Consulting Agency UkrAgroConsult
Donald Trump’s trade war with China is hitting American farmers the hardest, forcing them to take losses for soybeans and corn — just as the White House has granted exemptions to some oil refineries to avoid complying with biofuels’ rules.
Indeed, soybeans and corn are used to make biodiesel and ethanol that are blended with petroleum — required by the Renewable Fuel Standard of 2005. The law has been a boon to farmers producing those crops. The exemptions coupled with the trade war are thus a double whammy for farmers.
Not to be outdone by Trump, China now applies a tariff to $14 billion in American soybean exports entering its borders. Furthermore, changes to the Renewable Fuel Standard (RFS) could have a $21 billion impact on corn growers, Bloomberg reports. Congress has sought to expand ethanol use from a base of 6.5 billion gallons in 2005 to 16 billion gallons by 2022.
“Secret handouts to petroleum giants don’t just undermine the administration’s commitment to the RFS, they represent a very real threat to hard-pressed farmers and biofuel industry workers across the heartland,” Growth Energy Chief Executive Emily Skor said. “Every waiver represents a gallon of homegrown biofuel that can’t make its way to consumers, can’t contribute to U.S. energy security, and can’t grow the U.S. economy.”
The oil industry has objected to the RFS, saying that not only is ethanol an expensive proposition but it is also a giveaway — and that ethanol hurts gas mileage and thus has no real eco-advantages. The smaller-to-mid-sized refiners like Valero Energy Corp., HollyFrontier Corp., PBF Energy Inc. and Monroe Energy have written EPA to say that the cost of purchasing imported renewable fuels has “skyrocketed;” imports are needed to meet the mandates.
And over the summer, the Environmental Protection Agency exempted smaller refineries owned by Andeavor from those biofuels’ rules. This is atop the exemptions given to 25 other smaller refineries. That action, in turn, hurts companies that produce fertilizer such as Nutrien.
The agricultural sector, however, says that ethanol and biodiesel are a lot cleaner than pure petroleum and that it substantially reduces CO2 levels. Newer generations of those biofuels are in the pipeline, which include the transition to non-food based feedstocks.
The Terrible Tariffs
The oil and agricultural sectors have long been at odds over the forced use of biofuels and whether they are good investment or whether they are just a handout to farmers. But there has been near universal approval of open trade between the United States and China as it relates to farm exports.
While Trump is boasting that “tariffs are the greatest,” China is striking back. And soybean producers are feeling it.
China’s purpose in going after farm products from the heartland of the United States is that it will hit Trump where it hurts — right at his political base of supporters who put him in the Oval Office. Already, China has imposed tariffs on grains, oilseeds, livestock and fresh produce.
But Trump has devised a plan to assist the agricultural sector by providing it $12 billion in relief. Specifically, the U.S. Department of Agriculture will administer the so-called Market Facilitation Program to provide payments to corn, cotton, dairy, hog, sorghum, soybean and wheat producers. It will also purchase up to $1.2 billion in commodities from those same farmers while providing $200 million to them to help develop foreign markets.
“These programs are in keeping with President Trump’s promise: that his Administration will not stand by while farmers are treated unfairly by countries acting in bad faith,” Agricultural Secretary Sonny Perdue said in an email sent to this reporter.
China buys two-thirds of the world’s soybean exports and it buys about 61% of all U.S. soybean exports. That equates to one-third of all production here. That soy is then used in chicken and fish farms as well as to feed the millions of pigs there, all to eventually make cooking oil.
The resulting tariff on such goods means that China is now relying more on other countries such as Brazil, which is able to charge a premium for its soybeans. And the U.S. farmers are worried that they may lose those commodity markets for good. The result: soybean prices are down 20% since July, when China first imposed the tariff. And those prices have declined by 40% since 2013, leading to a 40% drop in farm income.
China’s agricultural markets have opened: The value of U.S. soybean exports to China has grown 26-fold, from $414 million in 1996 to roughly $14 billion in 2017, says the American Soybean Association.
“We need to be doing trade deals,” says John Heisdorffer, president of the soybean association, in a phone call. “I’m not expecting the government to keep giving out checks.” He said that the tariff is costing soy producers more than $2 a bushel and that the government offset is $1.65.
According to a study by Purdue University, sustained tariffs would mean that China’s import of U.S. soybeans could fall by 65 percent. U.S. production of soybeans would gradually decline by 15 percent.
The states producing those soybeans? Iowa, Nebraska, North Dakota, Ohio, South Dakota, Indiana, Missouri — all of which voted for Trump. Illinois, Minnesota and; Ohio is a voter-rich state, which if it went Democratic in the next election, could well mean the loss of the presidency for Trump.
The president likes to complain about trade deficits with China, or the fact that the United States buys more from China than it sells into the country. But the irony here is that U.S. agricultural sector runs a trade surplus — selling some $143 billion abroad, or $20 billion more than it buys.
“We talk about trade in the context of countries. But it is really firm-to-firm and business-to-business relationships. There needs to be a degree of certainty,” says Andrew Muhammad, a farm and trade economist with the University of Tennessee’s Institute of Agriculture, in an interview. “If they can’t rely on the U.S. as a primary source, then buyers will look elsewhere.”
In other words, companies have established relationships and supply chains. In the short run, trading partners may have to tolerate some disruption and eat the losses. But this can’t go on for a sustained period. Once the supply chain is re-ordered, it becomes almost impossible to reverse — that the cost of doing so would exceed any benefit. And American farmers come up short.
Altogether, about 900,000 jobs are tied to U.S. exports to China, says the U.S. Department of Commerce. That includes both goods and services, it adds, and for 2015, which is the latest year for which it has data.
“If the trade war is over by the first of the year, people will say it has been a tough stretch but we made it through,” says Heisdorffer, with the soybean association. “But if it goes on a year or more, it will be tough on farmers. They will vote with their pocketbooks.”
While Trump may have won the hearts of the country’s farmers during the last presidential election, he is quickly losing their support because of exemptions granted under the Renewable Fuel Standard as well as the tariffs on China. His relationship with farmers is, literally, in the dirt. Without a fix, the president’s chances of winning re-election in 2020 are greatly reduced.
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