Making Hay from the Trade War in Agriculture
Farmers, who have not seen their incomes grow in many years, are now increasingly anxious over the prospects of their most significant crop because of the worsening trade war. That crop? Soybeans, which are crucial for a huge variety of uses around the world.
It appears as if the Farm Belt will continue to suffer belt-tightening. But savvy investors are able to leverage good or bad news, regardless of policy trends.
According to the U.S. Department of Agriculture, American farmers have not seen an increase in their “cash receipts”, or revenue, since 2014 when total receipts rose slightly to almost $425 billion. That year ended up being the peak year in receipts for the Farm Belt. In the last three years, total receipts for farmers wilted to roughly $380 billion.
Farmers are nervous. Take this dire warning from Brent Bible, a soy and corn producer from Romney, Indiana who posted this comment on the Farmers for Free Trade website:
“For soybean producers like me, this is a direct financial hit. This is money out of my pocket. These tariffs could mean the difference between a profit and a loss for an entire year’s worth of work out in the field, and that’s only in the near term.
Over the long haul, soybean producers are deeply concerned that China will continue to substitute American soy with soy from our global competitors. The losses these tariffs represent can’t and shouldn’t be made up by government programs.
Frustration is growing quickly in the heartland, we need this solved now.”
The 25% retaliatory tariff on U.S. soybeans enacted by China last week may be the final nail in the coffin for some farmers. The tariff, which was considered only a threat up until a few weeks ago, is in response to the Trump administration’s taxes on more than 1,300 imported products from China. Those products include machinery, electronics, aerospace and robotic equipment.
China Punches Back
China imports one-third of the U.S.’s total soybean harvest and 60% of the U.S.’s exports. The U.S. administration may have taken faulty comfort in the fact that China produces very little of the soybeans that it consumes. The country imports 90% of the crop, which is critical for several uses including cooking oils and livestock feed.
However, that reliance on the U.S has inspired creativity and quick thinking in our Asian counterpart. The Chinese government has taken several steps to alleviate any pain from the higher priced U.S. export.
In the past month, China has made the following changes to lessen its reliance on U.S. soybeans:
- Removed inspection requirements on a variety of substitute products including peanut meal, cottonseed meal and rapeseed meal.
- Issued a mandate to farmers in Heilongjiang, China’s top soybean-producing province, to grow more soybeans. The government increased subsidies on soybeans to a level where they now are double those of corn, a strong incentive for farmers to switch crops.
- Increased imports from Russia and Brazil. Brazil, whose soybean crop is at record levels, could replace most of the orders previously supplied by U.S. farmers.
China canceled orders for at least one million tons of soybean exports from the U.S. earlier this spring due to fears of the proposed tariff. Brazilian soybean farmers are enjoying record harvests.
Due to the size of the Brazilian harvest, it could supplant a significant amount of the roughly 30 million tons of soybeans exported from the U.S. to China. Brazil is expected to harvest over 100 million tons of soybeans this year, enough to entirely satisfy the 90 million tons imported by China last year.
Like anyone worried about their income, U.S. farmers are tightening their belts. Their anxiety will likely result in the delay or cancellation of machinery purchases and other planned farm upgrades when demand from China appeared robust.
In the context of this dire news from the heartland, I’ve been leveraging the agriculture sector for bearish trades. There are many commodity-linked stocks and funds that investors can short. But my investment trades will take time, as the consequences of protectionism work their way through the farm industry.
However, my colleague Jim Fink knows how to make hay… quickly. As chief investment strategist of Velocity Trader, Jim has devised a system that reaps big gains in a short period of time. Here’s the kicker: his methods work regardless of sector, market ups and downs, economic cycles, or government policies. To learn the secrets of Jim’s next money-making moves, click here now.