World trade issues will have a huge impact on crop movement this year, according to Kent Beadle, director of Risk Consulting Services, CHS Hedging. He spoke at Farmfest 2018, held Aug. 7-9 in Redwood Falls, Minn.
Beadle shared statistics indicating the importance of exports to the U.S. ag economy, reminding people that nearly 50 percent of soybeans are exported and 60 percent of those go to China.
About 15 percent of corn produced by U.S. famers is exported.
The soybean world market share is a two-country game. Brazil has just under half of the market and the U.S. has about a third. Brazil has the capacity to open up new acres to produce more beans so they can move ahead with market share. Argentina exports soybean oil and meal. Their drought has brought crush margins higher, which fills some market gaps.
The Chinese market is extremely important to Midwest farmers. The U.S. exports about 40 percent of its soybean production with about 60 percent going to China. China is also Brazil’s No. 1 client. It’s a huge market for both countries.
China is the no. 2 importer of U.S. agricultural products, so actions by the current administration are impacting the prices received by farmers.
Beadle said the administration placed tariffs on $38 billion of Chinese imports with tariffs on another 12 billion “ready to go.” Chinese retaliation was $38 billion in U.S. imports including a 25 percent tariff on U.S. soybeans.
The administration targeted another $200 billion of imports and threated to increase the size of those tariffs from 10 percent to 20 percent. Beadle said these were not in effect at the time of his remarks. China threatened retaliation on $60 billon of US imports should those go into effect.
“We hope we can get things resolved to remove tariffs and avoid new ones,” Beadle said. “One of the major trade issue is intellectual property.”
Negotiating and uncertainty
Beadle provided an overview from his perspective on the impact on U.S. ag. On future prices, from the end of May to mid-July, the corn futures market lost 80 cents. This change occurred as a result of concerns about tariffs being imposed. This uncertainty was tied to potential changes in tariffs and the NAFTA agreement. Soybeans slid $2.35, and recovered about 80 cents as of the week of FarmFest. Corn recovered half of its loss as well.
“The biggest impact in the soybean market will come at this year’s harvest,” Beadle said. “The logistics and basis implications of not having a program with China are huge.”
At harvesttime, southern and western Minnesota and North Dakota and South Dakota harvest grain resulting in the movement of hundreds of shuttle trains. In the past, the grain primarily came off the combine and moved to the West Coast to be loaded in ships headed to China.
It is a huge logistical undertaking for CHS and others companies who have gotten very good at handling the process. It takes an enormous amount of planning, Beadle said. Trains must be in place. They must procure space for ocean freight. They make sure the grain, trains and cargo ships are in place at the right time. Sales must be made to Chinese at the other end. These steps don’t happen overnight. Currently, there is a no-bid situation for the West Coast soybean market, stopping movement.
The Chinese are buying a record large Brazilian crop of 119 million tons. The price gap is not covering the 25 percent tariff in the United States.
The new crop basis bids in southern and western Minnesota are mostly processor bids or rail shippers and reflect the price of rail freight to St. Louis. This offers the best rate to offload to barges which serve other markets which are not as deep. Normally 60 percent goes to China.
If and when a deal is in place, Beadle said it will take time to procure ocean freight and make the sale. Beadle said, “Otherwise, we are waiting for the gap in the tariff to be covered by the market price. Any late September shipments are pretty much lost. If we don’t get a deal soon, then October will be lost as well.”
How does this play out? Brazilian soybean supplies are tight. Beadle said eventually Brazilian prices will rise, and eventually will be high enough to cover the tariff. “And we will sell to China again,” he said.
The Brazilian harvest begins in February, carrying through to March when it peaks. It will take time to refill their pipeline. Beadle said, “We may hold on to Chinese business if trade issues are resolved. It’s possible to get business from China into mid-April which would partially offset losses from October.”
Some of the soybeans sold to other countries could make their way into China. With a 25 pernent tariff, the gap may make for some inefficiencies, but it might happen.
Beadle noted that enormous sales of corn are being made to Vietnam as they buy more than they need.
Significant drought in Europe and Australia impacts prices on the short term. Companies will be selling U.S. corn and wheat in some of those areas due to shortages in other countries.
An audience member asked how the public can be informed about the tariffs. Beadle referred them to the world trade organization, www.wto.org. Information on the site provides historical perspective as well as existing tariffs.
Beadle said, ”Tariffs and retaliations have resulted in lower prices which are harming U.S. farmers and ranchers and the rural communities that depend on them. CHS encourages Congress and the Administration to find a comprehensive and thoughtful resolution to the current trade environment and provide fair and open markets over government assistance.”
The long-term impact without these new trade deals will place more stress on the ag economy which is already stressed. “We need these export markets,” Beadle said. “We worry that these actions encourage production in other parts of the world, practically in Brazil, which will result in a gap in our prices.”