Why Even a Tweet Can Damage Midwestern Agriculture

By John Hensley

Please note that all opinions / viewpoints are the author's own and not necessarily those of his current or former employers or Thunderbird / ASU.

“And ye shall hear of wars and rumours of wars: see that ye be not troubled: for all these things must come to pass, but the end is not yet.”  -- Matthew 24:6

This Biblical verse was meant as a reassurance to early believers, but in this day and age even the rumor of a trade war has already had significant negative consequences for Midwestern agricultural producers. Among the clearest examples is the impact on soybean prices. Soybeans are a major commodity for most Midwestern states and, in fact, are the No. 1 or No. 2 crop in most Corn Belt states (corn and soybeans are typically grown in rotation).

Like corn, soybean prices are based on futures contracts that are traded daily on the Chicago Board of Trade (CBOT). And like any commodity or stock exchange, the market moves in anticipation of future events. This is why pronouncements of increased tariffs on products from major trading partners and the prospect of retaliation have an immediate effect on prices, even if the pronouncement is just a tweet in the middle of the night and no official action or retaliation has taken place yet.

Of course the basic fundamentals of supply and demand underlie market trends, and the Aug. 10 report from the USDA on World Agricultural Supply and Demand Estimates (WASDE) added to the bearish sentiment. The report estimated higher soybean yields at 51.6 bushels per acre, up from the July estimate of 48.5 bushels (3.47 and 3.26 metric tons per hectare, respectively).  

This boost in supply coupled with the loss of future exports to China and possibly other markets will result in an estimated increase in soybean stockpiles to 785 million bushels (21.36 million metric tons) which pushed prices down 43 cents per bushel or nearly 5% on the day of the report. Prices for the two major derivatives of commodity soybeans, meal and oil, likewise fell.  

[[{"fid":"63599","view_mode":"default","fields":{"format":"default","field_file_image_alt_text[und][0][value]":"Trade war and soybeans","field_file_image_title_text[und][0][value]":"Trade war and soybeans"},"link_text":null,"type":"media","field_deltas":{"2":{"format":"default","field_file_image_alt_text[und][0][value]":"Trade war and soybeans","field_file_image_title_text[und][0][value]":"Trade war and soybeans"}},"attributes":{"alt":"Trade war and soybeans","title":"Trade war and soybeans","height":"620","width":"1018","class":"media-element file-default","data-delta":"2"}}]]

Why Soybeans Matter

Soybean meal is primarily used as a protein source in livestock feeds such as for pork and poultry. As such, exports of pork and poultry are in effect a value-added export of inputs such as soybeans and corn. Thus the loss of major pork export markets such as China and possibly Mexico will impact not only pork and poultry producers but will also further impact the corn and soybean producers who supply them.

These effects ripple through the local and regional economies and a recent study by the Commercial Agriculture Program at the University of Missouri Cooperative Extension Service found that for every 10 cent drop in soybean prices there is a corresponding loss of $36.3 million in economic activity statewide.  

Over the course of the dispute with China, the overall drop has been around $2 per bushel, much of which occurred well before the retaliatory 25% tariff went into effect. This drop thus results in a $726 million reduction in economic activity for Missouri alone.  

The economic damage will be greater in states that produce the greatest amount of soybeans, such as Illinois, Iowa, Nebraska, etc. Somehow, the $12 billion relief package offered by the administration doesn’t look in any way adequate. And farmers overwhelmingly would prefer to market their crops at a profitable price rather than receive a one-time bailout in compensation for a crisis that was avoidable to begin with.

Losing Access to China Overnight

Although producers often employ risk management tools such as futures and options to hedge against price volatility, such measures add to overall costs and by no means do all farmers use hedging to cover the price risk on their entire crop each year.  

Furthermore, gaining access to and developing demand in markets such as China has taken decades of effort by the U.S. government and agricultural commodity groups. To lose practical access to the biggest market for U.S. soybeans almost overnight is not something that can simply be reversed in a similar timeframe. Regaining not only practical access but market share will be even more difficult going forward, with major competitors such as Brazil eager to profit from U.S. actions or even threats of actions.

Finding Alternative Markets Won’t Come Easy

Likewise finding alternative markets such as the EU will be much easier said than done. EU total soybean imports from all sources are only one-sixth the volume of China’s total imports (15.3 and 95 million metric tons, respectively). Furthermore, the EU is a mature market lacking the future growth potential of China and with its own priorities involving agricultural policy and markets. The USDA reports that oilseed processors in Europe are already running at near full capacity, thus limiting the potential for increased imports of U.S. soybeans.  

Adding to the downside for agriculture in the Midwest and nationwide is the continued uncertainty over the future of NAFTA. Although China has surged to become the largest market for U.S. agricultural exports at $26 billion last year, Canada is close behind at $24.6 billion and Mexico is third with $19.5 billion. Thus our NAFTA partners combined purchase almost 70% more in U.S. agricultural exports than China.

Midwestern Agriculture already a Casualty of War

On top of lower prices for their crops, Midwestern producers are also faced with higher prices for farm equipment, the predictable result of the U.S. tariffs on steel and aluminum, which provoked many of the current trade disputes.

The negotiation of intellectual property protections with China or modernization of trade agreements such as NAFTA may eventually achieve desirable outcomes, but only if done in a coherent manner rather than in a series of bellicose tweets. The trade wars or rumors thereof may pass, and administration officials have urged patience, but for Midwestern agriculture much of the damage has already been done. 

Author's Bio

John Hensley is a 1990 graduate of Thunderbird and has worked 20+ years in trade development and export promotion, including 14 years in the agribusiness sector. During this time he has conducted trade development projects on six continents dealing with products such as feed & grain, identity-preserved crops, and forest products.

He is a native of Gentry County, Missouri and a graduate of William Jewell College, where he majored in History and International Relations, as well as studying overseas in Córdoba, Spain.

In addition to international trade, he has 5 years’ experience in the renewable energy sector. He can be reached at johnhensley@global.t-bird.edu