Trump's And China's Tariffs Could Do Permanent Damage To Soybean Farmers
Forbes (08/07/2018) - To understand the potential financial impact to American farmers it is important to know that soybeans is the second largest financially important crop in the U.S. per NASS, the U.S. Department of Agriculture’s National Agricultural Statistics Service. In 2017 the value of soybeans grown was $41 billion, second only to corn at $48.5 billion . The next largest crop was hay, a distant third at $16.2 billion. For comparison, the value of apples grown in the U.S. is $4 billion and oranges is $2 billion.
The NASS report covers grains and hay, oilseeds, cotton, tobacco, sugar crops, dry beans, peas, lentils and potatoes. Their total value last year was $141.4 billion, which means soybeans were 29% of the total. Policies that decrease the price of soybeans and increase the cost to produce them (think steel tariffs that increase the cost of farming equipment) will have a significant impact on the profitability of U.S. farmers.
And don’t forget that President Trump needs China’s help with North Korea and Iran. China has a lot of cards to play in the tariff wars with the U.S.
Prices have fallen sharply over the past two months
The U.S. produced 4.39 billion bushels of soybeans in 2017, up 2% from 2016’s 4.3 billion. However, over the past five years U.S. farmers significantly increased production from 3.04 billion bushels, up 44%.
One interesting statistic is the value of the soybean’s 2012 crop was actually higher at $43.7 billion than 2017’s on far fewer bushels. In some ways that isn’t surprising since as the harvest was lower price per bushel increased. However, it does mean that the farmer’s cost in 2017 was probably higher due to having to harvest so much more to get the same revenue.
While soybean prices rebounded on Friday, they have been in free-fall since May after President Trump’s trade rhetoric escalated. As can be seen in the chart below (after adjusting for the number of bushels in a contract) soybean prices have fallen from about $10.50 per bushel to Friday’s $8.95. Before the one day jump they had been at a two year low of about $8.60 per bushel.
For every $1 lower in average price per bushel, U.S. soybean farmers will see their revenue decrease by over $4 billion or about 10% of total revenue. Since costs don’t decrease, or at least very much, as revenue declines this lost revenue essentially drops to the bottom line.
A profit can turn to a loss very quickly
Farmer’s profitability can be highly variable. In a report from the University of Illinois a farm with 3,000 acres of corn and soybeans had an operating profit margin of 24.5% from 2010 to 2014. However, it fell to a negative 3.6% in 2015 and only rebounded to 4.6% in 2016. This demonstrates that if soybean prices remain low and cuts farmer’s revenue by 10%, it could easily turn a profitable year into a loss.
China is probably more than willing to absorb the additional costs associated with the soybean tariffs it is imposing on its own people. It would not surprise me if the government steps in to subsidize their soybean businesses to at least partially offset the increased costs.