China’s attempts to make US farmers the economic casualties of the trade war are going to backfire

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China has targeted US farmers with tariffs as part of the trade war.
But China will eventually have to relent and import Americans products given its need for agricultural goods such as soybeans.
Two unexpected factors have made China’s attacks on US farmers look worse than they really are.
American farmers will likely bounce back stronger and China’s move will probably backfire.
Sal Gilbertie is the president, CEO, chief investment officer, and founder of Teucrium Trading.
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The trade war between the United States and China — which, at its core, is about technology theft, patent infringement, national-security concerns, anti-dumping, and other unfair trade practices — has claimed the US farmer first and foremost among its civilian casualties.

Beijing’s response to the US’s attempt to address trade differences was to directly target and attack both US farmers and, incredibly, the stomachs and pocketbooks of China’s own people. This battlefield tactic will ultimately prove to be China’s undoing, and the farm-belt economy of America will recover to be stronger and more resilient than ever.

China needs soybeans

In China, the preferred choice of animal protein is, by far, pork and pork products, hence China’s status as home to more pigs than any other country. It so happens that pigs get much of their protein from soybeans, mostly in the form of soymeal, which is a key ingredient in daily animal rations on swine and poultry farms around the world.

Soybeans are also consumed directly by humans as soy oil, tofu, and in myriad other food and industrial products. It’s why soybeans are such an enormous part of the global agricultural economy, and why China is the largest consumer and buyer of soybeans and soybean products.

According to the American Farm Bureau Federation, in 2018 China was the buyer of an astounding 62% of global soybean exports. The top three exporters of soybeans are the US, Brazil, and Argentina. No other country even comes close to any single one of these as a producer and exporter of soybeans. Importantly, China needs soybeans from all three countries; no two alone can supply China’s cumulative need for soybeans and soy products.

Therein lies China’s mistake for making the US farmer a target of China’s wrath: China needs the American farmer, friend or foe, to fulfill its agricultural needs.

The hit on US farmers looks worse than it is

As part of its "wartime" response to US tariffs on China’s exportable goods, the Chinese slapped a 25% tariff on imports of soybeans from the US. The impact on the US farm belt was immediate and severe. Soybean prices in the US collapsed and farmers’ incomes took the hit as prices of corn and wheat, also used for animal feed, fell along with soybeans.

At first glance, it would seem the Chinese had won a battle, successfully harming a large swath of the US population, and undermining political support for the US trade policy against China’s unfair trade practices. But a closer look reveals that China has caused only temporary harm. Much of that harm will befall its own people, who need US soybeans and will have little choice but to pay tariff-inflated prices and buy US soybeans to have enough for themselves and their animals to eat.

Ironically, Mother Nature has supplied two bits of bad luck, one in each country, that have made the Chinese attack on American farmers seem more effective than it is.

The outbreak of African Swine Fever in China and across Asia and a spate of historic rains across the US Midwest temporarily added to the downward pressure on soybean prices just as tariffs were imposed.

Swine Fever killed roughly half of China’s swineherd and reduced the country’s demand for soybeans to feed its pigs. In the US, historic flooding prevented American farmers from shipping last year’s harvest. China turned to Brazil and Argentina for its soybean needs, and US soybean inventories swelled to a record.

But the resulting low prices, culminating in an apparent price bottom in May, attracted buyers for US soybeans, including Argentina, the world’s third-largest exporter of soybeans, which has now become the fifth-largest importer of US soybeans, all in an effort to replenish much needed domestic supplies that were drawn down by Chinese buying.

In addition, once China had purchased almost all of the available soybean exports from Argentina and Brazil, they turned to US soybeans, purchasing them through state-owned companies exempt from tariffs anyway. This Chinese buying occurred in spite of the fact that China needs far less soybeans now than it did before the outbreak of African Swine Fever.

Yutong Yuan/Business Insider

The stark reality is that China’s need for soybeans, albeit temporarily reduced because of the African Swine Fever epidemic, is so great that the US farmer will be the beneficiary of China’s expanding human population and growing middle class for years to come.

To be sure, the rest of the world is also using more agricultural products for the same reasons as China. Demand for agriculture rarely abates. Agriculture is critically important for food, fuel, and industry. So much so that when there is a supply disruption, like the one looming this year because of historic springtime planting delays in the US, consumers face paying higher prices, and farmers are the direct beneficiaries of increasing grain prices.

When looked at as a whole, it seems as if China’s attack on the American farmer will backfire.

China’s swineherd will be rebuilt over the course of the next year, demand for soybeans from China and indeed the entire world will likely exceed production this year helping US farm incomes recover.

China’s people will pay the price, directly or indirectly, to US farmers for their crops. America’s heartland, and our farmers, will revive and thrive.

Sal Gilbertie, president, CEO, chief investment officer, and founder of Teucrium, brings deep experience in commodities markets, particularly in the areas of trading and liquidity, providing insights that enable him to design exchange-traded products (ETPs) for a variety of investors.

Disclosure: Gilbertie is the CEO of Teucrium Trading LLC, the sponsor of the Teucrium CORN Fund ETP (NYSE Ticker "CORN"), the Teucrium SOYBEAN Fund ETP (NYSE Ticker "SOYB") and other agricultural ETPs listed on the NYSE. He often holds in his portfolio his own funds along with other agricultural ETP products and agriculturally related securities.

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