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A Brewing Trade War and its Impact on Agriculture

A Brewing Trade War and its Impact on Agriculture

Escalating tensions between the United States and China could be bad for U.S. Grain export demand

By Devin Lashley
Farms.com Risk Management Intern

The recent surge in U.S. tariffs on Chinese goods has raised concerns about the escalating tensions between the United States and China. The possibility of a silent trade war between the two economic giants looms large, posing significant threats to future U.S. grain export demand.

China's emergence as the world's largest agricultural importer has positioned it as a critical market for most agricultural products, including wheat, corn, soybeans, pork, and cotton. However, recent developments have suggested a shift in trade dynamics.

The U.S. Department of Agriculture's announcement of significant cancellations of U.S. soft red winter wheat purchases by China in March signaled the start of a concerning trend. With cancellations totaling 504,000 tons, the implications for U.S. grain exports were large, and began to spook markets.

Tensions continue to grow with the Biden administration's decision to hike tariffs on $18 billion worth of Chinese goods, coupled with the retention of Trump-era tariffs on over $300 billion in goods. This move has triggered a ripple effect across agricultural commodities heavily reliant on Chinese imports. Soybeans and cotton futures, in particular, have experienced temporary declines in response to the tariff hikes.

Up until very recently the old crop soybean imports forecasted to be sent to China were almost miniscule. The initial outlook for 2024-25 shows a significant disparity, with the USDA estimating 14.4 million tons (529 million bushels) higher than China's ministry. Despite USDA's anticipation of China being the largest U.S. soybean customer in 2024-25, there are currently no new-crop U.S. soybeans, corn, or wheat contracts with China.

This could possibly mirror the same situation that happened in 2018. In November 2018, China's soybean imports from the United States dropped to zero for the first time since the start of the trade war between the two countries. China increased its imports from Brazil, bringing in 5.07 million metric tons, up over 80% from the previous year. We are seeing a similar situation play out right now where China is filling the gaps with Brazilian soybeans.

When this happened in November 2017, U.S. imports plunged from 4.7 million metric tons to 67,000 metric tons in October. Typically, China relies heavily on U.S. soybeans in the last quarter of the year as the U.S. harvest becomes available. However, purchases had declined significantly since China imposed an additional 25% tariff on U.S. imports in response to U.S. tariffs on Chinese goods. As a result, China increased its purchases from Brazil to compensate for the reduced imports from the United States.

Looking ahead, the potential return of Donald Trump to power could spell further challenges for U.S. farmers. Trump has vowed not only to maintain tariffs on China, but to expand them significantly. Such a move could lead to sharp declines in the prices of agricultural commodities and grains, as increased tariffs may lead to retaliatory measures from China, further constraining market access for U.S. farmers.

“Remember, the downside risk in grain futures increases after July 1,” reminds Moe Agostino, Farms.com Risk Management Chief Commodity Strategiest.

For daily information and updates on agriculture commodity marketing and price risk management for North American farmers, producers, and agribusiness visit the Farms.com Risk Management Website to subscribe to the program.


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