Many farm operators are patiently waiting for the prolonged winter weather to improve so they can begin to focus on spring planting. However, a more pressing matter to the future of many farm operations has risen: the increasing rhetoric and threats surrounding potential tariffs on goods and services that are traded between the United States and China.
The U.S. agriculture industry is particularly concerned — especially crop and livestock producers in the Midwest. While the U.S. has a large overall trade deficit with China and other countries, trade on agricultural products is one area where the U.S. has a trade surplus.
For the past few decades, China's economy has grown rapidly and the financial condition for mainstream residents has improved. As a result, the Chinese people have changed their diets, eating more protein, which has resulted in China importing more agricultural products — pork, beef, soybeans, corn, sorghum, wheat, fruits, nuts and more — from the U.S. and other countries.
The potential Chinese tariff on U.S. soybeans could have one of the biggest financial impacts on U.S. farmers. Currently, the U.S. exports about half of the annual soybean production, with China accounting for about 60 percent of the total U.S. soybean exports. Nearly one-third of annual U.S. soybean production is exported to China, with those exports totaling nearly $14 billion in 2017.
China also accounts for about 80 percent of U.S. sorghum exports, as well as smaller amounts of corn and wheat. China does import some ethanol and DDG’s from the U.S., which could be affected by the added tariffs.
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After the Chinese announcement about potential soybean tariffs, soybean futures on the Chicago Board of Trade were down more than 50 cents per bushel, but prices have stabilized since then. Soybean producers worry about the potential market price impacts if China were to actually implement its proposed additional 25 percent tariff on U.S. soybeans.
Some grain-trading experts say the timing of these threats toward U.S. soybean imports are favorable to the Chinese, because China usually imports a higher percentage of soybeans from South America during the spring and summer. Soybean imports from the U.S. into China usually increase in the fall, when the U.S. soybean harvest occurs.
Most of the soybeans imported by China are processed into soybean meal, which is fed to livestock. Many experts do not think that China can buy enough soybeans from South America and other parts of the world to meet their annual demand.
USDA estimates soybean ending stocks at the end of the 2017-18 marketing year to be more than 500 million bushels, the most in more than a decade. Any significant reduction in soybean exports to China in the next year would likely cause those carryover estimates to increase, which would put more pressure on soybean market prices. Of course, the number of planted soybean acres in the U.S. this year, along with the yield, also will impact the soybean supply and ending carryover level.
According to the National Pork Producers Council, China was the third-largest destination for U.S. pork, trailing only Canada and Mexico. U.S. pork exports to China totaled approximately $1.1 billion in 2017; however, U.S. pork exports to China have been declining in recent years, because of China’s increased domestic hog production, and more imports from the European Union. Hog prices have declined since the announcement of the additional Chinese tariffs on U.S. pork, but part of that has been caused by increasing hog numbers and pork supplies in the U.S.
What is frustrating for many farm operators is that soybean production has been more profitable than raising corn in the past couple of years, and soybeans are projected to be more profitable again this year.
According to farm business management data for western and southern Minnesota, soybeans showed an average profit of $28.11 per acre in 2017 and $84.82 per acre in 2016, as compared to negative average profit margins for corn of ($36.75) per acre in 2017 and ($55.36) per acre in 2016. Hog producers also showed positive profit margins in 2017 and 2016. According to the farm management data, combination crop and hog farms had the highest average net farm income level in 2017.
A trade war between the U.S. and China would likely have a serious economic impact on both countries. Farm operators, agricultural suppliers and rural communities in the Midwest would likely be especially hard-hit. Fortunately, it has mainly been threats thus far, and trade negotiations between the two countries are continuing.
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The agriculture industry is hoping that a workable agreement can be reached before the situation escalates into a full-fledged trade war.
