Harvest season is just around the corner here in the United States and farmers across the country are concerned. Not so much about yields – always a factor when your business partner is Mother Nature. No, this year the overriding consideration as American farmers gather their crops is trade, more specifically how President Donald Trump’s China tariffs will impact their bottom lines.
I will say the volume of calls on that topic I have received from concerned farmers recently has increased considerably. I emphasize the word “concerned.” While they have certainly communicated some anxiety about the President’s tariff policy, they also expressed a level of patience and a willingness to give him the benefit of the doubt – a big concession considering the state of the farm economy – for now. And then on Wednesday their patience was rewarded as the President took to the microphone in the Rose Garden of the White House and announced a preliminary agreement with the EU that would ostensibly allow U.S. goods into the European market at zero tariff, and vice-versa. He mentioned soybeans specifically, and farmers across the country are breathing a collective sigh of relief – as are the ag markets. Let’s hope this portends a sustained upward trend.
As the representative of an intensely agricultural district in eastern Arkansas, I understand these concerns. After all, I’m not that far removed (relatively speaking) from that Ag Econ class at Arkansas State University where we learned that tariffs are inherently bad for ag producers. And while the Republican dogma on the topic seems to support that theory, I think Americans should take a broader view on trade, tariffs, foreign investment and China’s posture in all this.
Consider the precipitating factors in the President’s tariff measures against China, who had been dumping highly subsidized, low-cost (and I would suggest low quality) steel into the U.S. market for quite some time. If the WTO was unwilling to address this ongoing practice, then President Trump should rightly have taken action, which he did. But not before an exhaustive investigation by the U.S. Department of Commerce under the authority of section 232 of the Trade Expansion Act of 1962. The investigation informed the President’s decision to implement a 25% tariff on Chinese steel entering the U.S. supply chain (and 10% on Chinese aluminum). The Chinese response to these actions resulted in the formalization of a trade war – a war I would submit China has been waging for the better part of two decades. A war in which the U.S. – until President Trump – was unwilling to fight back.
The President has since upped the ante to the tune of $200 billion worth of Chinese goods. Squarely in the Chinese crosshairs in response – U.S. soybeans at a rate of 25% entering the Chinese market. Enough to cause major trepidation throughout the American agri-sphere. Before we pronounce gloom and doom though, let me revisit my Ag Econ class.
That same professor who espoused the “tariffs bad” theory is the very same who taught us about “inelasticity.” Typically inelasticity is addressed in the context of price, but with an unchanging fundamental picture – 1.4 billion population and a highly limited agricultural production base – China is decidedly demand inelastic with regards to commodities like soybeans.
Further, soybeans and other grains are fungible in the global marketplace. 25% tariff or not, U.S. soybeans will necessarily find their way into the Chinese market. Perhaps not through direct sales, but most assuredly the U.S. – a top three global soybean exporter – will continue to be a factor in the Chinese import equation. China is the world’s largest importer of soybeans with a projected 95 million metric tons in 2017/2018, up from 70.36 million in 2013/2014. As an aside, the EU, while significant, is a distant second with 14.5 million metric tons projected in 2017/2018. Incidentally, the EU, a perennially prickly customer for the U.S., recently purchased American soybeans largely attributable to problems in Brazil resulting in a $1.95 premium over U.S. beans.
As Argentina and Brazil – numbers one and two respectively in global soy exports – continue to buy up U.S. soybeans to fill orders to markets like China, U.S. soybeans will be well positioned to capture the lion’s share of the EU market while still entering the Chinese market indirectly through Argentina and Brazil transactions, et al.
Whatever the state of our relationship with the EU, which has improved decidedly since Wednesday, simple economics will dictate that U.S. soybeans are a more attractive option, particularly as long as the $1.95 South American premium persists. Even if the South American trend doesn’t hold, one trend we should take notice of is the roughly 26% increase in Chinese soybean imports over a four year period, a markedly bullish factor for soybeans, regardless of country of origin.
So as we watch the continuing “trade war” drama with China unfold, consider this: U.S. soybeans are a strong and essential part of the global market and bottom line, China needs U.S. soybeans.
Editor’s note: U.S. Rep. Rick Crawford, R-Jonesboro, represents for Arkansas’ 1st Congressional district. He is co-chairman of the Steel Caucus, chairman of the subcommittee on General Farm Commodities and Risk Management, and a member on the House Agriculture Committee. The opinions expressed are those of the author.