It has been nearly a year since formal threats that tariffs would be put on Chinese imports. Since then we’ve seen a myriad of ideas on that subject, including the most erroneous belief that the counter tariff by China on U.S. soybean exports would not last long as “China needed our soybeans and we had them up against the wall.”
We have subsequently harvested crops in the U.S., quantified the South American crop and are about to plant another one in the U.S. All this has had a backdrop of distorted logistics and waning global demand. Who will buy what from whom and how much is still a moving target. Given the complexities, we may be harvesting again before we have a resolution and verifiable agreement. But there may be optimism.
The question: What agricultural goods could be imported by China to make a dent in the damage done to U.S. agriculture? Look at this chart showing the importance of soybeans and other non-ag related goods exported to China.
Soybeans: Of the $17 billion worth of U.S. soybeans sold last year, China took just $3.1 billion. To get back to pre-tariff levels, China needs to buy $10 billion more. So far this year, China promised to buy 20 million metric tons or about $7.4 billion (figuring $10 per bushel loaded). The purchases thus far have been slanted to August/September delivery or later. We might have permanently lost
5 million metric tons in demand. President Donald Trump has asked China to return to pre-tariff buying, so any purchase above 20 million metric tons would likely have to be done economically and come at the expense of Brazil.
Corn: China hasn’t purchased corn in a large way since 1994, when they had their last crop bust. Actual exports versus estimates of China buying in the past have fallen short, amounting to about $50 million per year. This compares to total U.S. corn exports of $12 billion. Simple math suggests U.S. corn could be a beneficiary of any trade deal. Ethanol and distiller’s grains would make more sense, as selling a value-added product adds jobs, and we know Trump is focused on that. The U.S. exports about $2.7 billion of ethanol and $2.5 billion of DDGs, with China’s portion being below 4% last year.
Wheat: The U.S. has stopped being even a marginal supplier to the world, losing out to Russia. Of the
$5.4 billion worth of wheat the U.S. exported last year, just $100 million, or 400,000 metric tons went to China. Talk of China buying 7 million metric tons would only amount to about $1.5 billion.
Sorghum: Exports to China have a chance to double to $1 billion per year, which is a historical amount.
Meat: About $1.1 billion of meat was exported to China last year, with beef exports amounting to $80 million, pork to $600 million and chicken to $420 million. This compared to U.S. total meat exports of $18 billion. China’s African swine fever epidemic means a meat deal could loom large in our future.
Energies: China has also voiced energies are on the shopping list. With natural gas already being shipped, a big increase could be on the table. E85 would be a win-win for both sides, improving China’s air quality.
The Bottom Line
In February, USDA’s chief ag economist said it could take eight years to get U.S. soybeans supply and demand in balance again, with no mention of interim effects on the corn and wheat markets. It might take longer to get a deal that includes the intellectual property rights and other business issues, not to mention a way to verify agreements.
Trust but verify is as important now as it was under former President Ronald Reagan. While the trade deficit isn’t all about soybeans, separating agricultural issues for the sake of a partial “verifiable” agreement makes sense. If China can’t live up to that, one has to question business-to-business issues. Fully comprehending the long-term effects on agriculture will take time, but time is of the essence. No deal is unacceptable!
See an interesting 15-year progression picture of our trade deficit evolution with China.
Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc., a producer market advisory firm with global reach. Contact him at (707) 365-0601 or GulkeGroup.com. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades.