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Thinking about the US-China trade deal

pdf fileAgDM Newsletter
January 2020

Ladies and gentlemen, as we see in many parts of our lives, change is an inevitable process. Agriculture and markets continue to evolve. And the same is true for the techniques to track and explain those changes. For us in Iowa State University extension farm management, we have maintained two monthly newsletters for the past couple of decades, the Iowa Farm Outlook and the Ag Decision Maker newsletter. Both have served as very useful platforms to provide education and information about the economics decisions within agriculture. But it now makes sense to combine those efforts. So starting this month, we will merge the Iowa Farm Outlook and Ag Decision Maker newsletters. The following article is the final Crops article for the Iowa Farm Outlook newsletter. In future months, outlook articles will be part of the Ag Decision Maker newsletter. We thank you for reading the Iowa Farm Outlook and look forward to continuing the discussion about agricultural markets in the Ag Decision Maker newsletter.

figure 1Many of the issues that loomed over the crop markets in 2019 continue to loom large in 2020. Weather conditions, specifically an ‘over’ abundance of soil moisture, threatens to create planting problems. International trade remains on shaky ground, with tariffs still in place. Biofuel markets are adjusting and re-adjusting to policy. And because of that, crop futures prices are floating in roughly the same range as they were this time last year.

While there have been a number of market movers (issues that change the direction and intensity of price moves) over the past year, most of these movers cancel each other out. The weather problems limit supplies and should push prices higher, but the trade disputes and tariffs limit usage and offset the price impacts. With the passage of the USMCA and the signings of trade deals with China and Japan over the past few months, there is some positive news on the trade front. But as the market reaction to the US- China trade deal signing indicated, the crop markets aren’t interested in the political deals, but in actually seeing trade flows change due to these deals.

International trade has become a very valuable component for US agriculture. As Figure 1 shows, the value of agricultural products moving both into and out of the US has more than doubled since 2000. While crop prices have dropped dramatically since 2012, US agricultural export values remained fairly firm. Over the past five years, US agricultural exports have held between $130-140 billion. And while imports have also risen significantly over the past couple of decades, agriculture remains one of the few sectors in our economy where the US holds a trade surplus. The recent trade disagreements have diminished that trade surplus, but overall trade values remain robust.

The progress on multiple trade deals signals th potential for significant shifts in agricultural trade. My own interpretation of the trade deals is as follows: the USMCA and Japan deals concentrate on solidifying existing trade flows, rather than significantly expanding trade opportunities. Canada, Mexico, and Japan have been major agricultural markets for the US for quite some time. These new deals maintain and protect those relationships, with the prospects for continued, but limited growth. The China deal, on the other hand, has the potential to fundamentally shake up global trade flows. To see why, it’s important to understand the current agricultural export picture. Figure 2 breaks down US agricultural export values by market destination. The middle (blue) line is the value of ag exports to countries where the US has a free trade agreement. Canada and Mexico represent roughly two-thirds of the volume here. The bottom (red) line is the value of ag exports to China. Prior to 2000, China was a very small market for US agriculture. Ag trade between the US and China ramped up significantly and quickly after 2000, peaking at roughly $25 billion in 2012. Between 2012 and 2017, US ag export values to China slowly declined, mainly due to the general reduction in ag prices. The outbreak of the trade fight between the US and China and the imposition of tariffs led to the steep drop in export values in 2018. But even before the signing of the Chinese trade deal, we were seeing some recovery in ag trade flows to China. The top (green) line is the value of ag exports to the rest of the world. This line shows that we rely on significant trade flows outside of China and free trade partners. To put it another way, ag trade is more complicated than the big three markets of China, Canada, and Mexico.

figures 2 and 3The “phase one” deal alters the ag trade landscape as China has agreed to specific targets for agricultural purchases for this year and next. The deal uses 2017 as the base year for trade. As Figures 2 and 3 show, Chinese agricultural purchases totaled roughly $19.5 billion that year. For 2020, China agreed to purchase $12.5 billion more in ag products than the base. So that puts 2020 US ag exports to China at $32 billion (you may see higher amounts in other publications; they are including forestry and ag-related products, such as infant formula and pet food). For 2021, the target is $19.5 billion more than the base, so that’s $39 billion in ag sales to China. These two targets alone guarantee a significant surge in sales to China, far eclipsing the record sales from 2012. The text of the deal also includes a statement indicating that the growth in US ag exports to China set in these two years is projected to continue through 2025. Figure 3 outlines those projections. If those projections from the deal are accurate, ag trade with China will grow to exceed what we ship currently to our free trade partners or to the rest of the world.

Traders are sorting through four big questions right now. One, will China follow through on these commitments over the next two years? Two, how secure are those projections for continued ag trade growth beyond 2021? Three, what will the product mix be as China increases its ag purchases? Four, what happens to our other markets as this agreement is fulfilled? My thoughts on these questions are mixed. I do think that China will follow through on the deal for the next two years. The outbreak of African Swine Fever there has created a significant protein gap for China. The deal contains language easing trade rules for meats between the two countries. So it makes sense that China would expand meat purchases from the US, fulfilling two objectives at once, filling in the protein hole, while also meeting the trade targets. While soybeans were the largest portion of previous ag sales to China, I expect meat, especially pork, to take the leading spots in our future sales to China. The product mix will shift, moving to more value-added products (which helps hit the dollar value targets).

However, I am significantly less secure on the projections beyond 2021. The deal does not lock those values in place. It only states that both countries currently think the trade flows would continue to develop that way. If the projections are anywhere close to holding, they imply significant shifts in global trade flows. US agriculture will become even more reliant on Chinese demand. My largest concern is what will happen to our other markets. This deal will likely crowd some of them out. Just because China has agreed to buy more doesn’t mean we just get to add that to the total. In fact, we are already seeing that potential for crowding out currently. Over the past few months China has reestablished itself as the top market for US soybean. As China moved back in, we have numerous other markets in retreat for soybean exports. Sales to the European Union, Mexico, Japan, Indonesia, South Korea, and Canada have fallen. With trade, there can be significant slippage, gains in one area are often offset by losses elsewhere. In this case, forcing sales to China will likely cost US open sales to the rest of the globe.

 

Chad E. Hart, extension economist, 515-294-9911, chart@iastate.edu