Farmers Grow Wary of Trade Conflict with China
As the Trump administration and China play chess over corn and soybeans — and the USDA predicts big crops of both — farmers look on with trepidation and a foreboding that they’ve faced similar storms before.
Warm spring mornings turn into raging blizzards by evening. A sudden thundershower becomes a crop ravaging August hail storm. And sometimes, when everything seems to be going well, prices go to hell in a hand basket.
That’s why farmers understand disappointment.
Take politics for instance.
When President Richard Nixon took office, one of his top priorities was to establish detente (an easing of hostilities through increased trade) with China and the Soviet Union. Trade was good for agriculture.
Top priorities for both countries were more food at home through ag imports from the USA. Surplus-challenged U.S. farmers were tickled pink. We went all in.
At first it paid off. In 1971, after negotiations, the Soviet Union agreed to buy up to $750 million worth of grain and oil seeds over three years. What the US did not know was the size and scope of Soviet crop failures. So what happened next was referred to later as the Great Russian Grain Robbery, when sneaky Russia spent close to one billion dollars buying up our entire surplus of wheat and other stuff in barely a year. Here at home, U.S. food prices shot higher. Much to the chagrin of U.S. farmers, President Nixon slammed the door shut in response, placing a partial embargo on U.S. grain exports. In 1975 President Gerald Ford did the same thing. And in 1980 after pledging during his campaign not to cripple the American farmer with price-killing grain embargoes, president Jimmy Carter, himself a Georgia peanut farmer, embargoed grain sales to Russia.
Once burned, twice shy. A farmer I know keeps a bumper sticker on his pickup truck commemorating Carter’s broken promise and making a promise of his own never to vote Democratic again.
Last week when President Trump vowed to start a trade war with China over unfair trading practices, China responded with threats of its own. With planting time imminent, the threat that caught most farmers’ eyes was a potential 10 percent to 25 percent retaliatory tariff on soybeans and other agricultural imports from the U.S.
It is important to remember that embargoes are not the same as tariffs. One says “we will not sell to you.” The other says “we are going to place artificially high prices on your stuff to hinder its movement into our country.” Currency values, freight, and availability could still swing the pendulum in favor of buying taxed commodities, but even then, U.S. farmers wouldn’t be paid full value because the tariff will most likely reduce prices here at home.
Tariffs won’t halt trade the way embargoes do; they simply weight the scale against it.
As the farm economy struggled with surplus, the Nixon, Ford and Carter embargoes maintained grain surpluses resulting in some very expensive farm support spending that lasted several decades.
One thing that helped reduce corn surpluses was high gasoline prices and the introduction of ethanol made from corn. After a false start during the energy crisis of the 1970s, more and more ethanol made its way into blended fuels and the oil industry slowly began to realize they had competition. They fought ethanol tooth and nail, which made big business investment shy away completely. Farmer investment in ethanol refineries was the only way they could be built.
Ethanol’s future seemed uncertain.
Then, everything changed when it was discovered that a highly volatile petroleum-based additive to gasoline, an oxygenate called MTBE, was polluting our water. In 2005 Congress refused to shield MTBE refiners from liability and ETBE made from ethanol replaced MTBE in gasoline.
The Obama Environmental Protection Agency continued to support use of ETBE. Ethanol production expanded and corn prices improved. Farmers began investing more in ethanol refineries. Obama vowed to stand by renewable fuel production including ethanol throughout his campaigns and during his eight years in office. In what is sometimes the contradictory nature of farmers, most supported his policy, but few supported his presidency.
Farmers still talk about exports. But corn for feed and ethanol has become our bread and butter. That’s because domestic ethanol production eats up about three times that of exports — almost half of all the corn grown in the United States each year goes to ethanol. Only 15 percent is exported. The rest is feed or food.
After President Trump made the same promise to support ethanol, he enjoyed broad support by farmers — much more so than Obama. But when EPA Administrator Scott Pruitt took office, he favored cutting the same ethanol mandate Obama’s EPA had defended. Now Pruitt has done what some say are illegal deals with profitable refineries to eliminate the ethanol blend requirement. (Refineries don’t want to blend ethanol with gasoline because they’d rather sell oil). And of course, logistically, ethanol and ethanol refineries are a long way from the oil patch.
Farmers were caught off guard and uncertain. Did they buy a pig in a poke? Now President Trump’s proposed trade war with China over steel and aluminum has been met with threats on U.S. ag exports.
U.S. agriculture has a positive trade balance with the rest of the world. The U.S. grows and sells more ag products than it buys. These include products such as soybeans, corn, apples, pork, beef, sugar, cotton, tobacco, fruits and tree nuts. Close to half the roughly 4 billion bushels of soybeans produced in the U.S. are exported. China buys more than half of those. Our main competition is South America, where Argentina and Brazil grow more soybeans than we do.
One reason that’s so: U.S. embargoes on soybean sales over 30 years ago encouraged foreign investment in Brazil as an alternative source.
The world wanted soybeans more than rain forests.
But South America still can’t grow enough alone to satisfy world demand. U.S. farmers may lose soybean business in China but make up for it by selling to former customers of South America when China replaces U.S. purchases with South American supplies.
On the other hand, corn enjoys limited export demand where our best customers are Mexico and South Korea. They grow their own, but they can’t grow enough at home to satisfy demand. There is not the same dollar for dollar worldwide demand for corn as soybeans enjoy.
That’s because one bushel of soy is worth about 2.5 times the price of a bushel of corn, and we export close to identical tonnages of each.
Though they import some corn, China has a surplus in areas where they don’t need corn. And they’ve been trying to get those farmers to grow soybeans instead. Raising the cost of U.S. soybeans with tariffs could make soybeans a more popular crop in China if domestic prices rise as a result. That would help China curb even more imports.
Like the fabled tar baby, China may simply be daring Br’er Trump to punch him again.
Depending upon perceived profitability, farmers in the U.S. regularly switch acres between corn and soybeans. The popularity of both crops has moved north and south as climate change broadens growing areas. If soy prices fall, planted corn acres may rise the following year, which in turn increases the corn surplus driving those prices lower. And vice versa.
Get the picture? Surplus begets surplus. It’s a little like watching a 1950’s era Slinky toy walk down the basement steps, seesawing lower and lower, collapsing at the bottom.
What the Trump/Pruitt EPA is doing to ethanol affects domestic demand, serving as an embargo on domestically blended ethanol fuel. Without domestic ethanol, our corn surplus will skyrocket overnight. That puts corn in the briar patch.
Altogether, political bickering and position switching has stalled a new farm bill that could offer some support, or at least consideration of it. In the meantime, Trump administration threats of trade wars as the EPA wages war on ethanol makes the possibility of a full-blown farm recession seem possible, maybe inevitable.
Current USDA projections this year are for 89 million soybean acres and 88 million corn. It looks like another big crop. Are those storm clouds I see building? For a farmer, I suppose that’s nothing new.
Richard Oswald, who writes the Daily Yonder’s regular Letter from Langdon feature, is past president and now serves as membership and policy director for the Missouri Farmers Union.