The Trade Policy is EVERYTHING to US Agriculture

We were privileged to be on USFR that will air this weekend. This was before the trade agreement was announced. But prior to going on, we researched the potential of what a positive trade policy would do.


Look at China Alone

World demand for corn has been exploding but off the radar. Funds and traders seem to ignore this because our trade policy has been so destructive to US demand, they simply do not see the what is going on with world demand. But here are the facts:

World corn demand has exceeded production 4 straight years in a row….despite 4 years of record or near record yields and production worldwide.

Chinese demand outstrips production despite a goal of self sufficiency

Chinese demand for corn makes up 24.68% of global use. Despite ASF, consumption of corn continues to grow 2-4% yearly with total demand reaching a record this year at 278 mm versus production at 260 mmt.  China’s 18 mmt deficit has been partially offset by an increase in imports.

Chinese imports have gone from 0-2 mmt to 7 mmt in just the last 3 years. This years 56% increase in imports reflects their growing demand for corn as a feed and food component. It is also important to remember that China’s food security policy is very strict and requires large reserve stocks. This policy is unlikely to change at lease for the next 10 years since it is a result of a generation that experienced  1959-1961 where approximately 14+ million people died. The end result was a political take over of the Ruler Mao. At that time and a very strict policy for food security was installed. Despite some tweaks in policy, China will import mass amounts of basic food components to avoid political criticism.

 China and future corn demand

China’s hog herd has already started to rebuild. Estimates range from 2-10 years for full recovery. Our opinion is that it will happen quickly and based on some reports in the industry, they are constructing new confinement building nearly as fast as they are quarantining an old facility. Combined growth and restoration, their hog production will likely exceed previous production by 2-4% within the next 5 years and will be much more secure. Asia as a whole, has massively increased poultry and other protein production to help make up for the shortfall. According to Grains of Truth, total corn/feed consumption has net held despite ASF. Assuming China is successful in rebuilding the hog herd, feed usage should increase at 2-4% per year. Additional industrial growth of corn use is also expected as China builds an ethanol industry.  Although plans have been delayed, it is expected their ethanol policy will be developed over the next 5 years.

Total corn imports by China is expected to reach 10 mmt within the next 2 years. The US is the most efficient producer of corn and has the most potential to become the main supplier. US trade policy has blocked the US from developing market share. However, depending on the details of the trade agreement and the successful implementation of the agreement, the US should stand a significant chance of meeting the majority of the growth in corn imports.

Chinese Ag Industrial Explosion

 Again we do not know the details of the trade agreement. So we are speculating on this, but we suspect that a significant door that may have opened in this agreement to buy 50 billion in Ag related products per year (versus ~10 currently and 24 at the peak prior to tariffs). We suspect this includes the purchases and partnerships of AgTechnology. Everything from Tractors and sprayers to grain bins and augers. Chemicals and seed to ethanol and processing. Obviously this opens the door for US Agriculture, and simultaneously opens the door for China to become a modern Ag Industry with competitive yield and production potential. So this demand growth we spoke of will be an ebb and flow from importing deficits to increased domestic production. But  based on Chinese populations, consumer demand and long term potential, the net will be increased opportunity the for US Ag industry


Growth in Soybeans

US market share of Chinese soybeans has been decimated in the US-PRC trade war. Some of this demand will never be recouped. And without knowing the details of the trad deal and how deep the tariff reductions are it is impossible to know how competitive the US bean market will become. But on the surface, China is consuming 30% of world Bean Demand vs 42-45% pre ASF. Based on the forecast for  China to restore pork production by 104%, that equates to demand of 12 mmt additional needs over the next 2-5 years. If the  US recaptures 15 mmt of the lost demand from current levels and another 10 mmt of the projected growth, total purchases of US beans by China could hit 35 mmt. That might not be too impressive to some that think the US will return to pre-tariff demand, but that is a far cry better than the demand we have experienced with a negative trade policy. Hence we would expect to see soybeans return towards pre-tariff economic values depending on the details and implementation of the trade agreement.

Chinese commitment to growth

When viewing the top 4 countries in the world ranked by GDP, China is outpacing the strongest competing countries (US) economic growth by  nearly three times. China’s population is 4.2 times larger than the US. Wages have increased from 63,341 Yuan in 2015 to 82,461 or 30% in just 4 years. As a result consumer spending (lifestyle) is also increasing at a pace and exceeded US growth in Q1 2018. This trend is expected to continue. This economic growth has set the stage for continued social development, sophistication and demand for better diets, entertainment, and lifestyles associated with such growth.

China is no longer a developing country and hence President Trumps insatiable quest to force China to be treated the same as every other developed trading partner. With the US Agreement, it would appear that China will be moving more quickly towards WTO developed nation requirements. Although China had previously agreed to transition to WTO compliance as a developed nation, they were of course dragging that on and holding onto the developing nation benefits. It is hopeful that this one agreement with the US, will open the door for other world trading allies to enforce similar agreements which will press China towards compliance in a much faster timeline.

In the end, a positive trade policy may not totally reverse the damage done to certain sectors of the US Ag industry, but it is very likely the US Ag Industry as a whole has the potential to enter a major growth cycle if US trade policy is reversed and implemented. That being said, we would advise to be aggressive in optimism and position your operation for demand growth as long as US trade policy is moving towards free trade.

Bill Biedermann


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