THE DEEPER ONE peers into the phase one trade agreement announced with the United States on December 14, the more opaque it becomes. Neither side appears to agree on what they have agreed.
To say the devil will be in the details is not the half of it. A big-figure dollar target for Chinese purchases of US agricultural products, energy and services makes for easily digested headlines. However, for producers, especially farmers who by their nature have to plant a season in advance, it will be the categories and volumes that matter.
For now, those remain unknown, and, we hazard, still not finalised. Take farm produce. We can guess that soybeans, the largest US agricultural export to China by far in the past, and hogs, much needed to compensate for the domestic African swine fever epidemic, will feature prominently in the buying, but not much more than that.
What of other US agricultural products such as beef and poultry, both recently unbanned by China and, one assumes, about to have retaliatory tariffs removed but still facing non-tariff barriers such as regulations on hormone use? Or rice, corn and wheat, which have not significantly figured in the bilateral trade and of which China has had reasonably abundant harvests this year, according to the UN’s Food and Agriculture Organization?
Related, will the energy sales be of crude oil products or ethanol, which in the United States is produced from corn and is a crucial government price-setting mechanism for the crop? And what of cotton, which although covered by import quotas, could be converted in China into more of the millions of T-shirts that Americans buy yearly? China’s textile manufacturers need higher grade cotton to stay competitive in international export markets where low-cost Asian producers are undercutting them.
China’s US farm imports in 2017, the baseline year being used in the phase one agreement and the last full year before the tariffs war started, totalled just over $24 billion (see the table below for a breakdown.) To lift them by the nearly $16 billion necessary to meet the target the United States says has been agreed of $40 billion a year for the next two years — a two-thirds increase — will not be easy.
|China’s agricultural imports from US, 2017||
|Oil seeds, inc soya, and oleaginous fruits||
|Fruit and nuts||
|Fodder and forage||
|Misc prepared food||
|Prepared vegetables and fruits||
|Animal and vegetable fats||
|Prepared cereals and flours||
|Misc animal products||
|Sugar and confectionary||
|Malts and starches||
|Gums and resiins||
|Coffee, tea and spices||
|Misc vegetable products||
|Prepared meats and fish||
|Source: UN Comtrade||
Total: $24.3 billion
To put the task in some sort of context, in recent years total US exports of corn, soya beans, beef and pork have averaged the $40 billion a year China alone is now meant to be buying. This raises the question not only of China’s capacity to absorb imports on that scale but also that of US farmers and ranchers to produce them in the near term without disruptively switching their exports from other markets. China, too, has concerns about not disrupting broader geopolitical relationships with import partners such as Argentina and Brazil, and with staying compliant with its World Trade Organization commitments.
Next year’s US soya crop will have to go into the ground in the spring (around the time of the first party primaries to select the nominees for next year’s US presidential election.) The 2020 corp is forecast to be the fourth largest on record based on planned expansions of acreage. But even that would only likely let US farmers get back to the little more than their 2017 export levels to China (32.8 tonnes, worth $13.9 billion) unless they were to cut into their domestic sales.
However, the demand for soya in China has fallen. Its two main uses in China are as oil and meal for pig feed. China’s herds have more than halved because of African swine flu. That opens possibilities for more pork exports as well as for other meats, once China removes the tariffs on US meats, so they are competitive with Australian, Brazilian and European exports. Even then, the issues over non-tariff barriers will persist; the flow of new red tape on both produce and proceed foods in the name of food safety has been incessant.
US pork exports to China were worth $286 million in 2017. US estimates of the potential market for US pork in China have ranged from $8 billion a year upwards. Last year, China’s total pork imports were worth barely $2 billion, which seems a more realistic short term target for US pork producers (the largest of which is Chinese owned). Similarly for beef, of which China imported $4.6 billion worth last year. US ranchers and meatpacking companies lay great store on the hope that a more prosperous China will be a beef-eating China. US poultry producers, whose products were banned until November on health concerns, also see a market potentially worth $2 billion a year to them.
Dairy products are also a promising category, riding on the back of Chinese middle-class consumers’ preference for foreign foods, ingredients and nurishment for children perceived as safer than domestic varieties. Overall dairy consumption is stable, but changing in composition as consumers, especially young professionals in the tier one cities, turn to higher-end products such as fresh UHT milk and yoghurts. Similarly, with nuts, where imports such as almonds, pistachios, pecans, and macadamias are increasingly vying with domestic walnuts as a health food. Regulation of e-commerce channels in China that let consumers buy directly from abroad is a point fo trade friction waiting to happen.
China’s farm sector is modernizing and consolidating, turning what was a vast patchwork of smallholdings into regionally or vertically integrated agribusinesses that span farming to food processing and distribution. These will potentially be formidable competitive barriers for US exporters.
One point of entry into these supply chains is animal feeds. The demand for imported high-quality fodder and forage, such as alfalfa for dairy herds, is expected to increase. The drive to upgrade domestic animal husbandry will require nutritional and efficient feed that China cannot currently produce itself in quantity..
In the same vein, getting market access to second- and third-tier cities will be critical to US agricultural exporters. These are largely untapped markets for them. Up until now, most US food imports have not ventured far from from the ports near first-tier cities, with their large populations. Improvements in the ‘cold chain’ and logistics along with the rise of e-commerce means this no longer needs to be so.
Putting together all these opportunities still leaves adding $16 billion a year in US farm exports looking a stretch over the next couple of years, short of authorities buying for purely political reasons. Given the repeated references in state media to buying US farm products at competitive prices, there will be no free lunches, so to speak.
There are, however, two ways the numbers could be massaged. One is that higher prices could boost the dollar sales numbers. Global farm commodity prices are at cyclical lows with an upswing having been stalled for more than a year by the US-China trade dispute. Some increase would be in the natural order of things. When the US exported a record $29.6 billion in agricultural goods to China in 2013, the soya bean price, for example, was more than $14 a bushel; it is currently $9. For much of 2017, the price was below $10 a bushel.
The other is to include forestry products in the grand total. In 2017, US wood, pulp and paperboard exports to China were worth $8.3 billion. Adding in those would raise the baseline to $33 billion, making $40 billion appear a lot more achievable.