Minus a Black Swan, Renewed US/China Trade Will Start the Long Way Back.

 


Wintertime is not my favorite time of year. When I was younger I really enjoy cross-country skiing and playing hockey and basketball during the Canadian winter we have here in southwestern Ontario. I must say, as I grow older I like winter less and less. However, this current winter in southwestern Ontario has not being too harsh. I’m saying that speaking quietly. We still have at least a month to go before winter is in the rear view mirror.

Last winter, your loyal scribe found himself in the deepest parts of South Asia. I visited Bangladesh, traveled all over the country and spoke at East-West University in Dhaka on agricultural environmental issues. It is always a wonderful time when I go to Bangladesh, one of introspection. Although it is a very poor country, incomes are rising rapidly and over the 26 years that I’ve been visiting there, poverty is tangibly less visual to the eye. There are still empty stomachs, but a better economy has made it better for everyone.

Strategically place between India and China, Bangladesh is in a fortunate position. When you are there now, you can feel the economic influence of both China and India. This is really helping. Of course, it is really helping all across Asia. Healthy Chinese and Indian economies are good for that part of the world. Of course, with food demand exploding in that area, it is also good for North American agriculture. The only problem is our American friends started a trade war with one of their biggest partner. The resultant economic impact has been incredibly tough on North American farms.

As farmers in 2019, we are hoping for good things especially with China US trade talks ongoing. Today, there was a Bloomberg news report that China was proposing to buy an additional $30 billion a year of US agricultural products, above the pre-trade war levels. That would be an incredible boost, but it seems too good to be true. The soybean market responded by going up eight cents a bushel. In essence, the market is almost becoming tone deaf to these daily news reports that may or may not happen.

Pretend for a moment you are with me next January drinking a cup of tea in Bangladesh and looking at the current situation from a Chinese perspective. Keep in mind that the Chinese are looking at ways to lessen their dependence on agricultural imports from North America. This certainly has been accentuated with the tariffs that were slapped on last year. One such development strategy is called the Belt and Road initiative, which is also known as the One Belt Road or the Silk Economic Belt and the 21st Century Maritime Silk Road. This is a series of overland routes by road and rail and maritime routes across Asia into Europe and Africa, which the Chinese government is developing in what they call a bid to enhance regional conductivity and embrace a brighter future. Essentially, they are developing infrastructure over land and by sea to increase and diversify their trade opportunities. Agriculture and food opportunities are a large part of that.

I recently read a report by Wendong Zhang, an extension economist with Iowa State University about the seven things you should know about China to understand the trade war. In this report Zhang talked about how the United States has lost meat exports to China over the last decade partly due to the new Belt and Road initiative. More meat is coming overland fro Europe. He also referred to Brazil soybean production increasing from 25 million hectares in 2012 to 35 million hectares in 2018/19 encouraged by stronger Chinese demand for soybeans. He went on to say that in 2016, Europe supplied more pork to China than the United States, while Australia, Brazil and Uruguay dominated the beef imports to China. He also went on to muse that intuitively the trade war would probably only encourage more agricultural trade diversification for China. It makes that $30 billion figure reported today regarding potential increased trade with China and the United States seem like fantasy.

This is all happening at the same time when Asia is growing. Last week at the Eastern Ontario Crop Conference I showed a picture of hundreds of women walking on the road going to work in Bangladesh. It symbolizes the changes that these women have seen over the last few years. Simply put, their labor in the garment factories in Bangladesh has raised their income, changing the economy and also changing food demand. They are even receiving fast food coupons dropped under their doors at night, which I personally witnessed when I was there. Multiply that across India Bangladesh and China and you can see the huge potential for increased demand of our agricultural commodity space. However, markets work, when politicians allow it. In 2018 politicians threw that baby away with the bathwater.

The road ahead will likely be difficult in 2019. However, I hope the road ahead is one where the trade war ends and global agricultural markets can find some peace. That market peace will only help North American agriculture. However, much has been lost, I think we all know that. So we’ll need that extra $30 billion in agricultural buying from the Chinese. With prices where they are, minus a Black Swan, renewed export trade will start the long way back.