South America Rising

South America Rising: Evaluating the impact of the 98 percent plunge in U.S. soybean exports to China. By Candace KrebsLet’s start here: competitive factors that allowed the U.S. soybean industry to establish a mutually beneficial trading relationship with China haven’t dissolved overnight.

“The U.S. clearly has comparative advantage growing row crops,” says Matt Herrington, director of analysis and client development, World Perspectives Inc., a consulting firm in Washington, D.C. “The thing to keep in mind is right now markets are reflecting strong political shocks. If a trade agreement is achieved, I think things would revert rather quickly. Right now, two years in, I think the impact would still be pretty small.”

Meanwhile, South America’s expansion of arable land is nothing new. It’s been going on for 20 years, although it had slowed in recent years, adds Gary Blumenthal, World Perspectives’ founder and CEO. He notes that while countries like Vietnam have made out very well in the China trade war, expanding and improving their manufacturing and shipping capabilities, “I would argue shifts in agriculture markets tend to be a little more inelastic and quicker to shift back to pre-trade war status.”

Add to that Brazil’s political uncertainties and its vulnerability to trucker and port strikes, Herrington observes, and “that supports the theory the U.S. will continue to be a reliable consistent supplier of agricultural products to China for years to come.”

Potential for Lasting Impact

That said, most analysts agree the longer the U.S.-China trade war drags on, the more uncertain the outcome.

For starters, Tanner Ehmke, a manager with CoBank’s Knowledge Exchange Division in Denver, argues President Trump’s preference for negotiating unilaterally, completely outside the usual governing bodies like the World Trade Organization with minimal if any ally support, brings into question durability and enforceability of any future pact.

“Take Chinese theft of intellectual property. China’s not going to stop doing that. What happens when they do it next time?” Ehmke asks. “Does Trump just perpetually keep dropping more tariffs on them or pull those away? I think we’ve got a tiger by the tail.”

As the feuding continues, changes in world trade patterns occur.

“You hear it over and over that the longer the trade war, the more permanent these changes become,” Ehmke says. “Trade routes and relationships that occurred because of the trade war become cemented. The longer we offend key trading partners, the more motivated they are to find somebody else with which to trade.”

The current situation is often compared to the infamous Soviet grain embargo of the early 1980s. Many now blame President Carter’s decision to cut off Soviet exports with setting in motion the rise of the Black Sea region as a global power player in wheat production, a development that has made wheat significantly less profitable for U.S. producers to grow.

Ehmke predicts current trade disruptions could ripple out across decades, adding Midwest soybean farmers will have no choice but to adapt. Analysts already predict farmers will plant more corn in 2020, in large part because it is more readily sold in domestic markets.

World soybean production graphTime for Strategic Repositioning?

Jason Clay, senior vice president of markets at the World Wildlife Fund, based in Washington, D.C., also sees the current trade spat having lasting impact, acknowledging the public’s alarm over fires burning in the Amazon.

“The trade war has played right into Brazilian soybean producers’ hands,” he says. “It’s given them an open door into the Chinese market, and that’s causing speculation around land and anticipation of higher demand for soy.”

“When markets shift,” he adds, “it takes quite a bit to get them back, and that’s what’s worrisome about this.”

From a global perspective, though, he sees an opportunity for both the U.S. and Brazil to put more emphasis on value-added agriculture. And in environmental terms, burning the rainforest isn’t that different from farming highly erodible land in the U.S. that should never have been converted from forest or native prairie, he says.

Responsible trade policy, including satisfying the growing economy of the world’s most populous country, doesn’t require the U.S. or South America to break new ground, Clay argues. Rather, the most productive acres should be farmed more intensively with livestock used to add value to crops. Instead of growing soybeans for export, the U.S. and South America could produce more pork and poultry, increasing income, generating jobs and reducing greenhouse gas emissions at the same time, he adds.

Brazil and Argentina Soybean Production 1994-2018“We are a low-cost producer. We should be selling animal protein to other parts of the world, because we can do that more efficiently than they can,” he says.

Devastating outbreaks of avian influenza and African swine fever in Southeast Asia could also play into that. “It will take 10 years to turn the hog industry around in China,” Clay says. “In that time period we could make a lot of money selling animal protein to China.”

“China does want to buy our soy,” he continues, “but my sense is China is going to shift to buying more meat. I think Brazil is going to pivot to more value-added production, and I think American farmers should be thinking along those lines too.”

As that happens, he believes the business model in the Midwest needs to change, to allow crop farmers to share in profits more equitably.

“The price of soybeans is determined globally. It doesn’t matter if demand comes from the U.S. or China,” he says. “The real question is: can we develop an animal protein system that incorporates grain producers as equity holders in those companies in exchange for supplying needed raw materials? Then more farmers might have a chance of surviving. Just selling commodities only gets more difficult and more competitive.”

An equity-sharing model would also improve agricultural resiliency in the face of climate change, by allowing grain producers to better manage production risk and make the kinds of long-term resource management investments that only pay off over time, he adds.

Pivotal Path to the Future

World Perspectives’ Blumenthal agrees that it’s a pivotal time for U.S. agriculture — and for individual farmers — to think strategically.

“The key thing is, what’s our objective? If our objective is to be a competitive bulk soybean supplier, then we have to continuously work on being a low-cost supplier. Now Europe has gone a different direction, because they know they can’t compete on price. They’ve decided to put more focus on quality and price per unit,” he says.

The U.S. clearly has comparative advantage growing crops. The thing to keep in mind is right now markets are reflecting strong political shocks.U.S. farmers will need to continue investing in technology if they want to overcome their main competitive disadvantage, which is high land and labor costs, he says. But the past two years point to another disadvantage that burdens farmers: politically motivated trade.

“As the leading country in the world, we take risks to mold the world as we would like it to be, and embargoes are commonly used to do that,” Blumenthal notes. “Brazil never participates in those types of embargoes. It’s not their policy, either because they don’t have the political heft or because their economy couldn’t handle it.”

“In any event,” he concludes, “that’s a risk our farmers take by producing in a country where our leaders take stands that sometimes end up hurting us on trade.”