Illinois soybean farmers worry trade war with China will lead to permanent loss of market share

Chicago News USA

Donald Trump is dredging up memories of Jimmy Carter for some Illinois farmers.

The 45th president’s trade war with China reminds David Droste of the grain embargo the 39th president slapped on the Soviet Union in 1980. Banned from buying U.S. wheat, Russia ramped up domestic production, transforming into an exporter. Nearly four decades later, Russian wheat undercuts prices for the U.S. crop on the world market.

“The thing about the Russian wheat embargo, we are still paying for that today,” says Droste, who farms 2,500 acres about an hour southeast of St. Louis. “That’s how long-term this could be if it’s not resolved.”

Farmers, particularly the soybean growers whose acres spread across Illinois, are paying a steep cost in the geopolitical struggle between China and the United States. China imposed a 25 percent tariff on U.S. soy in July 2018 in retaliation for Trump administration tariffs and added 5 percent Sept. 1. The country has all but stopped buying U.S. soybeans, creating an opening for competitors in South America and the Black Sea region that could reshape the world market in ways not easily undone.

“U.S. agriculture will have to be less reliant on China as a destination for soybeans and other agriculture products” in the future, Ray Young, chief financial officer of agricultural processing giant ADM, warned on July 16.

For the approximately 75,000 farmers in Illinois, permanently losing market share in China could lead to dwindling bank accounts, shrinking credit lines and a rise in foreclosures and bankruptcies.

It certainly means hard choices for farmers this spring. Droste, for example, currently dedicates about half his land to soybeans. The soil in Illinois and Iowa is well suited to the legume, used in animal feed and tofu, among many other products. But the trade war caused at least a 30 percent drop in the price he received for last year’s harvest, and if it continues, he may consider changing his crop mix next year.

“Right now we’re suited to grow soybeans more than any other crops . . . but if we have a burdensome supply, maybe we have to look at an alternative,” Droste says.

WILTING SHARE

The United States’ share of China’s soybean purchases is dropping. American exports held 39 percent of the Chinese market between Oct. 1, 2016, and Sept. 30, 2017, the soybean harvest-to-harvest span known as the “marketing year.” That share fell to 30 percent for the marketing year ended Sept. 30, 2018. The brunt of the tariffs is expected to appear in the statistics for the 2018-19 marketing year, because soy is shipped abroad between October and December.

Illinois, which is the country’s No. 1 soybean producer, shipped $1.29 billion worth of soybeans to China in 2017, representing about a quarter of its total sales for the crop. A year later, exports to China fell 91 percent to $116 million.

China is the world’s chief soy importer, bringing in beans to help feed an estimated 360 million hogs. But African swine fever is ravaging the country’s herd, and some analysts predict half will die by the end of the year. Dead hogs don’t eat much soy, notes Mike Doherty, senior economist at the Illinois Farm Bureau. ADM’s Young said that China’s projected soy imports for 2019-20 have dropped from a range of 100 million to 105 million metric tons to 80 million to 85 million.

What soybeans the Chinese do need they’re now purchasing from other countries, largely Brazil. Illinois and Iowa farmers used to hold an edge over Brazil because the quality of U.S. roads, rails and waterways held down transportation costs. But when China upped its Brazilian imports last year, international investors financed improvements to Brazil’s infrastructure.

“That’s permanent,” Doherty says. “They’re not going to tear those roads up. We’ve set ourselves up for future loss of our market share. . . .They’re selling more and more of their crop to China, and we’re selling less and less. That’s really the bottom line on it.”

If China doesn’t buy the U.S. soybean harvest this fall, Illinois farmers will head into 2020 with less working capital, Doherty says. Lower prices for soybeans reduce cropland values, making banks less likely to lend to farmers.

“We have a bit of a farm credit crunch in Illinois,” he says. “Right now it’s still manageable for the most part. The rates that farmers are delinquent on bank loans is relatively small. But I’m afraid if this doesn’t get turned around, that percentage is going to increase quite a bit.”

China pays the world’s highest prices for the world’s soybeans, Doherty says. Illinois farmers sold their harvest to Europe last fall, as well as to, ironically, South America, which was selling to China.

U.S. soybean growers are trying to develop new markets. That can mean exporting smaller quantities in shipping containers to Taiwan and Southeast Asia, or cultivating demand in countries where the legume hasn’t traditionally been consumed.

Acknowledging that American farmers probably won’t recapture the full market share they had in China, CEO Jim Sutter of the U.S. Soybean Export Council says, “I hope we will have stronger positions in other markets, so for the U.S. soybean farmers, your Illinois soybean farmers, there will be strong demand that will take away all of the production that U.S. soy producers want to put on the market in any given year.”

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