Farmers don’t seem to be brimming with relief over the Trump administration’s plan to offset the impact of trade tensions with a $12 billion, stopgap trade package nor the European Union’s apparent vow to begin snapping up more U.S. soybeans.
A little bit of history goes a long way toward explaining why.
It all comes down to market share and the fact that for commodity producers, it can be very hard to recover once lost. That’s a lesson U.S. soybean farmers learned in the 1970s and fear could be repeated if the U.S.-China trade fight turns into a long-running dispute.
“If we lose that sort of market share, it’s going to be very difficult to come back and find additional markets for our soybeans,” said Ted Seifried, chief market strategist at Zaner Ag Hedge in Chicago, referring to China, the world’s largest buyer of soybeans.
There’s still time to patch things up, Seifried said in an interview. But a long-running dispute would run the risk of China boosting investment in Brazil and other competing soybean-growing countries.
That’s where the history lesson comes in.
President Richard Nixon is often blamed for jump-starting competition from Brazil when he imposed an embargo on soybean exports in 1973 in response to dwindling U.S. supplies and domestic inflation pressures. In 1980, President Jimmy Carter retaliated for the Soviet Union’s invasion of Afghanistan by imposing an embargo on agricultural exports to the country, a move that also served to dent the reputation of the U.S. in the world market as a reliable supplier.
Similarly, China just last year reopened its market to U.S. beef, a trade flow that had been closed off for more than a decade after the mad-cow disease scare sent China away from U.S. product. Long after those fears eased, China still wasn’t hungry for U.S. beef, until recently. China had gotten used to buying beef from Australia instead.
Read: What any American who eats should know about Trump’s trade fight for farmers
Trump, of course, isn’t banning soybean exports, but that risks being a distinction without a difference. While China is the one imposing tariffs on U.S. soybean imports in retaliation for U.S. tariffs on Chinese goods, the bottom line is that the world’s largest buyer of the crucial oilseed is providing an opportunity for Brazil to make further inroads into global markets.
As recounted in this paper from the USDA’s Economic Research Service, the damage from the 1973 embargo didn’t come from a temporary hit to domestic prices, but Japan’s loss of confidence in the U.S. as a reliable provider of agricultural products. The fear is that the trade battle serves to similarly sour Beijing on the U.S. as a supplier.
The move by Nixon prompted Japan, a major U.S. soybean importer, to begin investing heavily in Brazil’s then tiny oilseed industry. Brazilian output was likely to grow, but Japan’s efforts are widely credited with accelerating production. In 1971, Brazil produced a 76 million bushel soybean crop versus 1.127 billion bushels in the U.S. In 2017, Brazil produced 4.3904 billion bushels, not far off the 4.3912 billion produced by the U.S.
And U.S. market share has declined steadily, with Brazil and Argentina now enjoying more than half the soybean export market versus less than 15% before 1980, according to USDA. In fact, Brazil has overtaken the U.S. as the world’s largest soybean exporter, a position expected too be enhanced in the current crop year by the trade dispute.
There’s still room to enhance the soybean industry in Brazil and elsewhere in South America, including Argentina, Uruguay and Paraguay, Seifried said. China could be encouraged to further invest in upgrading Brazil’s still often woeful transportation infrastructure, including rail and river terminals and ports.
Moreover, China may also move to invest heavily elsewhere, including South Africa and Russia — investments that would have echoes of those early Japanese investment efforts in Brazil, he said.
The summer, meanwhile, has been no picnic for U.S. producers as China’s tariffs took hold and the country shifted purchases to Brazil. Soybean futures hit a 10-year low earlier this month.
Such concerns might explain the unveiling of a multimillion-dollar anti-tariff advertising campaign by farm groups this week as well as the vitriolic response to the aid package by farm-state lawmakers, including both Republicans and Democrats.
Opinion: Replacing farm trade with farm aid will be an expensive recipe for disaster
Meanwhile, Trump on Wednesday touted a promise by European Commission President Jean-Claude Juncker to increase soybean imports, though analysts noted the EU was already expected to boost its purchases of U.S. soybeans as China shifted its purchases to Brazil, leaving the U.S. at a substantial discount.
Regardless, the EU won’t make up for the expected lost Chinese soybean purchases.
In the near term, soybean producers, who are set to begin harvesting what looks to be a bumper crop in late summer and the fall, might find some relief, Seifried said.
China’s salvo was well timed, threatening tariffs as South America completed its harvest. China will end up significantly reducing its purchases of U.S. soybeans this year, but will still need to buy some to meet its needs and as South American supplies dwindle, analysts said.
The resulting discount for U.S. soybeans relative to Brazil could more or less offset the tariff impact in the near term.
November soybean futures SX8, +0.86% found support Friday, rising 1.1% to $8.8575 a bushel and on pace for a 2.5% weekly gain. That was enough to turn the contract positive for the week. Soybean futures remain down 7.9% in the year to date and 11.3% from a year ago, according to FactSet.
But the story of Brazil didn’t take place over the course of a single growing season. That’s why U.S. farmers will be looking for some sign the Trump administration has an endgame in mind.
