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Feedstuffs is the news source for animal agriculture
September 27, 2019
These are grim times for most of American agriculture. Mother nature has not been kind but she’s often a problem. Neither has the price of commodities, staying frighteningly close to break even, occasionally dipping below that skinny point where a profit can be made.
The results have been a horror film for too many. Farms and ranches, even Centennial farms that have been in the family for a hundred years or more, are declaring bankruptcy at a rate not seen since the agricultural disaster that was the 1980s. The suicide rate among farmers and ranchers is the highest of any job classification, more than even among returning military.
Then we have the added agony of a tariff battle with the largest agricultural market in the world - China. It’s now a lost market opportunity, part of the Administration’s shouting war and it is effectively killing the export business for American ag, handing it to other world agricultural powers.
According to Oklahoma State University’s agricultural economist Derrell Peel, China is the world’s largest beef importer. Since 2015, Chinese imports have increased 153.4%, accounting for more than 75% of the net increase in total world imports. Brazil, Uruguay, Argentina, Brazil and New Zealand enjoy the majority of that business. Less than 1% of U.S. and Mexican beef makes it to the huge Chinese market.
The Chinese market might be a lost opportunity, driven by several world economic factors and complicated by American agriculture being an unwilling bargaining chip in the tariff war. Overproduction of grain, protein and other products caused by suddenly limited sales has led to crashing commodity prices, unharvested or unsold crops and some serious rethinking about what to plant next spring.
Good news finally came a few days ago when Trump announced the delay, until Oct. 15, of additional tariffs on Chinese goods. Beijing followed by excluding pork and soybeans from recently applied additional tariffs. The U.S. Department of Agriculture said the result was the immediate sale of 204,000 tons of U.S. soybeans to China, worth $67 million at current prices.
It’s the continuing uncertainty about new and increased tariffs, though, that are still driving the ag market today. Let’s take a deeper look into tariffs. What are they? Who really pays the bill? What are the effects on the export business? I called on my old fried, John Nalivka, for some answers. He’s president of Sterling Marketing, which provides economic research and marketing advisory services to the livestock industry. He’s been at it for more years than he will admit and that makes him one of the leading experts in the economics behind animal agriculture
Q. John, we have a problem with tariffs, understanding what they are and the effect they have on international trade. Let's start with defining the term. What is a tariff and who pays for them?
A. A tariff is a tax or duty paid on imported goods and are paid by the importer or buyer of that good when it enters the country of destination. Tariffs are often called a tax on the consumer who purchases the imported product that had a tariff levied under the assumption that the price will be increased equal to the tariff to offset the added cost to the importer or first buyer. This is the case whether the tariffed good is the final consumer product or it is raw material that is used in the manufacture of a final consumer good.
I think that assumption is what I refer to as an “heroic assumption” as the cost of the good may not be increased. I really think this is playing loose with economics and gives firms a license to increase prices beyond the cost of the tariff. Very few Americans could tell you much about tariffs let alone what the actual tariff-rate cost was on a given good.
Q. President Trump has started a ‘shouting’ war with the Chinese over trade and American agriculture is caught in the verbal crossfire. Like the old point/counterpoint way of arguing an issue, we're caught in a tariff/counter-tariff battle. With the understanding that the situation is as volatile as spilled gasoline on a hot day, what's the current state of affairs?
A. I think (my opinion) is that Trump’s hard line trade stance with China has backed them into a corner. Their economy had become heavily dependent on trade – fair or unfair - whatever worked. Their Belt and Road Initiative was largely driven by the trade policy they were running throughout the world. No one called their hand until Trump. Now they have had to rethink that policy and the Asian culture has always had more patience than we have. But I think they are even having difficulty in using their patience as a bargaining tool. Their economy may not have that much time and the situation is further worsened by ASF (Asian Swine Fever) and the 1.4 billion people in China who need to eat.
Q. All the major American agricultural outputs are in play: beef, pork, poultry, soy, corn. We're seeing an uptick in farm bankruptcies, even ag-related suicides. How much of the disruption has been created by the tariff war and how much should be attributed to the inclement spring weather?
A. I think the downturn in the farm economy is a mix of large supplies, weather-related problems (flooding in the Midwest), and the trade war. Depending on trade to support the market has too many uncertainties, particularly government policy and politics. U.S. agriculture has largely been able to produce more with prices supported by exports. That’s okay but when the worm turns, you may not like the financial result.
That’s where we are at with soybeans since that market became so dependent on exports to China. At least spread those exports around and diversify your portfolio. I agree with President Trump. The U.S. needed to take charge of our trade with China and, unfortunately, parts of U.S. agriculture were caught in the crosshairs. While the beef industry has looked to expand exports to China, those sales to China last year only accounted for 1% of total exports, while our largest beef trade export trade is with Japan, South Korea and Mexico. So, consequently, the beef industry may not like the China trade war, it has little direct impact, perhaps only lost opportunity at this point.
Q. On Dec. 1, China said they will increase tariffs on corn, sorghum and wheat from 25% to 35%, making the purchase of those products prohibitive. Without U.S. supply, China will have to buy ag products on the world market to fill a need. Which countries are stepping in? Who gains and who loses?
A. I have consistently opined to clients that China would buy all proteins from all global sources to fill the hole created by African swine fever in their pork supply. China consumes 49% of the world’s pork.
New Zealand, Australia, Brazil, Argentina and Uruguay are primary suppliers to meet increased purchases of beef. China recently approved 17 more packing plants in Brazil. South America will work hard to be a leading supplier to China of any proteins or grains. Brazil and Argentina have a relatively large production capacity to meet that demand and adding capacity, of course, is why they are burning the rainforest. The other consideration in addressing the topic of supplying China’s food needs is to take into account the number of plants around the world that have been acquired by Chinese companies backed by the Chinese government.
Q. It is extremely difficult to regain lost markets. Can American agriculture reclaim what's gone?
A. American agriculture is the most efficient producer of food in the world. In a free trade environment that is fair with mutual or shared goals for all parties, I am convinced that we can compete. This includes capturing or regaining any lost market share that may result from Trump’s hardline stance to bring China in line with a trade agreement that is consistent our best interests, not just theirs.
Since China was admitted into the World Trade Organization (WTO), it has consistently not been held accountable to the rules of global trade under WTO. This has been documented in a report issued by the Office of the U.S. Trade Representative years prior to the Trump Administration.
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