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Beyond soybeans: The ripple effect of US-China trade tariffs on agribusiness
06 November 2019
Soybeans have taken center stage in the ongoing US-China trade
war, ever since China's Ministry of Commerce imposed a 25% tariff
on hundreds of US products in April 2018. As the dispute between
the two countries continues, the knock-on effects of restricting
trade of the largest US agricultural export have rippled out into
the global agribusiness industry.
Soybeans are central to the US export picture. As the largest
importer of soybeans, China is the largest soybean trade partner
for the US, with shipments between the two countries topping 36
million tons in the 2016-2017 soybean crop year. As the full effect
of tariffs takes hold, Agribusiness Intelligence forecasts that US
soybean exports to China will slump to just 13 million tons for the
2018-2019 period.
While US exports to Europe and other markets have increased, the
scale of demand simply cannot match that of China. The net effect
is that US soybean exports are forecast to fall 20% in the
2018-2019 period.
The US government has made it clear that it is not going to
forget its farmers. It will continue to provide aid to agricultural
associations and their members. However, most farmers would prefer
to get their returns from the market, a prospect that looks to be
some ways off.
If an agreement is reached between the US and China soon, it
would provide significant support for financial markets and the
economy. However, an immediate translation into increased US
agricultural exports could take longer due to structural changes in
the international market.
China has taken steps to broaden its supply chain, making it
unlikely that export volumes would return to pre-trade war levels.
Other countries that developed supply agreements with China in the
last 12 to 18 months are not going to give up newly gained market
share without a fight.
Brazil is best positioned to fill the gap for a range of
agricultural products. Agribusiness Intelligence estimates that
Brazil's soybean exports to China have increased 36% in two years,
totalling 63 million tons in the 2018-2019 period.
A prolonged trade war is likely to create a sustained impact on
the US agricultural industry. Not only has the dispute impacted
planting decisions by US farmers - who are focusing more on wheat,
corn, and other crops - but it has affected other US agricultural
companies. With financial uncertainty on the horizon, many farmers
have been holding back on investment in new machinery and other
inputs into their businesses such as technology.
Other adjacent industries such as fertilizers, crop protection
chemicals, and biofuels are also impacted. Let's look at how trade
is changing.
Fertilizers
The trade war is not directly impacting the fertilizer market,
as both the US and China are mass exporters and make the most of
their fertilizer production. Indirectly, though, the change in crop
planting by US farmers has a knock-on effect to the domestic
fertilizer industry. As tariffs on soybean exports to China have
forced farmers to rethink planting patterns, the changing mix of
crops impacts the nutrients required. As a legume, soybeans absorb
nitrogen from the atmosphere and do not require additional
nitrates. However, like most agricultural crops, soybean yield is
significantly improved with phosphates and potash.
The reduction in soybean planting has led to oversupply in the
domestic fertilizer market. However, with Brazilian farmers
stepping in to fill the gap in China's soybean imports, US
phosphate and potash producers have increased exports to Brazil.
Compared with Atlantic market rivals Russia and Morocco, the US is
better-positioned to serve the South American market, due to
reduced shipping costs.
Crop Science
Developments in the US and China were already affecting the
global crop-protection market long before the tariff war began.
Ongoing US legal cases for glyphosate, the largest-selling
herbicide in the world, as well as some other herbicides, cast
doubts about the potential of these active ingredients for
manufacturers internationally - not just in the US. Furthermore,
the global market's reliance on the Chinese manufacturing sector
for agrochemical products left it vulnerable to developments within
China. Stricter environmental laws within China drove many smaller
companies out of the market, which in turn increased international
product prices.
Then the trade war began exerting an influence. China is the
manufacturing hub for the global pesticide industry, accounting for
around 25% of all production. The 10% tariffs implemented in 2018
mainly impacted formulated products being imported into China,
leaving imports of most of the large-selling actives such as
glyphosate and chlorpyrifos out of the tariff net. But the latest
round of tariffs includes some of those active ingredients as well.
With these tariffs, most US companies would have to pass the
increased costs on to farmers, which in turn would impact
sales.
Additionally, as China's demand for US soybeans disappears, many
US farmers have adjusted their crop plantings. This in turn has
changed chemical requirements and demand for particular
products.
If the trade-war was resolved and trade reopened in the next
year or two, the supply-demand balance could likely return to
normal. If the conflict continues for an extended period, it could
change the structure of the market entirely.
Animal Health
While tariffs have not hurt the vaccination or pharmaceutical
markets of the US and China, the indirect impact on this market is
already apparent. Animal health companies in China almost
exclusively serve the domestic market, with animal vaccines
produced to protect the Chinese livestock population. Although not
regarded as being as high in quality compared to international
products, Chinese products are significantly cheaper for small
farms to buy. The exception is farmers' purchases of vaccines for
fast-spreading diseases that could quickly wipe out an animal
population. For example, Chinese pig farmers are increasingly
purchasing doses of foot-and-mouth disease vaccines from
international businesses.
This trend ties into the wider soybean-led trade war.
Agribusiness Intelligence estimates that since its initial outbreak
in China in August 2019, African swine fever (ASF) has decimated
around 30% of the Chinese hog population. It also has spread to
several other countries. As soybeans make up the largest proportion
of hog feed, there is notably less demand for soybeans from Chinese
farmers. There is no available ASF vaccine and the launch of such a
product estimated to be five to seven years away. Thus, the
contribution of the country's hog population to soy demand will not
support pre-trade war import volumes, even if the trade war
concludes.
Biofuels
The US ethanol industry has reached the climax of a crisis that
had been building over the last two years. Political decisions were
made to support the oil industry even when reduction in demand from
China was already hurting US producers.
In August 2019, the US Environmental Protection Agency granted
31 exemptions to small oil refiners. The waivers free them from an
obligation - under the country's renewable fuel standard policy -
to blend biofuels such as ethanol into the gasoline they produce.
The latest round of exemptions brings the total to 85 since
President Trump took office in 2017. Earlier waivers already led to
significantly reduced demand for ethanol, creating a disastrous
psychological effect on the US ethanol industry. In fact, several
players have said they will shut down or reduce production at their
facilities.
Up to 40% of US corn is used for ethanol production, and many
farmers that planted both corn and soybeans had increased their
volumes of corn after the 2018 tariffs were imposed on US soybean
exports to China. The increase in corn production exacerbated the
issues of the ethanol industry - introducing more goods to an
export market hit by reduced demand just as the trade war halted
exports to China.
In 2017 the Chinese government announced plans to roll out
nationwide use of car fuel containing 10% ethanol by 2020, in a bid
to reduce pollution and smog in urban areas. Although ethanol can
be produced domestically, the build-out of production capacity has
not been fast enough to meet the deadline.
With the US offering the cheapest source of ethanol
internationally, early 2018 saw record US exports of ethanol to
China. Before the tariffs, full-year 2018 exports would have
totalled over 500 million liters.
If the trade war came to an end and the export market reopened,
Chinese demand for US ethanol could increase by 1 billion to 2
billion liters a year. This would in turn help to rebalance the US
supply-demand issue. Only time will tell whether the key players
decide this is in their best interests.