Farmers vs. Tariffs: How Trump’s Policies Are Reshaping Agriculture

Key Concepts

• Global Soybean Market Dynamics: The traditional flow of soybeans from the US to China during August-January, followed by China's shift to Southern Hemisphere suppliers (Brazil, Argentina) from January onwards.
• China's Current Soybean Procurement: A significant departure from historical patterns, with China purchasing no soybeans from the new US crop and no immediate shipping plans.
• US Soybean Export Dependence on China: Approximately half of US soybean exports go to China, representing one in four tons of US soybean production.
• Southern Hemisphere Dominance: Brazil and Argentina are currently supplying China's soybean needs, even during periods when they typically sell less.
• US Domestic Market Expansion: Efforts to increase domestic consumption of soybeans, particularly in the renewable diesel market.
• Price Competitiveness: US soybeans are currently priced lower than Brazilian soybeans, attracting some international buyers but not enough to offset China's reduced purchases.
• Impact on Farmers: Low soybean prices, coupled with high input costs (fertilizer), are squeezing margins for both small and large farms.
• Farm Structure in the US: The majority of US soybeans are produced by large family farms, not large agro-business conglomerates.
• Government Bailout Packages: Past US government interventions (2018-2019) provided financial compensation to farmers but did not address long-term market share losses.
• Brazil's Increased Market Share in China: Brazil has significantly increased its share of China's soybean imports, growing from 45% pre-trade war (2018) to around 70% currently, while US share has dropped from 40% to 20%.

Shifting Global Soybean Market and China's Procurement

Joseph Gla, Senior Research Fellow at the International Food Policy Research Institute, discusses the significant shifts in the global soybean market, particularly concerning China's purchasing behavior. Traditionally, the US exports soybeans to China from August through January. Following this period, China typically shifts its sourcing to the Southern Hemisphere, primarily Brazil, and to a lesser extent, Argentina.

However, this year marks a substantial departure. China has purchased no soybeans from the current US new crop, and there are no immediate plans for shipping. This is a stark contrast to previous years, where China would purchase between 10 to 12 million tons during this period. This represents a significant disruption, as China accounts for approximately half of the US soybean export market, meaning about one in every four tons of US-produced soybeans historically went to China.

China's Alternative Sourcing and Potential for US Re-engagement

In the interim, Chinese buyers are sourcing their soybeans heavily from South America. While this is typically a period when South American countries sell less, Brazil has been shipping substantial volumes, and China has also bought significantly from Argentina. These countries are reportedly selling nearly all their produced soybeans, and in some cases, reducing sales to other trading partners to meet China's demand. While the US has picked up some of this slack from other buyers, it has not compensated for the loss of the Chinese market.

Gla suggests that a potential path back for US soybeans to the Chinese market exists, contingent on the resumption of normal trade relationships between the US and China. However, this is not currently the case.

US Domestic Market and Farmer Challenges

In response to the reduced export demand, US farmers are exploring ways to expand the domestic market. One significant outlet is the renewable diesel market, which utilizes soybean oil for fuel production. This industrial use has grown considerably, especially since the last trade war with China.

Furthermore, US soybeans are currently priced very low relative to Brazilian soybeans. This price competitiveness has led to some other countries increasing their purchases from the US, but it's not sufficient to offset the loss of the Chinese market. This price disparity is a primary reason for the low soybean prices observed in the US.

The low prices and high input costs, particularly for fertilizer, are creating significant financial pressure on farmers. Margins have shrunk considerably over the last three years, with agricultural prices declining generally, independent of the US-China trade war. Gla notes that these price pressures affect both small and large farmers, with the impact often depending on a farm household's debt levels and reliance on farm income. He clarifies that the majority of US soybean production comes from large family farms, rather than massive agro-business conglomerates.

Outlook for US Soybean Exports and Long-Term Market Share

Looking ahead to next year, the outlook for US soybean exports remains challenging. Farm incomes are depressed. The US administration has discussed providing bailout packages for farmers to compensate for trade losses, similar to the $23 billion spent in 2018 and 2019.

However, Gla points out a critical flaw in these past compensation measures. While they may have provided short-term financial relief, they did nothing to address the longer-term losses, specifically the loss of market share. During the 2018-2019 trade war period, the US planted fewer soybeans, which allowed Brazil to significantly increase its market share in China.

Prior to the 2018 trade war, Brazil accounted for approximately 45% of China's soybean imports, with the US supplying another 40%. Currently, Brazil's share has risen to around 70%, while the US share has fallen to about 20%. Despite China's overall import growth during this period, almost all of that growth has been absorbed by Brazil, to the detriment of US farmers.

Conclusion

The current global soybean market is characterized by a significant disruption in US-China trade, leading to a substantial loss of market share for US soybeans. While domestic industrial uses and lower prices offer some relief, they are insufficient to compensate for the loss of the Chinese market. The long-term implications of this shift, particularly the increased market dominance of Brazil in China, pose a significant challenge for the US soybean industry and its farmers, highlighting the need for strategies that address market access and competitiveness beyond short-term financial aid.