China’s exit from US agriculture is a devastating blow to an already struggling sector

Agriculture has been a weapon of choice in the escalating trade war between the world’s two largest economies.

With China officially pulling out of buying U.S. agricultural products, American farmers are losing one of their biggest customers. It could be a devastating blow in an already tough year for crops and commodity prices. It may also dent U.S. gross domestic product and hurt companies like Deere, whose business is directly tied to farming in the Heartland.

“Sales have already been lower this crop year because of the existing tariffs. If we went all the way to no China exports whatsoever, that would of course result in even larger market and price impacts,” said Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri. “Cutting China completely out of the market would be a very big deal.”

China made up $5.9 billion in U.S. farm product exports in 2018, according to the U.S. Census. It’s the world’s top buyer of soybeans and purchased roughly 60 percent of U.S. soybean exports last year. Westhoff estimated that soybean prices have already dropped 9% since the trade war began last July.

From September 2017 to May 2018, soybeans exports to China totaled 27.7 million tons. That number dropped by more than 70% to 7 million tons during the same nine-month period in 2018 and 2019, according to an analysis by University of Missouri.

Westhoff estimated an additional $4 billion drop on soybean exports after the effects of tariffs but before the total loss of China as a customer. Tariffs also have a ripple effect across other crops, he said. With less demand for soybeans, farmers end up planting more crops like corn. That results in lower corn prices because there’s much more supply.

Former Iowa Lt. Gov. Patty Judge said the loss of a trading partner like China sets up a “dangerous situation.”

“There are going to be some serious repercussions for farmers,” Judge said.

China is the fourth largest market for U.S. farm exports, behind Canada, Mexico and Japan. She also highlighted a “languishing” trade pact with Canada and Mexico that has yet to be signed. New tariffs are another “financial whammy on top,” said Judge, who was also Iowa’s secretary of Agriculture.

While farming exports are a relatively small portion of the United States’ annual $20 trillion in GDP, Judge said it will directly hit farmers and exacerbate other problems they were already facing.

U.S. net farm income has been falling in the past six years, well before the effect of tariffs. Income has dropped 45 percent since a high of $123.4 billion in 2013 to about $63 billion last year, according to the U.S. Department of Agriculture.

In addition to tariffs, farmers were faced with floods and African swine fever this year, which has softened demand for soybean and farm products that pigs feed on. The White House began rolling out a $16 billion federal aid package in May to help farmers weather the trade war and other circumstances. But Judge said much of that bailout has skipped over small farmers and isn’t widely embraced as a permanent solution — at least in Iowa.

“Farmers want to have a fair profit at the end of the year— they would like to do that in the marketplace rather than through a government program,” Judge said, adding that it’s also difficult for small farmers to get access to loans if they don’t have certainty of customer demand to pay it off.

On Tuesday, President Trump tweeted that farmers know that China “will not be able to hurt them,” since “their President has stood with them.”

Election issue

Agriculture has been a sensitive issue for President Donald Trump. He claimed he had secured large quantities of agricultural purchases when he met with President Xi Jinping at the G-20 summit in June, then later accused China of not following through with those purchases. That led Trump to announce last week 10% tariffs on the remaining $300 billion in Chinese imports that had escaped his previous duties.

On Monday, a spokesperson for the Chinese Ministry of Commerce said Chinese companies have stopped purchasing U.S. agricultural products in response to Trump’s surprise tariffs.

“This is a serious violation of the meeting between the heads of state of China and the United States,” the ministry said in a statement Monday, as translated via Google.

John Rutledge, chief investment officer of global principal investment house Safanad, said it’s no mistake that agriculture was China’s weapon of choice in upping the trade war ante. On one hand, It hurts GDP and Trump’s political base of small farmers — but perhaps more importantly, it hurts corporate farming companies that tend to be huge Republican donors.

“Clearly this was retaliatory,” Rutledge said. “It’s a really serious area to go after.”

Rutledge, who said he has met with the Trump administration’s core trade team on multiple occasions this year, said Trump “cannot allow the trade war to end before the next election” because of its political value.

China’s end to agricultural buying may also hurt sales at U.S. companies like Deereand Caterpillar, which rely on farmers for much of their business. Deere said in May that farmers were delaying buying products based on uncertainty. Shares of Moline, Illinois-based Deere dropped 4.8% Monday after reports that China would stop buying U.S. farm products.

Judge pointed to the farm crisis in the 1980s, when low crop prices led to farm operators falling behind on land and equipment loans. Based on few signs of progress in trade talks, Judge said she fears a repeat of the painful decade for farmers.

“We don’t want to see people losing their farms and people unable to meet your financial obligations,” she said. “But it doesn’t look like trade is going to get any better, so I think we’re in for a very rough ride.”

Source: CNBC