Like Russia grain embargo of 1980s, China trade war again taking its toll on farmers

FARGO – The 1980s were a decade when one in four U.S. farms failed in the face of economic hardship.

While experts say today’s hardships for U.S. farmers aren’t as widespread or deep, there is a growing worry about the collateral damage of a trade war with China.

Government actions – both in the U.S. and abroad – effectively shot American farmers in the foot, leading to economic traumas in the 1980s. It seems to be doing the same today with its vast Chinese soybean market, says a North Dakota State University agricultural economist.

U.S. interventions backfired 40 years ago, and seem to be doing the same again.

In the 1980s, a partial embargo destroyed long-term commodities markets says William Wilson, a distinguished professor who advises numerous international companies in the U.S. and abroad. It was one of the factors that led to the credit crisis that spanned the decade of the 1980s. In North Dakota, the number of farms fell 10 percent from 1978 to 1982, and by 23 percent by 1992, when things started to turn around.

The Trump administration now has cast a pall on U.S. soybean exports to China with his trade war, Wilson says.

The 1980s crisis actually was set up in 1972, when the former Soviet Union made secret deals with five American grain companies to purchase 24.2 million tons of U.S. grain, worth $9.2 billion in 2019 dollars. U.S. farm income initially jumped from $2.3 billion in 1972 to $19.6 billion in 1973. Secretary of Agriculture Earl Butz famously toured the country to urge farmers to plant “fencerow-to-fencerow,” and to “get big or get out.”

In the late 1970s, the U.S. economy was suffering, with annual inflation rates going from a moderate 4% in 1972 to 12.3% in 1974 and then remained high, peaking at 13.3% in 1979 and 12.5% in 1980.

And then?

Global food fight

On Jan. 4, 1980, President Jimmy Carter, canceled 18.7 million tons of grain exports to the Soviet Union – a “partial” embargo – in response to the 1979 Soviet invasion of Afghanistan. The U.S. government paid $2.2 billion in 1980 dollars to compensate both farmers and grain companies for their losses.

Secretary of Agriculture Bob Bergland, a farmer from Roseau, Minn., who had represented the Minnesota ag heavy 7th District, was quoted as saying he couldn’t “sell” the Carter program to farmers, who had lost their wheat market. Bergland would remember Carter’s piercing, angry blue eyes at the suggestion the pain to agriculture might be more important than Carter’s “national security” issue.

Ronald Reagan, a Republican, was elected with farm support. In 1981, Reagan ended what he described as a toothless embargo.

Meanwhile, without a production control program, farmers produced burgeoning surpluse

Wilson says the Soviets quickly got their supplies elsewhere. The Russians expanded production and Russia now accounts for 50% of the world’s wheat production, taking away what were U.S. markets.

The impact on U.S. wheat farmers was permanent. Dakotas and Minnesota had shipped their big wheat crops through the Port of Duluth-Superior, declined precipitously.

Although Bergland later said the embargo got too much blame, it was widely described as one of the catalysts for a decade-long farm crisis. Grain income losses from 1981 to 1985 led to land value collapses from 30% to 70%, depending on the location. There were tractorcades, protests, bankruptcies, and farm loan debt forgiveness.

The Reagan administration instituted a “Payment-in-Kind” program, that gave farmers surplus grain if they’d plant less of it. This helped drive agricultural equipment companies, including Steiger Tractor Co. of Fargo, into bankruptcy in June 1986.

In the 1990s, enabled by wetter weather, government policies and plant genetics, farm production rebounded The 1996 “Freedom to Farm” program allowed farmers to pivot out of cereal crops like wheat and into crops like soybeans and corn.

With Asian (mostly Chinese) markets rising, farmers and companies built a rail and transportation system to the Pacific Northwest. The final fix for market prices was a Corn Belt drought in 2010, leading to higher prices through 2012.

U.S. exports of soybeans to China had been growing annually at a remarkable 18% per year, and was expected to increase until 2025, Wilson says.

But in 2018, the U.S. government intervened in markets again.

Intervention deja vu

The Trump administration chose tariffs to “threaten” China into rebalancing trade policies that he described as unfair to U.S. national interests, especially on intellectual property rights.

The Chinese retaliated with tariffs on U.S. agricultural products, specifically soybeans. Unlike the 1980s, the U.S. government this time may have “under-compensated” its farmers for the trade impacts, and didn’t compensate grain companies at all, Wilson says.

Wilson cites an article by Bloomberg in 2018 that indicated China couldn’t get along without U.S. soybeans. But – another surprise – China “quickly discovered and created numerous sources of supply.” They’d bought 80% to 90% of the Brazilian bean crop. They expanded purchases and dealings in Argentina, Uruguay, Paraguay, Ethiopia and Russia.

It shouldn’t have been a surprise because they’d just done the same thing with corn.

U.S. corn exports to China were increasing and were expected to hit more than 20 million tons per year by 2025. But in 2013, the Swiss company Syngenta started selling a genetically-modified corn variety trait in the U.S. before the Chinese approved it for import.

China’s large state-owned entities – COFCO and Sinograin – when hunting for news sources for corn. Chinese imports of U.S. corn went to “zero,” even though they had to pay $11 per ton more for it elsewhere, Wilson says.

The long game

Peter Frankopan, a British historian, in his 2019 book, “The New Silk Roads,” describes how Chinese President Xi Jinping in 2013 announced a “Belt and Road Initiative.” Frankopan details some of the $1 trillion in infrastructure investments worldwide, mainly in loans, to about 1,000 projects. Many have to do with the movement of food.

Wilson notes that U.S. soybean export trade in the Pacific Northwest, growing from 2 million to 20 million tons per year, has shrunk to 4 million tons. “We’re not going to return to normal because China is quickly learning that relying on us as a trade partner is not good,” Wilson says.

If the U.S. strikes a new deal on agriculture, Wilson is wary that it will not focus on the damage done to the soybean market. U.S. soybean prices markets have fallen, with North Dakota and northern states linked to the Pacific Northwest hit especially hard.

To recover Chinese markets, the U.S. will have to “convince them that they could rely on us as a supplier” but it’s “not so obvious they’re going to instantaneously walk away from their other suppliers,” Wilson says. Until the Chinese market returns, U.S. farmers are storing crops while other countries are selling.

Financially wounded farmers may try to shift more acres away from soybeans. They may send more through the Great Lakes, or down the Mississippi River. But federal payments to farmers may need to continue.

A “crop failure in one of the major producing countries of the world,” is the main thing that would help, I’m guessing,” Wilson says.

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