Ag may have played a role in convincing Trump to hold off on China trade action

Source: By Jeff Daniels, CNBC • Posted: Tuesday, August 8, 2017

Ag may have played a role in convincing Trump to hold off on China trade action

Agriculture may have indirectly played a role in helping encourage President Donald Trumpto hold of off on taking trade action against China — at least for now.

The agriculture lobby and politicians from farm states have been pressing the administration, including Agriculture Secretary Sonny Perdue and U.S. Trade Representative Robert Lighthizer, to refrain from imposing tariffs or trade penalties. The biggest fear they have is ag could become collateral damage in a trade war with China.

“We have been having meetings with the Secretary of Agriculture, with the U.S. Trade Representative, and talking to them about the importance of trade and how important it is to agriculture — and letting them know what kind of impact sanctions would have on agriculture,” said Jim Miller, chairman of the U.S. Soybean Export Council and a Nebraska soybean farmer.

Last year, China purchased about $21.4 billion worth of U.S. agricultural exports, with soybeans accounting for two-thirds of it, according to the U.S. Department of Agriculture. Other U.S. agriculture exports to China include distiller’s dried grains, a corn byproduct used as livestock feed, cowhides, as well as tree nuts, cotton and fruits.

Soybeans shipped to China are processed or crushed into animal feed for the swine and poultry industry and other uses. With half of the world’s hogs residing today in China, the demand for soy protein is significant and growing due to its rising population and middle-class wealth.

Last month, a delegation of nearly a dozen companies from China signed a $5 billion deal to purchase 460 million bushels of American soybeans. There also have been recent agricultural agreements with China involving U.S. beef and rice.

For its part, China has been preparing for what could be trade actions by Trump after frustration Beijing was not doing more to help on the North Korea issue. A speech scheduled for Friday on trade was postponed.

China’s semi-official Global Times newspaper wrote in an op-ed Thursday about the situation: “With the highest volume of bilateral trade as the basis, China and the U.S. are like a couple in the same bed but with different dreams.”

The paper’s op-ed added, “A trade war threat to Beijing is only to vent its sentiment and send a warning to Beijing.”

“The real question is whether there’s a ‘tit-for-tat’ situation,” said Joseph Glauber, senior research fellow at the International Food Policy Research Institute in Washington. “Typically, what countries do is take out equivalent measures [in any retaliation.]”

Glauber said if Beijing wants to get “the attention of a lot of people in the U.S. who spend a lot of time talking to the White House, hit soybeans. That’s a pretty big number — and that would be a real concern if I were agriculture right now.”

Then again, Glauber said it’s not only soybeans; China could target sorghum and cotton.

“Farmers have expressed concern about trade issues,” said Glauber. He said they’ve been worried about North American Free Trade Agreement renegotiations and more now about “adverse effects of any trade war with China.”

Austin Rincker, a soybean producer in central Illinois and at-large director for the Illinois Soybean Association, said he’s “fairly optimistic” that U.S. agriculture won’t be impacted if there’s a trade spat with China and points to the soybean deal signed last month as another encouraging sign.

“The deal that was put together is the second-largest deal for importing U.S. soybeans into China,” Rincker said. “We really preach free trade and hopefully keep all those avenues open.”

About 60 percent of the soybeans grown by American farmers are exported, with China by far the largest customer. China is the world’s fourth-largest producer of soybeans but its need for soybeans is so great it imports from the U.S. and South America, including Brazil, Argentina, Paraguay and Uruguay.

Miller, the Nebraska soybean grower, said South America is a competitor of American soybeans but adds “the U.S. cannot produce enough soy to meet the needs for the world. It takes world production to meet demand for soy protein.”

That said, China could still retaliate against American soybean producers by encouraging its importers to purchase from other places such as South America. Similarly, Mexico is a major importer of U.S. soybeans and reportedly has been looking to buy more corn and soybean from South America so supplies could run short.

“If China were to increase the import tax from the United States [on soybeans], then initially we’re going to see all the business shift to South America until they run out of beans,” said Terry Reilly, a senior commodity analyst at Futures International in Chicago. “It’s going to be a nail-biting experience.”

Still, he believes an increased levy would hurt Chinese soybean companies in the end since “their crush margins are already very thin. So it’s kind of a catch-22 for China because they depend on so much soybeans from South America and the United States.”

Currently, China levies a value-added tax, or VAT, of 11 percent on imported soybeans, although prior to July 1 the amount was actually 13 percent. Beijing cut the rate to spur growth and also to help soybean processors since they have faced lousy profit margins for several years.

Anticipating the cut in the VAT, China recently saw ships with soybean cargos begin to stack up as importers waited for the lower tax rate to go into effect. Reilly expects the “congestion of beans” waiting to get unloaded after July 1 is a sign of just how sensitive the Chinese importers are to swings in the tax.

However, if China retaliates with a major increase in the VAT tax for U.S. soybeans, Reilly estimates it could pressure soybean prices, possibly to the lowest levels in a decade.

Yet even if China does encourage more soybean buying from South America, there could be a silver lining over the long term for U.S. growers.

“You don’t want to lose a customer that you’ve invested so much time and effort in,” said Miller, the Nebraska soybean farmer. “It’s hard to get a customer back once you lose a customer. But it would open up new markets for us. We would be able to pick up market share in those regions that would no longer be supplied by South America.”