How Trump's Trade Fight Risks Upending Global Agriculture Flows
(Bloomberg) -- U.S. President Donald Trump could be about to reshape what global agricultural commodity trading will look like in the years to come.
The trade fight he’s picking with nations from China to Mexico has already roiled food markets, and will escalate further if he slaps tariffs on $34 billion of Chinese goods as planned on Friday -- something the Asian country has vowed to retaliate against.
The U.S. is a key cog in global agriculture trading, and about two-thirds of its farm exports are shipped to nations it’s in trade disputes or talks with, according to farm lender CoBank. Mexico and the European Union have already imposed some trade barriers on American products, and shipments of U.S. soybeans have been redirected away from China. U.S. markets will probably be hardest hit by a trade war, which could see flows of everything from pork to cotton to grains rerouted around the world.
“We’re picking a fight with our trading partners when they have options,” Tanner Ehmke, a manager and economist at Greenwood Village, Colorado-based CoBank, said by phone. “That doesn’t bode well for us.”
Here’s what could change in some of the most impacted markets:
The oilseed, used to make cooking oil and animal feed, accounts for about 60 percent of the U.S.’s $20 billion of agricultural exports to China. If China retaliates with 25 percent tariffs, American shipments may drop by $4.5 billion, according to a study by the University of Tennessee.
Brazil is set to be the biggest winner, filling the gap left by the U.S. The world’s top exporter is already seeing the benefits, with the premium Brazilian supplies command over Chicago futures doubling. Still, China’s annual demand of almost 100 million metric tons is so big that Rabobank International foresees the nation continuing to buy as much as 15 million tons from the U.S.
“Once we have some sort of certainty this Friday, the market might sort of wake up and realize that trade flows will start to reroute themselves in time and the broad global demand picture doesn’t change too much,” said Tracey Allen, an analyst at JPMorgan Chase & Co.
The trade merry-go-round could see Brazil maximizing lucrative soybean exports to China, and importing from Argentina the meal it typically makes from domestically grown beans in order to meet its needs, Allen said. That could spur Argentina to buy more U.S. soybeans.
On the other hand, expensive Brazilian supplies could allow the U.S. to gain market share in Europe. The U.S. could become the top soybean supplier to the EU next season, according to Rabobank.
As Chinese crushers’ costs rise, companies like Wilmar International Ltd., which has several plants in China, are taking a hit. Its shares are down 7.3 percent in the past month in Singapore.
China, the world’s top pork producer and consumer, relies heavily on soybean meal to feed animals. Higher soy prices will raise costs for China’s pigmeat industry, the Organisation for Economic Cooperation and Development and the United Nations said this week. That could help lead to “noticeable” increases in domestic pork prices and may spur China to turn to supplies from the EU, Canada and Brazil, it said.
U.S. pork faces the biggest risk from trade disruptions because its output has surged after new slaughterhouses opened, CoBank said. Mexico has imposed retaliatory tariffs on U.S. pork and China began targeting it in March.
A U.S.-China dispute earlier this year over sorghum already halted shipments. China accounted for 80 percent, or almost $1 billion of U.S. exports last year. The spat could lead China to draw down its corn inventories and boost imports of other feed grains, notably barley, according to the OECD and the UN.
“We should anticipate heightened corn demand into China not only as a result of a reduction in U.S. sorghum exports, but also as a result of high domestic soybean meal prices,” JPMorgan’s Allen said. “Heightened trade flows of corn from Ukraine to China should be anticipated this year.”
The sorghum feud meant many cargoes had to be redirected and U.S. agribusiness giant Archer-Daniels-Midland Co. will see a hit of $30 million in the second quarter. Spain, the EU’s biggest grain importer, could be among those to benefit from cheap U.S. supplies.
Losing the Chinese market would be a big deal to American farmers, with more than $900 million of the fiber going to the Asian country last year.
One country that could fill the gap in supply to China is India, where a weaker rupee is making cotton more attractive. Australia and Brazil also offer similar cotton grades and could help meet a looming shortage of high-quality fiber. But China will still need to buy some U.S. cotton because alternative supplies are limited, Rabobank said.
With tariffs being bearish for U.S. futures, prices will probably fall to 76 cents a pound in the fourth quarter, from about 83 cents now, Rabobank predicts.
The U.S. accounts for 55 percent of whey shipments into China, which relies almost entirely on imports, meaning no other nation can supply enough, according to Rabobank. Tariffs will burden U.S. producers and China’s animal feed sector, the biggest user of imported whey.
Dairy has also become an issue in Mexico, the largest market for U.S. dairy, and farm groups have warned that a 25 percent tariff on cheese will curb American exports. Trump has also repeatedly called out Canada’s dairy policies as being unfair to U.S. farmers, which could prove another issue in trade negotiations.
©2018 Bloomberg L.P.