China Buying More U.S. Farm Goods Is a Dead End

(Bloomberg Opinion) -- With trade talks collapsing between the U.S. and China in Shanghai on Wednesday, there’s even less hope of any resumption in American farm exports, which were once portrayed as the foundation of any agreement.

That’s not good enough, according to President Donald Trump:

Had a trade detente materialized, those expecting a rapid return to the status quo on farm trade likely would have found themselves disappointed, anyway. The current tensions have dealt a lasting blow that could take decades to heal.

To understand why, consider Chinese Foreign Minister Wang Yi’s visit to Brazil last week. Relations between Beijing and Brasilia have been rocky ever since the election last year of President Jair Bolsonaro, a pro-Trump populist who has accused China of trying to buy Brazil and angered Beijing with a visit to Taiwan during his election campaign.

The tone from China has been conciliatory, though, even in the face of personal snubs, with Wang promising two meetings between Bolsonaro and President Xi Jinping later this year. That’s a remarkable display of pragmatism for a country that can be exceedingly prickly about its diplomatic dignity.

The best explanation for this is Beijing’s legendary anxiety about food security. China’s staple crops of rice, wheat and corn are protected with tariffs as high as 65% to ensure the country doesn’t become dependent on imports.  While Trump has been keen to increase farm revenues in the Republican-voting grain belt, his willingness to turn exports of U.S. technology into a bargaining chip naturally raises the prospect of Washington some day turning food supplies into a cudgel, too.

In recent decades, episodes when major commodity exporters threatened their trading partners often sparked the development of new supplies in other countries. The 1973 Arab oil embargo was the catalyst for the development of new oilfields in the North Sea, Alaska and Siberia. The fact that soybeans are grown in Brazil at all owes a great deal to another 1973 embargo, when President Richard Nixon sharply cut exports to Japan to prevent domestic supplies from running short.

Japanese investment was so crucial to developing Brazil’s Cerrado savanna for soybean in the following decades that one of the main local cultivars is named after Toshio Doko, a leading figure of Japan’s postwar industrialization.

The current trade tensions look to be extending the shift that Nixon started.

Back in May, the U.S. Department of Agriculture announced that Brazil was set to overtake the U.S. as a producer of soybeans in the current crop year. Since then, the devastation wreaked by flooding in the U.S. Midwest has increased South America’s lead. Traditionally, the two countries exported roughly equal quantities of soybeans; in the coming harvest, Brazil will ship about three metric tons of oilseeds for every two tons dispatched from American ports.

Agricultural companies are already moving to take advantage. Nutrien Ltd. will spend $200 million to $300 million a year over the next five years to build up its presence in Brazil, Chief Executive Officer Chuck Magro told Denitsa Tsekova of Bloomberg News on Tuesday. That pace of growth, equivalent to as much as a fifth of capital spending at current rates, is a remarkable shift for a company that’s historically had a minimal presence in the country. Revenues from external customers in Brazil came to just $112 million in 2018, about 0.6% of total third-party sales.

It’s a similar picture with Nutrien’s chief North American rival, Mosaic Co., which now gets a larger share of its revenue from Brazil than the U.S. following the acquisition of Vale SA’s fertilizer business last year: 

“While the trade war is certainly going to affect U.S. farmers, it created an opportunity for Brazilian farmers,” James O’Rourke, Mosaic’s chief executive officer, told an investor call in May. “China will get their grains and oilseeds and it’s just a matter of where those come from as opposed to whether they come. But clearly this trade war is not good for the U.S. farmer. I mean that is an absolute given.”

One might think that such a shift would strain the capacity of Brazil’s farmland, but it still has ample potential to increase production. Converting pastures used for feeding livestock into arable land for grains and oilseeds could add 43 million hectares in the Cerrado region where most of the country’s soybeans are grown, local grain producer SLC Agricola SA told an industry conference last year. That would increase the area under such crops by about half.

China’s main motivation in halting imports of U.S. farm produce has been trade retaliation, but don’t underestimate the way that temporary moves can become permanent. At present, Beijing may be hunting for alternative sources of nutrition to punish Washington. In the future, it could start doing so for its own sake. 

There's a small quota allowed in with lower levies, but it's rarely fully utilized and represents only a small fraction of overall demand.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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