion bailout to keep U.S. growers whole until negotiations with China are concluded. Some $7 billion of that is being directed to U.S. soybean farmers. Once the program is fully implemented, it could provide real relief to farmers in these uncertain times.
We must stay the course and let this process play out – while still making clear that delays and posturing are counter-productive. In the long run, it will be worth some short-term pain to make more money in the future, and a healthy alternative to having competitive products coming in from overseas with either low or no duties.