What are the ramifications of a trade war with China? Just look at the corn and soybean prices of the last six weeks, says Joe Glauber, senior research fellow, International Food Policy Research Institute and former USDA chief economist.
Take a look at the November Soybeans chart:
And here is the December Corn chart:
Recently soybean prices have recovered a bit, after plunging in the last several weeks. Prices for commodities like soybeans, wheat, pork, beef, dairy, cotton, almonds and cherries have dropped so much that last week, USDA announced it would provide $12 billion in relief to farmers suffering financial harm from the trade tactics enacted by President Trump.
While some of the decline in corn and soybean prices can be attributed to record soybean acres and good crop conditions, Glauber says, it’s also due to the fact that one of every four acres of soybean production goes to China.
Even though the Chinese market is especially critical for soybeans, he says the ongoing trade uncertainty is also impacting corn, wheat and livestock markets.
“Things could get worse before they get better,” says Glauber, who spoke at the recent Agricultural Symposium, hosted by the Federal Reserve Bank of Kansas City. “In trade wars, there are no winners, only casualties. They aren’t easy to win.”
Even if the trade dispute continues with China, Glauber says, U.S. soybeans will find a home to be consumed. But, the long-run aspect is that it puts a lot of costs on an efficient transportation and logistics system that has taken decades to build.
Who will feed China’s appetite for soybeans?
“Brazil is going to take the Chinese market to the extent they can, but they can't take it all,” Wallace Tyner, agricultural economics professor at Purdue University, told AgriTalk host Chip Flory. “Brazil doesn't have enough soybeans to keep their own markets plus get the Chinese markets. Since they'll get 25% more, close to that, in China, they're going to focus on China, but then we'll take the markets they lose.”
While Brazil can’t immediately meet all of China’s soybean needs, if the tariffs stay in place for a significant amount of time, it would give Brazilian farmers a chance to increase their soybean acres, Glauber says.
“They have land they can expand into, and they can double-crop corn,” he says. “If this [trade situation] continues, we will see that. That will put more stress on Brazilian infrastructure and Brazilian farmers would have to build more storage facilities. A lot of little things like that that would add cost to the system. It will be a big disruption for a supply chain that has grown to be really efficient.”
Additionally, the Brazilian government imposed a rule change in late May that pushed up freight costs as much as 150%. That move will squeeze farmers’ profit margins and potentially halt soybean expansion.
The uncertainty around trade is weighing heavy on the already stressed agricultural sector, says Esther George, president and CEO, Federal Reserve Bank of Kansas City.
“To date, the impact of new tariffs on the broad economy has been minimal,” she says. “However, anecdotal reports from our business contacts suggest that some companies are taking a ‘wait and see’ approach to new capital spending due to uncertainty about future trade policies.”
Will this slow the U.S. economy, which has been firing on all cylinders? The verdict is still out.