FORT COLLINS, Colo. (Reuters) - U.S. grain and oilseed producers cheered when the United States signed the Phase 1 trade deal with China a year ago, as it suggested one of their most crucial customers would be back in the American market in a bigger way than ever before.
But while the deal delights U.S. farmers and exporters, its short-sighted nature could end up being harmful to domestic users of grain and other commodities, and those effects could ultimately hurt consumers.
Cracking down on China’s trade practices was among the top goals of the Trump administration, which set forth the Phase 1 trade deal in January 2020. That deal suggested China’s 2020 U.S. farm imports would rise at least 50% above 2017 levels, and the 2021 target was even more aggressive.
President Joe Biden, sworn in on Wednesday, said late last year he would not immediately cancel Phase 1 or the existing trade tariffs, since a deeper review was necessary first. But he has acknowledged China’s “abusive practices,” including stealing intellectual property and dumping products.
Chinese media reported shortly after the U.S. election that Beijing would seek to renegotiate the trade deal with the new president, claiming the agreement favored the United States.
China has certainly used the trade war and trade deal to its advantage, however, as evidenced by the record volumes of U.S. corn and soybeans it began securing last year at significantly lower prices than current ones. The situation has even drawn comparisons with the “Great Grain Robbery” of 1972, when the Soviet Union cleaned out U.S. wheat supplies.
Although China likely fell short of the 2020 Phase 1 target, most analysts believe the country’s demand for agricultural commodities, specifically raw materials, will remain elevated in 2021 and continue to drive strong U.S. exports.
But some of the premises and motivation behind Phase 1 appear faulty, and Biden would do well to re-examine the agreement to ensure it does not foster disadvantages for either agriculture industry participants or U.S. consumers.
One of the most puzzling aspects of Phase 1 is that the trade targets are in dollar values instead of tonnage. That means commodity prices largely drive China’s progress, and at the time of the negotiation, those prices were substantially lower than in the record trade years.
Even with the recent rise in prices, the 2021 target of $43.5 billion, some 19% above the 2020 goal, seems incredibly ambitious. The current record for U.S. farm exports to China is $29 billion in 2013.
Those lofty numbers would require more record participation from feed ingredients and other bulk commodities like soybeans, corn and cotton. Bulk commodities accounted for nearly two-thirds of U.S. agricultural and related exports to China between January and November 2020.
Therefore, in theory, U.S. trade officials should have been aware that they were possibly setting up a supply fight between domestic end users and exporters. Former President Donald Trump hinted at this in an October 2019 rally, when he seemed to suggest his advisers had recommended a 2020 trade target of at least half his requested $40 billion to $50 billion based on the idea that U.S. production is not sufficiently large.
In the speech, Trump was upbeat on the idea of China completely emptying U.S. grain bins, implying that the trade deal completely ignores how much supply is needed at home.
Exports usually account for only about 15% of annual U.S. corn use, while feeding and ethanol production occupy a bit less than 40% apiece. U.S. soybean use is split half-and-half between exports and crushing, but more than 70% of the resulting soybean meal is used domestically.
Feed costs for U.S. end users have risen drastically in recent months, and this could ultimately mean higher food prices for American consumers. Soybean and soymeal prices are about 50% above year-ago levels and corn prices are around 35% higher. Meanwhile, prices for lean hogs, live cattle and feeder cattle are near or below a year ago.
Another problematic aspect of a contractual agreement for a fixed amount of exports is that U.S. production volumes are unknown in advance each year. The 2020 corn and soybean crops fell well short of original expectations, though record exports are still forecast, contributing to elevated prices.
Luckily for U.S. end users, Beijing has stated its intentions to purchase only what it needs from the United States instead of simply buying stuff to fulfill the deal. But in the case of corn, sky-high domestic prices in China, at least 50% above year-ago, suggest that the country indeed needs the yellow grain.
A similar controversy arose nearly a year ago when the pandemic temporarily shuttered many U.S. slaughterhouses, reducing meat supply on the domestic market. But at the same time, American exporters were shipping record amounts of pork to China, drawing some criticism.
China’s pork spree sought to fill the protein gap that arose after African swine fever ripped through its hog herd starting in 2018, sharply reducing pork output. That deficit still exists, though China’s pig population has made significant recovery.
On paper, the trade deal and ASF combination looks like a huge opportunity for U.S. livestock producers and meatpackers, but the results are likely not living up to expectations. U.S. pork exports to China have not yet returned to the record levels observed last spring.
China’s U.S. beef purchases accelerated late last year and remain strong, but that segment of total American agricultural trade with China is relatively small. China accounted for 7% of total overseas sales of fresh, frozen or chilled U.S. beef cuts in 2020.
Between January and November 2020, the value of U.S. exports to China of pork, beef and poultry products topped $3 billion, well above the full 2019 figure of $1.4 billion, which was a record. Even with this huge surge in business, it represents a small portion of the full-year Phase 1 goal.
By comparison, the United States exported $13.4 billion worth of soybeans, corn, sorghum and wheat to China in the first 11 months of last year, with soybeans reaching $11.1 billion.
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Matthew Lewis
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