Does the U.S. Ag Sector Rely Too Much on China for Exports?

The recent trade war with China hit all segments of agriculture hard. That’s been well-documented. Howard Olson is the Senior Vice President of Government and Public Affairs with AgCountry Farm Credit Services in North Dakota, Minnesota, and Wisconsin. During a recent Farmfest 2020 virtual presentation, he questioned whether the U.S. ag sector has become too reliant on exports to China. Olson talks about the impact of the trade war at the farmgate level on farmers in eastern North Dakota and Northwest Minnesota.

“Around July 1 of 2018, the drop in that basis from about a 96-under basis went down to $1.38 under and eventually to $1.49 under, and this was when the Chinese tariffs came into place and the trade war hit us. The futures price had dropped about $1.50 in that time, but the basis price also dropped a good 50-60 cents during that period, so it indicates and illustrates the heavy reliance that we have on Chinese trade, which is probably too much reliance.”

The fall in cash prices only got worse as ethanol demand crashed hard due to COVID-19.

“Ethanol is also subject to world problems. We locked down the country, and then we had Russia start an oil-price war with the Saudis, so our demand for ethanol dropped dramatically, plants had to reduce production, some went into a hot-idle and some shut down. This hurts the corn farmers who had contracted corn with those ethanol plants to deliver.”

AgCountry rates their borrowers’ credit risk using a term called “Probability of Default,” or “PD.” Most borrowers’ credit-risk ratings have deteriorated since 2005, and the rate of that deterioration is picking up.

“From 2016 to today, we’ve had difficult-to-no cash flows, there’s been a struggle to maintain debt services and working capital, and especially after the Chinese trade issues. Big yields and outproducing helped, but otherwise, we’re becoming more dependent on government payments and these PD’s are continuing to grind higher.”

While some farm income looked good in 2019, those numbers don’t tell the whole story of what’s happening at the farmgate level.

“We have benchmark data that shows 2019 net farm income of corn and soybean growers averaged $63,000. Now that was net farm income before family living costs and taxes were taken out. However, the top 25 percent of producers in the benchmark averaged $321,000. So, if we’ve got the top 25 percent at $321,000 and an overall average at $63,000, that means there are a lot of farmers that had negative earnings in 2019.”