As the bitter reality of a seemingly never-ending and possibly-expanding trade war crashes down on the farm sector it’s useful – albeit sobering – to think about the economic consequences and impacts.

Exports see

huge decrease

Although it’s difficult to say exactly when the trade war with China began, the U.S. farm economy has clearly felt its impacts. The most notable of those impacts began officially in July 2018 when China imposed a 25 percent retaliatory tariff on soybeans imported from the United States.

But the reach of the trade war extends well beyond soybeans. For reference the value of total U.S. exports to China in 2017 – pre-trade war – was almost $130 billion. Agricultural exports accounted for about 15 percent of total U.S. exports to China that year.

Figure 1 shows the value of annual U.S. ag exports to China since 2000. As we said in an earlier post, the chart shows two stories – the boom in ag exports during the farm-economy expansion, and then the trade-war impact. From the early 2000s to 2012-2013, exports to China increased at an incredible pace. Weak commodity prices from 2014 to 2017 translated in a decreased value of exports to China. That’s one of the challenges of using the value of exports to measure activity.

Take note at the change from 2017 to 2018. The value of total ag exports to China in 2017 was about $19 billion. Ag exports to China in 2018 decreased by more than 50 percent, to $9 billion. Thinking about 2019, one must wonder how depressed the value of ag exports to China might become should the trade war last through the full calendar year.

Soybeans have received much of the attention in the trade war because China is such an important market for soybeans. Figure 2 shows two measures of soybean exports – total bushels exported in blue and bushels exported to China in orange. Soybean exports to China pre-trade war had been at or more than 1 billion bushels annually since 2014.

China since 2009 has accounted for more than half of all U.S. soybean exports. In 2018, exports to China fell to 300 million bushels, levels last observed pre-2003. The change from 2017 to 2018 was a 74 percent decline.

While the U.S. increased exports to other countries, total export activity slumped since the trade war began. After more than 2 billion bushels of exports in 2016 and 2017, total soybean exports in 2018 were 1.7 billion bushels. That’s a 16 percent decline from 2017.

The sharp contraction in soybean exports certainly has the makings of an adverse demand shock. The question is how long this will be sustained.

Commodity-prices outlook not good

Figure 3 shows the average monthly price farmers received for their soybeans sold. As the realities of the trade war and a large U.S. soybean crop became evident, soybean prices decreased from the $9.50 per bushel and more prices in the spring to about $8.50 per bushel since August 2018.

Depressed soybean prices are a reflection of burdensome ending stocks. Figure 4 shows U.S. soybean ending stocks relative to use since 1990-1991. While the stocks-to-use ratio was averaged about 9 percent through the time period, stocks are currently at well more than those levels. For the crop harvested this past fall in the 2018-2019 marketing year, stocks are at 25 percent of use. For the crop being planted now for the 2019-2020 marketing year, the current forecast is for a stocks-to-use ratio of 23 percent. To put that in perspective, U.S. soybean stocks prior to the trade war exceeded 20 percent of use only three times since 1960.

It’s certainly difficult to argue that trade-war impacts on corn were a penny a bushel – the 2018 Market Facilitation Payment rate – when indirect impacts are considered. That’s to say producers were likely to plant more acres of corn given the bleak soybean outlook. When the prices of one commodity are depressed that has a way of working into other commodities. That’s essentially what we have been arguing about wheat for some time. Depressed prices of wheat have created a search for alternatives, thereby depressing prices of other commodities. Now soybeans are playing that role.

Figure 5 shows the USDA’s forecasted corn stocks-to-use ratio for 2019-2020. Corn had been maintaining stocks at about the average of 14 percent. But current forecasts – due to a large increase in acres planted – is that corn ending stocks could approach 17 percent of use. If realized that would be the most inflated level since the early 2000s. That is of course before the impact of the terrible planting season has been accounted for. But the weather causing that is clearly independent of the trade war.

The reality of the situation is that poor soybean prices – and returns – lead producers to plant alternative crops. That is effectively pushing soybean problems onto corn, wheat and other crops.

Farm income lousy

There is no way around it. The farm economy is struggling. After coming off the boom-era numbers, aggregate net farm income since 2016 has been lousy. Farm income in 2018 was $64 billion, the worst in recent years. That was in spite of $5.2 billion of the 2018 Market Facilitation Payments being allocated to the 2018 calendar year.

Some comfort can be taken from the fact that farm income hasn’t decreased to levels observed and sustained during the farm financial crisis of the 1980s. But farm income since 2016 has been painfully bad and is at levels that erode farm financial conditions. U.S. net farm income is a long way from the $80 billion – or so – that will be needed to provide stability. Furthermore it’s doesn’t seem like we’ll have that in 2019.

Big Picture not pretty

Colleagues at Purdue University this past summer conducted research looking at the big-picture impacts of the 25 percent tariff China placed on U.S. soybeans. That research used what is known as a general equilibrium model and considers alternative scenarios. It’s important to recognize that the work is not a forecast about the future.

But it provides a method for us to measure the impacts of the single event.

  • U.S. soybean exports to China decreased substantially, but didn’t go to zero. The research estimates the decline to range from 48 percent to 91 percent less.
  • Total U.S. soybean exports decrease. The rest of the world will not compensate for all the losses to China.
  • China’s total imports of soybeans decreases.
  • U.S. soybean production declines, from 11 percent to 15 percent.
  • Brazilian production of soybeans increases by 9 percent to 15 percent.

Brazil is the only one that wins. Economic losses for the United States of $2.2 to $2.9 billion annually and for China at $1.7 to $3.4 billion annually create a gain for Brazil. Brazil has an uptick in economic well-being of $1.5 billion to $2.8 billion annually.

Wrapping it Up

The impacts of the trade war on the farm economy are substantial. The recent announcement of another round of trade aid to U.S. producers will provide some help. But program details are to date unknown and perhaps a moving target. While the government payments will provide some relief they will not solve all the problems that have been created by the trade war. Exacerbating the problem would be an outbreak of tariffs with Mexico – which is where we seem to be headed.

Combined with strong soybean production in 2017 and 2018, the United States is facing burdensome ending stocks, depressed commodity prices and weak farm income. China is by far the world’s most important importer of soybeans and an important market for a number of other agricultural commodities.

Without Chinese purchases, it will be extremely difficult to shrink the soybean balance sheet without significantly fewer acres and/or a crop failure. Without a crop failure, that will almost certainly be accomplished through soybean prices that are depressed enough so as to discourage production.

Looking a bit longer term, the prospects of a continuing trade war with China – one that continues beyond 2019 – have seemingly increased. If that happens the impacts on U.S. agriculture will be profound. The depressed prices that would be required to shrink soybean acres would result in producers significantly increasing acres of other crops, most notably corn. As one might expect, that will also have negative impacts on corn prices.

At this point there is great uncertainty about the trade wars, but also regarding the prospects for crop yields in 2019. The presence of that potential supply shock is helping to mitigate the negative demand shock associated with the trade wars. How long either continue is uncertain at this point. We can only hope the trade wars will find resolution sooner rather than later. If they continue beyond this year, the government will need to be prepared to deal with again making major trade-aid payments or seeing the agricultural economy sink.

Visit ageconomists.com for more information.

Trade war takes crops as victims

Brent Gloy and David WidmarAgricultural Economic Insights

As the bitter reality of a seemingly never-ending and possibly-expanding trade war crashes down on the farm sector it’s useful – albeit sobering – to think about the economic consequences and impacts.

Exports see huge decrease

Although it’s difficult to say exactly when the trade war with China began, the U.S. farm economy has clearly felt its impacts. The most notable of those impacts began officially in July 2018 when China imposed a 25 percent retaliatory tariff on soybeans imported from the United States.

But the reach of the trade war extends well beyond soybeans. For reference

the value of total U.S. exports to China in 2017 – pre-trade war – was almost $130 billio

n. Agricultural exports accounted for about 15 percent of total U.S. exports to China that year.

Figure 1 shows the value of annual U.S. ag exports to China since 2000. As we said in an earlier post, the chart shows two stories – the boom in ag exports during the farm-economy expansion, and then the trade-war impact. From the early 2000s to 2012-2013, exports to China increased at an incredible pace. Weak commodity prices from 2014 to 2017 translated in a decreased value of exports to China. That’s one of the challenges of using the value of exports to measure activity.

Take note at the change from 2017 to 2018. The value of total ag exports to China in 2017 was about $19 billion. Ag exports to China in 2018 decreased by more than 50 percent, to $9 billion. Thinking about 2019, one must wonder how depressed the value of ag exports to China might become should the trade war last through the full calendar year.

Figure 1. Value of Total U.S. Ag Exports to China, 2000 – 2018. Data Source: USDA Global Agricultural Trade System

Soybeans have received much of the attention in the trade war because China is such an important market for soybeans. Figure 2 shows two measures of soybean exports – total bushels exported in blue and bushels exported to China in orange. Soybean exports to China pre-trade war had been at or more than 1 billion bushels annually since 2014.

China since 2009 has accounted for more than half of all U.S. soybean exports. In 2018, exports to China fell to 300 million bushels, levels last observed pre-2003. The change from 2017 to 2018 was a 74 percent decline.

While the U.S. increased exports to other countries, total export activity slumped since the trade war began. After more than 2 billion bushels of exports in 2016 and 2017, total soybean exports in 2018 were 1.7 billion bushels. That’s a 16 percent decline from 2017.

The sharp contraction in soybean exports certainly has the makings of an adverse demand shock. The question is how long this will be sustained.

Figure 2. U.S. Soybean Exports, total in blue and to China in orange, 2000- 2018. Data Source: USDA Global Agricultural Trade System

Commodity Prices Outlook

Figure 3 shows the average monthly price farmers received for their soybeans sold. As the realities of the trade war and a large U.S. soybean crop became evident, soybean prices decreased from the $9.50 per bushel and more prices in the spring to about $8.50 per bushel since August 2018.

Figure 3. U.S. Farm-Level Soybean Prices, monthly, Jan 2017- March 2019. Data Source: USDA Global Agricultural Trade System

Depressed soybean prices are a reflection of burdensome ending stocks. Figure 4 shows U.S. soybean ending stocks relative to use since 1990-1991. While the stocks-to-use ratio was averaged about 9 percent through the time period, stocks are currently at well more than those levels. For the crop harvested this past fall in the 2018-2019 marketing year, stocks are at 25 percent of use. For the crop being planted now for the 2019-2020 marketing year, the current forecast is for a stocks-to-use ratio of 23 percent. To put that in perspective,

U.S. soybean stocks prior to the trade war exceeded 20 percent of use only three times since 1960.

Figure 4. U.S. Soybean Endings Stocks to Use Ratio, 1990-1991 to 2019-2020. Data Source: USDA’s Production, Supply and Distribution. Average from 1990-1991 – 2018-2019 – 9.3 percent; 2019-2020F – 23.1 percent.

It’s certainly difficult to argue that trade-war impacts on corn were a penny a bushel – the 2018 Market Facilitation Payment rate – when indirect impacts are considered. That’s to say producers were likely to plant more acres of corn given the bleak soybean outlook. When the prices of one commodity are depressed that has a way of working into other commodities. That’s essentially what we have been arguing about wheat for some time.

Depressed prices of wheat have created a search for alternatives, thereby depressing prices of other commodities.

Now soybeans are playing that role.

Figure 5 shows the USDA’s forecasted corn stocks-to-use ratio for 2019-2020. Corn had been maintaining stocks at about the average of 14 percent. But current forecasts – due to a large increase in acres planted – is that corn ending stocks could approach 17 percent of use. If realized that would be the most inflated level since the early 2000s. That is of course before the impact of the terrible planting season has been accounted for. But the weather causing that is clearly independent of the trade war.

The reality of the situation is that poor soybean prices – and returns – lead producers to plant alternative crops. That is effectively pushing soybean problems onto corn, wheat and other crops.

Figure 5. U.S. Corn Endings Stocks to Use Ratio, 1990-1991 to 2019-2020. Data Source: USDA Production, Supply and Distribution. Average from 1990-1991 – 2018-2019 – 13.9 percent. 2019-2020F: 16.9 percent.

Farm income lousy

There is no way around it. The farm economy is struggling. After coming off the boom-era numbers, aggregate net farm income since 2016 has been lousy. Farm income in 2018 was $64 billion, the worst in recent years. That was in spite of $5.2 billion of the 2018 Market Facilitation Payments being allocated to the 2018 calendar year.

Some comfort can be taken from the fact that farm income hasn’t decreased to levels observed and sustained during the farm financial crisis of the 1980s. But farm income since 2016 has been painfully bad and is at levels that

erode farm financial conditions

. U.S. net farm income is a long way from the $80 billion – or so – that will be needed to provide stability. Furthermore it’s doesn’t seem like we’ll have that in 2019.

Figure 6. Real Net Farm Income, 1929 – 2019 where 2019 equals 100. Data Source: USDA’s Economic Research Service

.

Big Picture not pretty

Colleagues at Purdue University this past summer conducted research looking at the big-picture impacts of the 25 percent tariff China placed on U.S. soybeans. That research used what is known as a general equilibrium model and considers alternative scenarios. It’s important to recognize that the work is not a forecast about the future.

But it provides a method for us to measure the impacts of the single event.

U.S. soybean exports to China decreased substantially, but didn’t go to zero. The research estimates the decline to range from 48 percent to 91 percent less.

Total U.S. soybean exports decrease. The rest of the world will not compensate for all the losses to China.

China’s total imports of soybeans decreases.

U.S. soybean production declines, from 11 percent to 15 percent.

Brazilian production of soybeans increases by 9 percent to 15 percent.

Brazil is the only one that wins. Economic losses for the United States of $2.2 to $2.9 billion annually and for China at $1.7 to $3.4 billion annually create a gain for Brazil. Brazil has an uptick in economic wellbeing of $1.5 billion to $2.8 billion annually.

Wrapping it Up

The impacts of the trade war on the farm economy are substantial. The recent announcement of another round of trade aid to U.S. producers will provide some help. But program details are to date unknown and perhaps a moving target. While the government payments will provide some relief they will not solve all the problems that have been created by the trade war. Exacerbating the problem would be an outbreak of tariffs with Mexico – which is where we seem to be headed.

Combined with strong soybean production in 2017 and 2018, the United States is facing burdensome ending stocks, depressed commodity prices and weak farm income. China is by far the world’s most important importer of soybeans and an important market for a number of other agricultural commodities.

Without Chinese purchases, it will be extremely difficult to shrink the soybean balance sheet without significantly fewer acres and/or a crop failure. Without a crop failure, that will almost certainly be accomplished through soybean prices that are depressed enough so as to discourage production.

Looking a bit longer term, the prospects of a continuing trade war with China – one that continues beyond 2019 – have seemingly increased. If that happens the impacts on U.S. agriculture will be profound. The depressed prices that would be required to shrink soybean acres would result in producers significantly increasing acres of other crops, most notably corn. As one might expect, that will also have negative impacts on corn prices.

At this point there is great uncertainty about the trade wars, but also regarding the prospects for crop yields in 2019. The presence of that potential supply shock is helping to mitigate the negative demand shock associated with the trade wars. How long either continue is uncertain at this point. We can only hope the trade wars will find resolution sooner rather than later. If they continue beyond this year, the government will need to be prepared to deal with again making major trade-aid payments or seeing the agricultural economy sink.

Brent Gloy and David Widmar are agricultural economists with Agricultural Economic Insights.