Eric Schuck: Soybeans, cherries tell sad trade tale

Current soybean pricing is one of those situations where the late Paul Harvey should jump in with, “and now you know the rest of the story …” It really is that weird.

But simply because it’s weird doesn’t mean there isn’t a trail to follow — or more importantly, understand. Let’s start with the basics.

The U.S. exported about $12 billion worth of soybeans to China in 2017. That represents about half the total soybean exports from the U.S. and almost a third of all U.S. farm receipts for soybeans. So U.S. soybean trade with China is a big deal.

Unfortunately, China recently canceled about a million tons of orders.

One reason is simply a byproduct of markets being markets. It seems Brazil had a an excellent crop this year, so its price came in lower. That happens.

But not all can be explained by a good spring in Brazil. Some of it is a direct byproduct of Chinese tariffs on U.S. soybeans, triggered by new U.S. tariffs on Chinese goods. In short, some of the decrease is a side-effect of U.S. actions. 

This is where things get somewhat complicated.

In the short run, total U.S. soybean exports have actually picked up. And much of those soybeans are headed to — wait for it — Brazil.
Global grain markets are mutually interchangeable. So while Chinese tariffs have effectively priced the U.S. out of Chinese markets, and by extension priced Brazil in, U.S. soybeans that once went to China are now going to Brazil to backfill that market because so many Brazilian soybeans are headed to Shanghai.

Guest Writer

Eric Schuck teaches economics at Linfield College. He also heads the school’s Environmental Studies Program. Schuck, now in his 12th year at Linfield, holds a B.A. from Pacific Lutheran University, M.A. from the University of Montana and Ph.D. from Washington State University. His specialty is agricultural economics.

On the surface, that would seem to mean U.S. growers aren’t taking a hit from our nascent trade war with China. But that couldn’t be further from the truth. 

China has been our best customer in part because it pays the best price. While our soybeans are now finding an outlet in Brazil, they are doing it at a price that has tumbled nearly 20 percent in the last 90 days.

American farmers are going to suffer losses. How large those losses will be remains an open question.

Under the soon-to-expire 2014 Agricultural Act, programs are in place to compensate farmers for losses stemming from significant drops in commodity prices.  However, for those to kick in, prices need to drop from their current $8.50 per bushel to about $5 per bushel. That represents a drop of more than 50 percent from the price prevailing before the recent free-fall.

Even then, the programs really only keep the prices from dropping below that $5 per bushel threshold. Some revenue insurance programs are available to farmers, but they would have to have been established at the beginning of the growing season — before the trade dispute erupted and prices started tanking.

The end result is this: A multitude of growers are either playing without a safety net or facing a long fall to reach that net.

To add insult to injury, the proposed remedies actually make things worse down on the farm.

The U.S. Department of Agriculture has announced its intention to use the Depression-era Commodiy Credit Corporation to backstop falling prices. The mechanics are convoluted, but the CCC will basically act as the buyer of last resort for crops that no longer have a market.

This leads to the federal government holding larger stores of surplus crops, most of which will wind up going into food banks or school lunch programs.

While that can be helpful in some respects, the pressure of large domestic surpluses and demand diversion through food aid programs tends to drive crop prices down even further. And that drives up the cost to U.S. taxpayers even more.

What’s more, any action to aid farmers beyond current levels would most likely expose the U.S. to lawsuits by both China and Brazil under the World Trade Organization rules. And because the trade fiasco was triggered by U.S. actions, we would most likely lose. 

Worst of all, this is only the beginning for American farmers.

Cherry growers witnessed tariffs rise as much as 50 percent while their crop was in transit to China. Unable to adjust, the price paid by Chinese consumers has held steady while the price paid to American growers has fallen through the floor.

Other commodities, notably apples, pears, chicken and pork, will soon suffer similar trauma. As a result, the Chinese treasury stands to be the primary beneficiary of U.S. tariffs on Chinese goods.

None of this needed to happen.

While China can be a frustrating trading partner, especially in terms of intellectual property, there were other ways to manage the problem. The Trans-Pacific Partnership offered to collectively exert leverage over China, in concert with the rest of our trading partners, but has been cast aside by the new administration.

Instead, we find ourselves adrift with virtually no international support, because we’ve simultaneously started trade wars with everyone else who might share an interest in confronting China, including Canada, the European Union and Japan.

And by instigating many of the tariffs, the U.S. has put itself in a position where the WTO will — with more justification than we may care to admit — side with our trading partners.

There’s only one way out of this: Declare victory and try to get back to the status quo. Unfortunately, that may no longer be an option.