‘Trade got us into the mess, trade is also what is going to get us out of this mess’
By KRISS NELSON
FORT DODGE – The ag market outlook in 2019 was discussed during the Crop Advantage Series meeting last week in Fort Dodge.
The data was presented by Chad Hart, Iowa State University Extension and Outreach ag economist, who is also known as Dr. Doom.
He said sharing thoughts on the ag market can be difficult at times, but especially more difficult due to the recent government shutdown.
“Since late December we haven’t had any official data on what our exports look like,” he said.
Hart said there have been some shipments of beans going to China, but not enough to help fill the 750 million bushel hole in soybean exports that happened when the trade war with the country began.
“What we can confirm is those sales have been relatively small and it doesn’t really move the export numbers that much,” he said. “Until the soybean market figures out how to fill in that gap, it’s hard for that market to get traction and that’s the hole we find ourselves in today.”
Does not having a report matter?
Without an official report from the USDA, Hart said it is hard to know how to adjust and it’s hard for the markets to go anywhere right now without the data.
“We use those numbers for confirmation and the easiest way to see that was two weeks ago,” he said. “I was watching the soybean market and a rumor had come out that China bought three cargo loads of soybeans. What did the market do? It went up 6 cents. That market acted as you would expect.”
“The next day, the rumor was it wasn’t three loads, it was 15. What did the markets do? Went up 12 cents. Why? Because we don’t know whether the rumor is accurate or not. Everybody is waiting for the official report, which there is none right now.”
It’s not necessarily the information the USDA can supply, it’s the confirmation of that information.
“It gives us that we can trade with some certainty,” Hart said.
The plus side, he added, is other markets are being found, but it’s not happening fast enough. Those sales are not big enough to absorb what China used to take.
Hart said that “2019 is looking to be just as rough as 2018 was.”
“I’m still that short-term bear, long-term bull. It’s the problem with China that is going to hold things up again this year.”
He is also seeing some reasons for optimism looking further down the road.
“We are seeing growth in global demand for a lot of products we produce here,” he said. “Trade got us into the mess, trade is also what is going to get us out of this mess. When you look at the markets and where we are growing, there are a variety of folks we are dealing with.”
Currently, Hart said the European Union is a No. 1 exporter with Mexico, China, Argentina, Japan and Indonesia following.
“We are growing those different markets,” he said. “I’m going to argue they are growing quite substantially. The EU is up over 100 percent. We have more than doubled our sales there. Mexico is up 84 percent. There is incredible growth there.”
“But it also speaks how big that Chinese market was; how drastic of a change that was for us. They were buying one out of every three soybeans we produced in this country.”
Hart said farmers are going to try to fill that large hole left from China with these new and old customers. Some of the customers will remain, while others won’t.
For example, the current No. 4 exporter is Argentina. Hart said farmers should not anticipate seeing them on the chart this year.
“Their crop went to China, and then they figured out they needed some of that back, so they had to come to us,” he said. “They needed those to keep those crush plants going. Most of those crush plants built in Argentina are built for the export industry, so they can re-export the soybean meal.”
The one export market Hart finds fascinating is the EU.
“They didn’t like to buy our crops before, but suddenly they are buying them now,” he said. “We’re redirecting a lot of beans and bean meal throughout the globe.”
The bulk of the South American soybean crop has been, and will continue to be, sent to China recently. Hart feels the U.S. is simply filling in the other markets that South America typically serviced.
“At the same time too, it also means we are likely to increase our crush here and export more soybean meal to help fill in the void as well,” he said. “The other thing we are trying to do is, we are trying to figure out and gather has many trade partners right now as we possibly can.”
The EU is a crucial one to watch right now.
“The president is trying to do now, and he has been doing this for the past eight months, he is trying to get as many trade partnerships as possible right now – reaching some sort of agreement on an individualized country basis,” he said.
It was about seven months ago, when the steel and aluminum tariffs were being put in place, that Hart said there was a parade of world leaders coming into Washington D.C. to try to head those tariffs off and one of the people in that parade was the president of the EU.
“At time I remember it was late June they had a press conference out in the Rose Garden where President (Donald) Trump and president of the EU announced they had a handshake agreement,” Hart said. “President Trump was going to hold off on some of the tariffs in Europe with an agreement they were going to buy more agricultural products. At the time I thought it’s only a handshake agreement. Nothing was in writing, we weren’t going to see a darn thing out of that, but now I look and six months later there was something to that hand shake agreement.”
“We have seen Europe dive in and buy more agricultural products from us and as we still negotiate with China, we are also negotiating with the EU to make that handshake agreement a written agreement.”
An agreement that does exist is the one with Mexico. After the end of NAFTA, there is the new USMCA. There is also one with Indonesia and a trade agreement is in the works with Japan.
Those agreements are something to watch for, Hart said, going into 2019.
“How many additional of those bilateral agreements do we get done here?” he asked. “Let’s face it, when you’re fighting with China, you would like to have some allies with you. I think that is what President Trump is doing right now; we are trying to get a band back together. If you are going to battle with a large economy you are going to want to have your friends with you.”
As far as any trade issues with the U.S. pulling out of the Trans-Pacific Partnership, Hart said trade is still going well with the countries covered by the agreement.
“The thing that may hurt as the TPP moves forward, is that while we are trading well with those countries, we will be at a disadvantage here starting probably next year as those countries trade with each other,” he said. “The TPP didn’t die when we pulled ourselves out. The other countries just kept going and they have an agreement in place. One of the things to watch for here, as you think about Mexico and other countries, you are going to see more trade develop between themselves, possibly off-setting some of the gains we would have.”
Corn exports, Hart said, appear to be up 17 percent for the year. There is some strong growth showing in those places that the TPP would have fixed.
“Hopefully we will be able to continue to build like that,” he said. “And I think we can, because what I am seeing is global growth – not only in the crop side, but I am also seeing it in biofuels; 2018 was a record year for ethanol exports.”
What is driving the global marketplace?
Hart said it is a world wide growth in income.
“That’s why I am long-term bear in the agricultural market right now,” he said.
The number of households making $20,000 a year – a middle class earning on a global scale – is on the rise. Hart said China, in 2016, had 225 million households that were considered middle class.
If you put only two people per household, there are at least 450 million people who are middle class in China. That is compared to the 330 million people that live in the United States.
“You are talking there are more middle class consumers in China than there are total consumers in the U.S.,” he said. “That’s why we talk about that market so much. It’s gigantic.”
Hart said as there is a growth of income happening throughout the world, when it comes to agricultural trade, it’s not necessarily about how many people that are out there – it’s how many people have money that are out there.
“As people get money, what do they like to do? Spend it,” he said. “They spend it to improve their lives. It’s not just eating meat.”
Why are we seeing an increase in ethanol demand?
“Those people get money,” Hart said. “They’re improving their lives. What’s that mean? I’m buying a vehicle that has a motor on it, and if they get enough vehicles and motors out there on the road what happens in the big cities? Smog. Now how are they going to clean that up? Biofuels.”
In fat, a big spike in ethanol exports came from China right before the tariffs hit. Hart said this was due to their smog problem. To help offset that issue, they have put in an E-10 mandate that by 2020 they want all of their gasoline to be an E10 blend.
“Where are they going to get all of that ethanol? They want to make it, but they can’t,” Hart said. “They’re going to try. They’re building 10 new ethanol plants right now. But even with those 10 ethanol plants it is still not enough to meet their needs so they jump into the world market. Who’s the biggest producer of ethanol in the world? Who’s the biggest exporter of ethanol in the world? It’s the United States.”
He added another way people will improve their lives once they can afford it is by improving their diet, which will mean moving from plant proteins to meat.
In 2018, the U.S. produced more than 100 billion pounds of meat. Looking forward to 2019, Hart said that number is looking to rise to 105 billion pounds of meat, which is a record amount.
Why are we producing all of this meat?
Although cheap grain could be a part of it, it’s mainly because somebody in the world can afford to buy that meat. Hart said the average meat consumption in the U.S. is 210 pounds of meat, per person, per year. China’s meat consumption is about 100 pound per person which has grown significantly in just the past two decades.
India’s meat consumption is 20 pounds of meat per person, but is also a market to watch. Hart said in the past three years, their meat consumption has moved from 18 pounds to 20 pounds.
“That’s two pounds per person. How many people live in India?,” he asked. “One point three billion people. That means with that change in India alone, the world needed an extra 2.6 billion pounds of meat.”
“And how much is our meat industry growing by again this year? Basically that amount. I just used India – just one country in the world – and I can explain our entire growth in meat production. That’s the biggest thing driving things right now. When you look at meat exports the last three years, we have been on a steady upstream. Why? Because we found customers outside of our borders.”
Hart said it is going to take awhile for the demand of feed grains to catch up to the demand for more meat.
“In order to make meat what do you need? Feed grains,” he said. “This is the engine, I think, that argues for long-term growth for the demand for our products. This is what we are waiting for. The problem is going to take a little while to catch up to us because what we have been able to do is produce enough feed grains to more than meet the demand we got.”
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