Key takeaways

  • The trade war between China and the United States has altered traditional agricultural commodity alliances throughout much of the world.
  • U.S. soybean imports to China, for example, have nearly ground to a halt, and Brazil has gained market share from the United States in the global soybean trade.
  • Farmland investors would be wise to consider diversifying along a range of dimensions, broadening exposure to properties across multiple geographical regions associated with multiple crop types, and shipping to multiple end markets throughout the world.

Since spring 2018, U.S. global trade policy has undergone a paradigm shift, moving to a more confrontational position that’s resulted in increased restrictive trade barriers. The first salvo was the March 2018 tariffs that the United States imposed on steel (25% duty) and aluminum (10% duty) imports from all countries except Argentina, Australia, Brazil, Canada, Mexico, the European Union members, and South Korea. In May 2018, the metal tariffs were expanded to include Canada, Mexico, and the European Union countries. These tariffs were quickly followed by a series of retaliatory tariffs on U.S. exports, including agricultural commodities. Of the trade restrictions on U.S. agricultural products, we would highlight the 25% tariff imposed by China on U.S. soybeans for its significance and impact to date. Implemented on July 6, 2018, this particular measure has already begun to shift traditional alliances in the global exchange of agricultural commodities. Current and prospective holders of farmland investments would do well to mind the implications. Diversification may be among the best lines of defense.

 

Retaliatory tariffs on U.S. agricultural products have narrowed some trade routes, widened others

The 2018 trade barriers came in an already challenging market environment for the U.S. farm industry, which had already been contending with a strong U.S. dollar relative to the currencies of most competing agricultural export countries around the world. Certain agricultural commodities from one region, especially grain and oilseeds, can be extremely susceptible to supply substitution from other regions, because they’re often interchangeable with crops produced elsewhere.

 

Global trade plays a material role in the U.S. agricultural sector

At US$138 billion in 2017, the United States stood as the world’s leading agriculture exporter, representing over 20.0% of all U.S. agricultural production.1 Between 2000 and 2017, U.S. agricultural exports expanded at a compound annual growth rate of 6.4%, outpacing the growth in total production.1 By value, the leading export categories in 2017 were soybeans, corn, tree nuts, beef, and pork.2

 

U.S. soybean exports led the way in 2017

Top U.S. agricultural exports in 2017

U.S. soybean exports led the way in 2017

Source: USDA Foreign Agricultural Service, 2018.

 

 

Top U.S. export customers included Canada, China, Mexico, Japan, the European Union, and South Korea. Until 2018, China was the fastest-growing destination for U.S. agricultural exports, reflecting rising per capita income and accompanying shifts in diet to higher consumption of meat and fresh foods. The North American Free Trade Agreement and its pending replacement, the U.S.-Mexico-Canada Agreement, already establish free farm product trade for most agricultural commodities, but the lack of an in-place trade agreement between China and the United States enabled 2018’s tariffs on products worth hundreds of billions of dollars.

 

In terms of value and percentage exported, soybeans and tree nuts are two product categories highly exposed to trade policy shocks. The main market for American soybeans is China. In 2017, the US$12.3 billion of U.S. soybean exports to China represented 32% of total U.S. soybean production (US$38.6 billion)3 and 60% of all U.S. soybean exports.4 Tree  nuts are a much smaller product category by volume, but they are, pound for pound, higher-value luxury crops, with total exports of US$8.5 billion in 2017. The key markets for tree nuts are Western Europe and Hong Kong, where tariffs aren’t an issue.

 

Top U.S. agricultural export customers include Canada, China, and Mexico

U.S. agriculture export growth (US$ billions)

Top U.S. agricultural export customers include Canada, China, and Mexico

Source: USDA Foreign Agricultural Service, 2018.

 

 

Since July 6, 2018, when the Chinese government implemented the tariff, U.S. soybean exports to China have nearly ground to a halt. Seasonally, the third and fourth quarters of each calendar year account for the bulk of exports, but this year’s data has demonstrated an abrupt deviation from the recent past. China has already shifted buying behavior to support its growing livestock industries. Dramatic shifts in trade are occurring as China boosts imports from Brazil to replace tariff-encumbered supplies from the United States. U.S. domestic soybean demand could also be moderated by the Chinese tariffs on U.S. livestock products, which are expected to reduce livestock exports and may have a ripple effect on domestic demand for feed—including soybean products.

 

The impact of Chinese tariffs on tree nuts, currently 50% on almonds, 45% on pistachios, and 65% on walnuts, has been more muted than those on soybeans, since Hong Kong is the primary entry point for U.S. tree nut exports to Asia. U.S. tree nuts shipped into Hong Kong aren’t subject to the tariffs and, accordingly, they’re holding up better than U.S. soybean exports to China. Although the vast majority of U.S. tree nuts are exported, their exposure to mainland China’s market is relatively limited, and options for substitution by other products or alternative supply regions is more limited. In addition, tree nuts are less price sensitive than soybeans, whose primary end use is livestock feed.

 

U.S. soybean exports to China have nearly ground to a halt

Weekly export volumes, U.S. soybeans to China, 2015–2018 (metric tons)

U.S. soybean exports to China have nearly ground to a halt

Source: USDA Foreign Agricultural Service Export Sales Reporting, HNRG Research, as of September 30, 2018.

 

 

Enduring consequences may unfold over an extended period

Institutional investors in U.S. farmlands producing annual crops such as soybeans may be insulated to a certain degree from the direct impact of the initial market disruptions related to the recent tariffs. The prevailing operating model for institutional investors on U.S. annual crops is leasing farmland to independent farms, rather than directly operating them. Most institutionally owned U.S. annual croplands are leased to operators on a multi-year basis, providing some shelter from the impact of short-term commodity market volatility. We believe a compromised position in key export markets and resulting declines in commodity prices will eventually translate into downward pressure on lease rates, but the changes will likely occur over a more extended time period, allowing for market adjustments.

 

The market has begun to adapt as global alliances shift

Markets are already in the process of adapting to the tariffs. After exporting none since 2009,5 U.S. soybean exports to Argentina grew rapidly in 2018 following the imposition of the Chinese tariff on U.S. soybeans, and soybean exports to Brazil also rose. In the third quarter of 2018, Argentina became the largest importer of U.S. soybeans.

 

Although final export statistics for Brazilian soybeans to China for the third quarter aren’t yet available, we expect the tariffs to accelerate the long-standing trend of Brazil gaining market share in the global soybean trade. When the United States and China are able to agree on a new trade deal and remove tariffs, the United States will likely resume exports to China; however, we don’t expect an immediate return to prior levels. Even if a deal is reached, countries will still be sensitive to the possibility of the risks of being highly dependent on a single country to supply a key commodity.

 

The impact of Chinese tariffs on tree nuts has been more muted than that on soybeans

U.S. almond, pistachio, and walnut exports to China and Hong Kong, 2014–Q3 2018 (000 lbs)

The impact of Chinese tariffs on tree nuts has been more muted than that on soybeans

Source: USDA Economic Research Service, as of September 30, 2018.

 

 

Farmland investors should consider diversifying on multiple fronts

The recent tariff-induced price volatility in the agricultural commodity markets reinforces the need for farmland investors to consider diversifying their holdings across different crop types and different geographical regions— not just within the United States, but throughout the world. This means being open to a global portfolio of properties beyond U.S. borders, including places such as Australia, Brazil, Canada, Chile, and New Zealand. A globally diversified portfolio of farmland properties may provide a measure of protection from the type of policy-induced trade turbulence that we’re currently seeing most acutely in segments such as U.S. soybean exports.

 

Brazil is gaining market share from the United States in the global soybean trade

Global soybean market export share (%)

Brazil is gaining market share from the United States in the global soybean trade

Source: USDA Production, Supply and Distribution, HNRG Research, 2018.