The much-anticipated signing of the phase one deal with China did occur on Jan. 15, however, the final details leave some significant concerns for agricultural producers moving forward in whether a “win” is truly in store to rescue a stymied agricultural economy.
Promised $40 billion purchases could fall short.
According to U.S. Trade Representative fact sheets, “China has agreed to purchase and import on average at least $40 billion annually of U.S. food, agricultural, and seafood products, for a total of at least $80 billion over the next two years” and could add an additional $5 billion per year.
Veronica Nigh, economist at the American Farm Bureau Federation, explains in a recent market report that the “on average” component of the at least $40 billion gives China flexibility for different levels of imports in 2020 and 2021. After all, $1 billion and $79 billion and $40 billion and $40 billion both average to $40 billion.
Nigh adds that U.S. ag exports to China in 2017 were $19.5 billion. If U.S. ag exports in 2020 increase by the $12.5 billion minimum, that would mean that U.S. ag exports to China in 2020 will be at least $32 billion. If U.S. ag exports in 2021 increase by the $19.5 billion minimum, that would mean that U.S. ag exports to China in 2021 will be at least $39 billion. “If China only imports the minimum amount in 2020 and 2021, the total value of imports over the two-year period will be $71 billion,” Nigh shares.
Tariffs remain in place.
One primary concern is the retaliatory tariffs from China will continue on nearly 100% of U.S. ag exports, explains Nigh. The tariffs, despite the agreement reached Wednesday, will remain in place which could continue to place U.S. agricultural products at a competitive disadvantage.
The deal will cut the 15% tariffs on $120 billion of Chinese imports in half but leave 25% tariffs on an additional $250 billion of imports in place. The agreement prevented a planned tariff rate hike in October 2019 and a new round of tariffs in December 2019.
President Trump has specifically stated that the tariffs on $360 billion in products will remain in place as an enforcement mechanism. Though negotiations are expected to begin immediately, a 'Phase Two' agreement is not anticipated until after the U.S. elections, specifically no sooner than 10 months after Wednesday’s signing. Success of the negotiations will hinge on China's adherence to the Phase One Agreement.
Deal is short-term without a long-term strategy.
Because the agricultural purchases are ensured for just 2020 and 2021, the U.S. agricultural industry may receive some short-term relief, but a vulnerable, volatile market remains in the long haul, shares Karla Klingner, CEO of Palindromes Inc. “Even with trade assistance, U.S. farmers are incurring net losses and reduction of net worth,” Klingner adds.
“China is playing a long game and has built an aggressive strategy to reduce dependence on U.S. goods that not only includes bringing in more goods from South America of where China even controls some of its most critical infrastructure and ports but also expanding markets into Central Asia and Eastern Europe,” Klingner states.
Recapturing lost market share won’t occur overnight.
In order to properly consider whether $40 billion is achievable, Nigh explains it’s important to understand how the U.S. fits in China’s overall ag import landscape. From that perspective, the U.S. is a top-five supplier of ag imports to China but has not been the top exporter since 2016.
In 2018, Brazil, the EU-28, the United States, Australia, Canada, New Zealand, Argentina, Indonesia, Thailand and Vietnam accounted for 82% of China’s lucrative $124 billion ag import market. The rest of the world split the remaining 18%. If December exports (which won’t be released until Feb. 5) reach $2 billion, U.S. ag exports to China in 2019 would reach approximately $14.3 billion – up $5.1 billion, or 56%, from the previous year. And so the big jump to $40 to $50 billion remains in question.
“In order to achieve this level of ag exports, the U.S. will have to win market share away from other competitors and the product mix may be different from what the U.S. has exported in the past. Market share will be won on a product-by-product basis, with different competitors for each product,” Nigh says.
Price still matters, and China can control that.
The agreement recognized that China and the United States realize that purchases are to be made at market prices based on commercial considerations and that market conditions may dictate the time of year that agricultural purchases are made within any given year.
Klingner says these provisions allow prices to be heavily influenced by China, “especially when China already controls a great deal of the US meat and grain market through their wholly foreign-owned subsidiaries.”
For example, Chinese-owned Smithfield, which is a leading integrated pork production and processing company, controls over 25% of the US pork industry and once you control more than 20% of the market you become a price-setter, she explains. “With Chinese state-owned enterprises more than likely having access to these ‘classified’ details, it puts American-owned companies, traders, and farmers at a significant disadvantage when it comes to pricing and marketing,” she says.
Farmers’ cash flow is already strained, and price recovery will take time.
Klingner explains with about 20 months into this trade war many farmers didn’t have the cash flow to sustain and control the timing of when and how they could market the 2019 harvest.
“As a result, a lot of grain is in the hands of traders and agricultural-industry who need at least a short-term jump in prices,” she said. “However, this is going to do little to help the mainstream Midwestern American farmer if the prices cannot sustain through the 2020 production season at a price that offsets the growing cost of inputs.”
Josh Smart, leader with global agribusiness insurance brokerage HUB International, shares a real rebound in commodities pricing and an increase in domestic exports is still likely at least a year away.
“Tighter budgets are likely to endure, and rising property insurance costs will persist at least throughout the year. U.S. farmers that can weather the current storm have a better chance of coming out stronger next year,” he says.