CoBank’s Knowledge Exchange Division recently released a report looking at the shift in rhetoric surrounding US trade, ongoing effects from the tariffs put in place and potential market sourcing implications.
One challenge in establishing if a trade war has started comes from the fact that there is not a set definition, said Will Secor, economist for grain and farm supply with CoBank’s Knowledge Exchange Division. Unlike some economic terms, there are no specific parameters for when a trade war exists, he said.
“It doesn’t have a definition, unlike a recession,” he told FeedNavigator. “We don’t have a precise definition, [it may be] one that is best defined in retrospect.”
As such, when examining US exports of feed grains and commodity markets the focus has been on ongoing trade tensions, he said.
However, the sooner that uncertainties can be addressed the easier it will be for producers to prepare for market changes based on crop size.
“The risk of an escalating trade war is the greatest threat to the US and agricultural economies in the near term,” said report authors. “Nearly 70% of US agricultural exports are sold to destinations that are under active negotiations or embroiled in trade disputes.”
Role of world markets
In the past few decades global GDP has grown by about 600%, said Tom Halverson, CoBank president and CEO in a related report on the role of exports for US agricultural producers. International trade has been an important driver for that growth.
“Global exports – facilitated by a series of multilateral free trade agreements enacted over the years – now account for approximately 29% of world GDP, compared to only 12% in 1960,” he said.
In the US, feed crop and livestock producers have both been among those who benefited from the expansion in international trade, he said.
“The US now exports about $140bn per year in agricultural products and commodities,” he said. “That compares to approximately $50bn per year in the early 2000s.”
On average, exports account for about 20% of the total production for feed crops and livestock producers, said Halverson. However, some commodities including grains and oilseeds, soybeans and wheat see a larger percentage exported.
Of those exports, about 45% goes to China, Canada and Mexico, he said. But, the US has been seeing increasing competition for some feed grain or ingredient markets.
“China imported over 50% of its soybeans from Brazil in 2017, compared to less than 35% from the US. Russia now accounts for 22% of global wheat exports, compared to 13% for the US,” he said. “America’s share of global corn exports has fallen from almost 70% in 2005 to under 40% today, with Brazil and the former Soviet Union picking up most of the slack.”
Weather and tariffs
When considering the ongoing trade uncertainties and implications for pricing or feed crop producers tariffs remain a priority, said Secor.
“The big things to watch are the tariffs situation and how that can impact where the grain is going,” he said.
If changes are not made regarding tariffs and trade negotiations, domestic growth expectations may need to be altered, report authors added.
“With large global supplies in most crop, animal protein and dairy sectors, competition for market share is significant and will impact the entire food, fiber and agriculture supply chain including prices received by US producers,” they said. “Net cash income in agriculture has declined sharply over the past few years and the erosion in working capital has increased the need for debt in a rising interest rate environment.”
Competitors for feed crop markets also have been “aggressively seeking” trade relationships that could alter US supply chains, they said. Exports to China have dropped and new restrictions on the presence of foreign matter slowed some existing shipments.
“If trade tensions remain high through harvest and into the new marketing year, the impacts will become increasingly severe for US soybean exports and prices,” they said. The market for meal has been stronger although if export sales slow it could hurt crush margins.
There have been some suggestions that despite tariffs on US feed grains and ingredients by China, and the potential for new tariffs to be added, China will still need to buy US soybeans, said Secor. However, those actions still reduce prices.
“They’ll take more Brazilian beans,” he said. “The US will ship exports elsewhere, but it’s not as efficient as shipping to China – prices will be lower.”
Producers also may face a challenge from the weather, as soybeans have been experiencing beneficial growing conditions in several parts of the US, but the crop is still developing, he said. “Weather in the next few weeks will determine the crop – that will have an effect on where prices go,” he added.
Corn exports have had a strong year thus far, potentially in preparation for the imposition of tariffs, he said.
Total exports have reached 1.5bn bushels and increased year-over-year, the report authors added. “Only four weeks have ever recorded more than 70m bushels in weekly exports, and three of them were posted in April and May of 2018 – this is unheard of for spring months when average weekly exports are closer to 40-45m bushels.”
Internally, there may be some regional price hikes for corn, said Secor. “Normally there’s a good amount of corn, but now you’re going to have local reduction in corn.”
Corn prices throughout the country may not see much change, he said. But ongoing dry conditions in areas including the Southern Plains and excessive water in some Mid-Atlantic states could alter production and local pricing.
Weather also has been challenging for corn producers outside of the US and dryness continues to be a challenge for the Safrinha corn crop in Brazil, the report authors said. However, a smaller Safrinha crop could support US corn exports going into 2018-19.
Drought in the Southern Plains has reduced yield expectations for some US wheat production, the authors said. However, producers globally have been facing similar challenges.