During this week’s Ag Day festivities, it was easy to feel great about agriculture – lots of optimistic words about how we provide the best, safest food supply in the world. All good.
Even so, there’s a lot at stake for farmers right now – and some things that need to go right for President Trump if he hopes to keep his rural voting bloc intact for 2020.
“The biggest threat to Trump’s re-election chances are crop prices,” says Gary Blumenthal, CEO and analyst at World Perspectives, a Washington, D.C.-based consulting firm focusing on agribusiness and agrifood. “Much will depend on how big this year’s harvest is and whether it will have a place to go.”
Ted McKinney, Under Secretary of Agriculture for Trade and Foreign Agricultural Affairs, said Wednesday he was “very confident” the China trade dispute would be resolved by the onset of 2019 grain harvest. That would certainly help U.S. farmers, who are betting on higher prices. While USDA’s latest estimate shows a year-after-year drop of 4.2 million soybeans acres going in the ground this spring, that still leaves 85 million acres of soy that will need a home this winter.
McKinney also said he believes there is little chance the president would walk away from the on-going negotiations, even though that tactic has been used with NAFTA, TPP, and the Paris Climate Agreement; the president later reversed course on NAFTA. At one point Trump threatened higher tariffs if no agreement could be reached by a preset deadline, which came and went March 1; now he says he’s in no rush to walk away.
Clearly he needs a win – as do farmers.
Intellectual property still in question
So, what needs to happen for a China agreement?
“We’re close, but there are important issues that need closure,” says Blumenthal. “The agriculture piece of the China deal is settled – the hang up is intellectual property. They won’t do forced technology transfers, but they will do what might be called ‘reverse engineering,’ and that could allow the Chinese to escape the need to get expensive patents.
“Then again, many companies around the world are doing this.”
State-owned enterprises make up 40% of the country’s economy, with many tied to the Chinese military. China’s elite benefit from SOEs. They like doing business as usual.
These SOEs are not great economic performers. The National Bureau of Economic Research – the group that tracks recessions – indicates private Chinese companies that do not get government discounted loans perform better.
In some ways President Trump is doing China a favor by pushing for change within China’s economy – a change that would cause heartburn for some of the country’s elite, but in the long-run, help China’s economy grow. Chinese political leaders predict modest GDP growth of 6% to 6.5% this year – great for any other country but a far cry from the country’s past double digit performances.
“The main hang up is trying to change business models that have been working for China’s elites for decades,” Blumenthal says.
He notes that our own ‘elite class’ has a similar stranglehold on beneficial government policies. U.S. investors, for example, make money through ‘carried interest,’ which is taxed at a lower rate compared to common income.
“None of us have clean hands, but the Chinese happen to do it with more adverse impacts on capital,” he says.
Still, U.S. political leaders seem mainly upbeat about a deal. Sen. Pat Roberts, R, Kansas, recalled a recent trade meeting with Chinese officials in Beijing. “I found them to be very enthusiastic,” he says. “They know we produce the best food in the history of the world. They also know we can be a realiable supplier.
“I’m not convinced we will get everything the administration wants, but at least in terms of agriculture the president, U.S. Trade Representative Ambassador Robert Lighthizer, and (USTR chief ag negotiator) Gregg Doud, why, we’re optimistic.
“If we can do that and achieve some price recovery, we’ll be in a much better place.”