Where next for soybeans?

At this writing, the future for United States soybean growers is as uncertain as it’s ever been. At the beginning of September, the U.S. Department of Agriculture reduced its export estimates for soybeans and corn.

The trade war has so far cut agricultural exports 6% from last year, to $134.5 billion. If those numbers don’t change, they would be on track to be the lowest since 2016. Although in mid-September the industry received a dose of good news in that China agreed to purchase 600,000 metric tons of soybeans and that it was going to exclude soybeans and pork from tariffs it imposed on agriculture imports. Still, the decline in agricultural exports is forecast to put the U.S. ag trade surplus at $5.2 billion, the smallest since 2006.

Chinese exports actually dropped in August, a sharp contrast with the double-digit annual growth in exports the Chinese economy enjoyed for much of the 21st century. The price of pork in China, its most commonly consumed, meat, has doubled since July, a result of the swine-flu epidemic. Will a damaging economic slowdown be enough to bring the Chinese back to the negotiating table?

President Xi Jinping has indicated that China’s national prestige is at stake. As the trade war drags on with seemingly no end in sight, some observers have concluded that China is giving up on dealing with a negotiating partner they find puzzling, erratic and unpredictable.

Meanwhile, soy marketers are concentrating, as they always have, on developing new markets. Mike Steenhoek, executive director of the Soy Transportation Coalition, said that the trade war “seems to be settling into a long haul,” with the Chinese waiting for the 2020 elections. U.S. access to Chinese market “won’t snap back like a rubber band,” he said.

“The long-term consequences are much more concerning to me than the short-term consequences. When you don’t have a predictable, dependable supply chain, customers will make other arrangements. For years, we told the Chinese that we were the most cost-effective and reliable supplier,” said Steenhoek.

In the long term, he said, “the Chinese don’t have to completely abandon the U.S. soy market for the effect on U.S. farmers to be negative. A sizable amount of beans that we used to send to China will go away.” Steenhoek said there are already ripple effects on all farm-dependent industries, such as farm equipment suppliers.

On Aug. 30, the USDA projected that U.S. net farm income this year will reach $88 billion, up $4 billion from last year.

That estimate, though, includes emergency payouts for this spring’s flooding, which prevented planting, and income from several multi-billion-dollar aid packages approved by the Trump administration to compensate farmers for trade war fallout.

That kind of income is not sustainable. John Newton, chief economist for the American Farm Bureau Federation, told Yahoo News there had been a 13% increase in farm bankruptcies in the 12 months through June and an uptick in delinquent farm loans, indicating underlying problems in the farm economy masked by the aid.

Criticism mounts

As the trade war escalates, many Trump supporters who agree with the reasons for the tariffs—to rein in China’s lawless trade practices—are becoming increasingly vocal about their dissatisfaction with the tariff policy and its outcomes.

The Wall Street Journal runs almost daily criticisms of the tariffs. On Sept. 4, a WSJ editorial warned, “Mr. Trump can rightly boast that the U.S. has added more manufacturing jobs since he took office than during Barack Obama’s entire second term. But he could lose his economic bragging rights due to trade policies that have done serious economic damage without the gains he promised.”

CoBank, one of the largest rural lenders, has mounted a large media campaign against the tariffs, including YouTube videos as well as magazine articles and print ads. In a direct response to Trump, who continues to insist in his tweets that China is “paying for” the tariffs, a CoBank article makes the point, “With the prospect of declining bargaining power, U.S. exporters of most agricultural commodities will face still greater pressure to absorb more–if not all–of the costs of retaliatory tariffs in the future.”

Improvements

Jim Sutter, CEO of the U.S. Soybean Export Council, describes himself on his Linkedin profile as a “glass-half-full person.” His organization continues to maintain the close relationships it has nurtured with Chinese importers and crushers. A Chinese delegation, for example, was present at a recent event USSEC had in Chicago.

Besides its farmer aid programs, the Trump administration is trying to show farmers in other ways that it has not forgotten them. A USDA report was released Aug. 28 on waterways infrastructure, titled Importance of Inland Waterways to U.S. Agriculture. Sutter noted, “We complain about our waterways infrastructure, but it’s still the envy of the world. We export 60% of our soy crop in the form of beans, meal or oil, so international markets are crucial to us.”

Ken Eriksen, the head of the Informa Economics IEG Client Advisory and Development Group, said America’s waterways infrastructure still provides a transportation premium that translates into margin for farmers.

Shrink before you grow?

Sutter said his organization and similar export councils must think in the long term. “We’re interested both in increasing demand in existing markets, and in opening new ones.”

As an example of the latter, Sutter cites Nigeria, with 200 million people and an oil economy that is growing, but where protein consumption is still low. “Nigerians raise a lot of chickens, but poultry consumption is still relatively low and could benefit from modern high-protein feeds,” he said.

The Nigerian market for U.S. soy is tiny right now. But Sutter pointed out that the USSEC patiently worked in China for 13 years before the first Chinese import of U.S. soybeans.

Sutter notes that despite the tariffs, not all U.S. soy shipments to China have stopped despite China’s announcement in early August that it was directing state agencies to halt U.S. ag purchases.

“It’s still one of the larger destinations for U.S. soy,” said Sutter. “We think it’s mostly purchases by [state-owned grain firms] Cofco and Sino Grain, which might have exemptions from the tariffs or that might have made the contracts before [the announcement] kicked in; we really don’t know.”

When Sutter spoke with High Plains Journal, there were 2 million tons of open contracts with the Chinese available, or about a half ton per week with four weeks left in the harvest season. Sutter didn’t see much hope for additional Chinese buying activity this harvest season without a trade war breakthrough.

Eriksen thinks soy acreage will contract and “concentrate” back into the Corn Belt. He notes that China, currently reeling from a swine-flu epidemic that has required the slaughter of millions of pigs, is building high-quality centralized pork facilities that will need high-quality feed.

“Demand for quality feed for pigs and chickens will grow around the world, but how many U.S. farmers can hang in there while those markets are rebounding or being developed? Some soy growers will make it, but they are going to have to ‘push the pencil’ and work with their banks.”

Eriksen notes that agribusiness companies like Bunge are remaking themselves, partly in response to new trade realities. The recent move of Bunge’s world headquarters from White Plains, New York to St. Louis, Missouri, was part of a strategy that its CEO called “shrink before you grow.”

That might be a useful motto for U.S. soy growers.

David Murray can be reached at [email protected].