You have to hand it to the Chinese. Their trade negotiation tactics are complex. Ten days ago with much fanfare they announced required “deposits” equal to 180 percent of the value of sorghum imported from the United States. This was not, they said, an actual tariff increase, but rather money to be held pending the results of an investigation into whether U.S. sorghum production and exports are subsidized.
lottermanAt the same time, according to Soren Schroeder of Bunge, a large global ag commodity trading firm and the largest U.S. soybean processor, Chinese importers have quietly stopped buying any soybeans from our country at all. This evidently was no secret in the grain trade, as soy prices barely dropped on the news. But it was a signal reinforcing China’s willingness to play hardball. And again, it illustrated that governments in other countries can understand U.S. domestic policies better than we understand how those countries’ internal political dynamics affect their trade position.
So we are in at interesting situation, one that isn’t going to pass quickly and one that has both economic and political aspects. These raise questions that merit answers. Here are a few:
If China stops buying U.S. soybeans, why don’t farmers just grow something else?
This is an example of “the fallacy of composition,” the assumption that what is true for an individual is true for a group. Yes, one or 10 or 100 or 1,000 farmers could switch to growing oats or okra or buckwheat. But 120 million acres of soybeans are grown on about 300,000 farms. Not all of these, nor even a large fraction, can be shifted to other crops in the short and medium term.
There are multiple limitations. First, inputs such as seeds or specialized machinery for alternatives may not be available, especially in the short run. Storage and processing facilities do not exist for large volumes of the more exotic alternative. But most importantly, demand is simply not there to absorb the sorts of production increases that would result from major shifts out of soy into specialty crops. Prices would fall dramatically for the alternative products.
Yes, soybeans are now grown on land where wheat, oats and corn once were common. And yes, much of the machinery to raise these traditional alternatives and to store and transport them overlaps that for soy. So this shift is technically possible. But major shifts out of soy into even these crops with relatively high demand volume would depress their market prices substantially.
Yes, at the margin, acreages shift between soy and these traditional alternatives every year based on relative prices. If the price of corn increases relative to soy, some acres shift out of the less favorably-priced crop into the more favorable one. But this is a small fraction of total acres.
Ditto when there is adverse weather that delays planting. If corn planting is delayed to a point where the probability of it maturing before frost becomes chancy, farmers may choose to plant one field or another to the later-seeded alternative. But acreages shifted are a small fraction of total plantings.
And even in these cases, availability of seed may be a constraint. Some 3 million tons of seed soybeans are used. Seeding that acreage to corn would take a million tons of seed corn. Coming up with even a tenth of that would strain the system.
Won’t China have to keep buying soybeans from us since other major producers like Brazil already have established customers for the share of their exports not already going to China? Why are some economists from places like Iowa State or Purdue predicting substantial harm to U.S. producers?
Yes, experienced grain traders will tell you that established relationships with specific buyers are important. But soybeans are fundamentally a “homogeneous commodity.” A bushel of beans meeting a certain USDA grade substitutes for any other bushel with the same grade. Yes, there are minor differences in protein and oil content between South American beans and those from the U.S. But these differences can be accommodated with small premiums or discounts relative to the world price.
The upshot is that over the medium to long term, fewer Brazilian beans may flow to existing buyers in Japan or the Netherlands, ending up instead in China. And U.S. beans that went to China will flow to these markets.
But adjustments are not instantaneous. In the short term a complete cutoff of Chinese purchases here will hurt U.S. producers and Chinese buyers. Exactly how long a full adjustment will take is unclear.
U.S. farmers are quite politically conservative and many like Trump’s general program. So are they really going to switch because of their exposure to a trade war?
Yes, large majorities of actual farmers voted for Trump. And yes, while this is not a presidential election year, there are counties and congressional districts that are so firmly Republican that some disaffection among soy growers is not going to change the outcome in congressional races.
But, as in many economic issues, what happens “at the margin” politically is important. Minnesota’s 1st and 7th districts have many farmers who usually are Republicans and are generally conservative. Yet Democrats like Tim Walz and Colin Petersen can win in these districts if they are judicious in their positions on social issues, including guns and abortion, and strongly “support agriculture.” There are enough competitive districts like this in other farm states that are held currently by Republicans, that a wholesale abandonment of the GOP by farmers is not necessary. Just enough of them changing to tip a near-balanced scale can have a big effect in the House. Moreover, China has been adroit so far and it still has a few cards in its hand.
Won’t China suffer domestic political repercussions from restricting imports of food and feedstuffs?
Yes, just as its import restrictions will lower prices to U.S. farmers in the short run, so they will raise food prices to Chinese households over a similar time horizon. And food is still a much bigger component of living costs for these households than it is for Americans or Europeans. So it is not a negligible issue. On the other hand, China is still a Communist regime with much experience in and resources for repressing dissent. And it is a nationalistic country. In nearly any country, whipping up public outcry against maltreatment by perfidious foreigners is a time-tested success. Look how far it has taken Donald Trump. So don’t expect higher prices for bean curd, sorghum beer or even eggs and pork to cause a revolution.
Won’t the increased shipping costs of getting commodities from countries other than the United States rebound against China?
Yes, it does cost more to ship bulk commodities from ports on Brazil’s coast or the River Plate than from Portland. But people do not realize just how cheap sea transportation is. And current shipping rates are depressed compared to a decade ago at the height of the global commodity boom.
For the “Capesize” bulk carriers too large to transit even the Suez Canal and hence limited to rounding Cape Horn or the Cape of Good Hope, the cost of transporting grain from Paranagua, Brazil’s principal soybean port, to China is nearly twice as high as from Portland, Ore., to the same ports. However, this difference is only $5 per metric ton or 13.5 cents per bushel. That is only 1.2 percent of the market price. It is less than a third of what it would cost to truck the same bushel the 180 miles from my hometown of Chandler, in southwest Minnesota, to a barge terminal in Savage. It is less than a tenth of the extra cost imposed on Brazilian growers by that country’s lack of railroads and deplorable road system.
Over the long-term, soybean farmers are exposed to less harm from trade frictions with China than many fear. But in the short term, i.e. the next two or three years, things might be quite dicey.