Trade War Reaches a Conclusion
Published: Friday, January 24, 2020
Before last week's much-anticipated signing of a U.S. trade agreement with China, there was already a measurable uptick in the sentiment of U.S. crop producers.
Purdue University's Ag Economy Barometer, which is based on a survey of 400 crop and livestock producers, over the past few months showed increasing optimism about future economic conditions—even as producers became less optimistic about their current conditions.
According to Purdue agricultural economist Michael Langemeier, the index received a boost from crop yields that were surprisingly good, especially in the eastern Corn Belt. But the main reason underlying the optimism, he said, is that farmers have a sense that the trade war with China is reaching a conclusion.
In the Phase One trade agreement signed last week, China pledged to buy between $40 billion and $50 billion worth of U.S. farm products annually over the next two years. That's a significant increase from the 2017 figure of $24 billion.
"We've had quite a bit of bullish news regarding soybeans," Langemeier told the farm show crowd. "I looked at some numbers of potential imports from China in Phase One, and that makes people a little bit more optimistic. Those are some sizeable import numbers if they bear out."
He added that U.S. farmers will need to plant a minimum of 85 million acres of soybeans to satisfy the level of buying from China. Last year, farmers planted 76.1 million acres of soybeans and harvested 75 million acres. The number of harvested acres was down 14 percent from 2018.
For 2020, Langemeier estimates that both corn and soybeans will regain some of the acres that were lost due to last year's wet weather.
"Soybeans are less bearish than they were," he said. "I actually think as we go into the first two to three months of 2020, that bearish soybeans will go to bullish."
The price outlook for corn is not as rosy. Although prices have increased substantially since September, the concern is that farmers will increase corn acreage this year (from 81.5 million acres to 93 million acres).
Another factor is exports.
"Corn exports have not been as strong as they had been the year before or two years ago," Langemeier said, "and that's a big concern for corn as we start pushing that acreage up."
The Purdue ag economist recommends looking for pricing opportunities for corn this spring.
Average prices for corn and soybeans for the 2019-20 marketing year, from the U.S. Department of Agriculture, are $9 per bushel and $3.85 per bushel, respectively.
But Langemeier noted that soybean prices could rise to about $10 per bushel if the Chinese follow through on their trade commitment.
Pork, dairy and beef producers should benefit from the trade deal with China, and also from passage of the U.S.-Mexico-Canada trade deal. The U.S. Senate passed the USMCA agreement last Thursday, sending it to President Trump for his signature.
For beef, "the (export) numbers are relatively small, but think about that market—1.2 billion people," Langemeier said. "Even if they eat just a little bit more beef, and a little bit of that comes from the U.S. corn-fed beef, that's just tremendous growth in beef. There's quite a bit of hope there that we start exporting more beef to China."
Pork exports were surging even before the trade deal with China was announced.
The U.S. exports more than 20 percent of its annual production of pork, and China—the world's largest producer and consumer of pork—has stepped up imports from the U.S. to satisfy domestic demand. China's pork industry has lost an estimated 40 percent of its swine herd due to African swine fever.
Langemeier said China's buying activity has been a "pleasant surprise," even during the ongoing trade dispute.
But even as China increases its purchases of U.S. pork, producers here are still waiting to see higher prices. Kendell Culp, Indiana Farm Bureau vice president and a pork producer from Rensselaer, said he welcomed the Phase One trade agreement between the U.S. and China but said other factors are responsible for low prices at the farmgate.
"Part of the reason is, we are overproducing pork in this country right now," Culp said.
He added that processors aren't passing along profits to producers.
"The packer is making really good money right now," Culp said. "When the packer harvests hogs on Saturdays—when they have Saturday kills—then you know they are making money. And they are, which is good. But my theory is, everybody has got to make a little bit of money to keep everybody in business."
He added, "Everybody needs to make something, and right now the producer is not making anything in pork."
According to Langemeier, hog prices this year should average between 69 and 74 cents per hundredweight.
Looking at the broader picture, Culp was optimistic that farmers would benefit from the trade deal.
"Let's hope that there's multiple phases, that this is just the first step," he said. "Both countries needed a victory in this. Because it definitely is affecting our commodity prices. It's definitely affecting the economy of China."
As the "Phase One" trade deal is implemented, negotiators from both the U.S. and China will continue to work on resolving the remaining issues. In the meantime, President Trump said he plans to keep tariffs in place and use them as leverage while the negotiations play out.
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