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DAVID KRUSE

Making South American agriculture great

April 11, 2018
Farm News

I have been using a slide in my seminars showing Donald Trump, "Making South American Agriculture Great!" for nearly two years. Like many of my forecasts, they are early, so initially there is great skepticism until they come true. This is just the beginning though. . .there is a long way to go. The global order since World War II is in transition to something new and coming events will be historically profound. Geopoliticist Peter Zeihan, has described the future as the "coming disorder." The Ag Sector will be very much impacted by what will occur. In the short term, the relationship between the US Ag sector and its South American Ag sector competitor will be changed dramatically. South American agriculture will be the beneficiary of that change. The trade confrontation between the US and China initiated by the Trump administration is not going to be settled easily or quickly. What the Trump trade proponents want will not be easily conceded by Beijing. The impact on the soybean trade is a just microcosm in the larger transition.

Chinese traders were reportedly buying soybeans several days in Brazil ahead of the tariff announcement, offering premiums there 70-cents/bushel over the usual price relationship to the U.S. market. They knew what was coming and what the reaction to 25 percent tariffs on U.S. soybeans would be which was for Chinese buyers to buy Brazilian soybeans to avoid the tariff. A 25 percent tariff is over $2.65/bushel from where the soybean market started. They could pay a premium for Brazilian soybeans and still come out way ahead over paying the 25 percent tariff on U.S. soybeans.

Brazil skirted the drought that impacted Argentina and is expected to produce a record large soybean crop. They have soybeans to sell. China will not or cannot buy all their soybeans from Brazil but the market will determine the origin of their purchases. By that I mean that the market will determine where the equilibrium occurs between the difference in price between Brazilian soybeans with no tariff and ours with a 25 percent tariff. Their soybeans may go up over a dollar bushel while ours declines in relationship. The market has to monetize the 25 percent tariff on our soybeans somehow.

Chinese buyers will discount the tariff on U.S. soybeans relative to what they can buy them for in Brazil. Other global buyers will be put off by higher prices in Brazil with our soybeans becoming cheap by comparison. That means that the EU and Japan will source more soybeans from the U.S. offsetting some of the loss of Chinese demand. The problem is that the Chinese are such a big part of our market that there are no other buyers big enough to balance the loss of their demand. You can add the soybean purchases of our next nine largest soybean export buyers and combined, they only total 2/3rds of what China buys. That is hard to offset.

The market has a big job to do to figure the price differential out. The bottom line is that it favors the Brazilians. They are producing a record soybean crop and getting a high price for it. Trump just gave them a home run at our expense. As China pays higher prices for soybeans it will slow their demand growth, which is not in the interest of soybean farmers anywhere.

The differential that the market will determine between U.S. and Brazilian soybean prices will impact acreage. Brazilian soybean farmers, flush with cash, will significantly expand their soybean acreage again next season. They have a lot more land to convert to soybean production. U.S. farmers will get the short end of the stick growing soybeans only if profitable. The tariff, if implemented, would give Brazil a strategic advantage. China is not dumb and has resources.

The primary advantage that the U.S. has had over the Brazilian ag sector is transportation infrastructure. We can get our commodities from farms in the heartland to market in Shang-Hai much cheaper than they can get their commodities from the remote Mato Grosso to the Amazon and through the Panama Canal. Our river transportation system is a major competitive asset to us. They have struggled to build roads and railroads. Our locks and dams are past their "best-used-by" expiration date by a long shot and are at risk from aging out. Politicians talk about updating our market transportation systems but it doesn't happen. Trump's infrastructure plan has not been tied down yet. It is delayed and unspecific, searching for funding as the federal deficit complicates fiscal resources.

The Trump trade agenda gives China enormous incentive to invest in development of South American ag sector infrastructure. They will take the "America First" Trump trade agenda as meaning that they need to develop business and trade relations to acquire their strategic commodities somewhere else. Trump is way too volatile to depend on your next meal for. Japan, Korea and Mexico will all arrive at similar conclusions.

Commerce Secretary Wilber Ross thinks that the U.S. farm sector is just a bunch of winners. Do not expect a reasonable conclusion of this trade war anytime soon. Brazil is ripe for Chinese supported infrastructure development. They have tremendous additional ag production potential.

Trump is going to unleash it. The "America First" Trump trade agenda fully incentivizes the investment by China and others that will, indeed, "Make South American Agriculture Great!" I believe that the U.S. soybean industry may have just lost the long-term initiative to Brazil on April 4th, 2018 if the Chinese tariffs are implemented.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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