China trade

The Hong Kong-registered cargo vessel OOCL Rotterdam is moored at the Port of Tacoma. China's government says it won't buy U.S. agricultural products, but whether that applies to private companies was unclear.

It’s unclear what actual impact China’s announcement this week that it will stop buying U.S. agricultural products will have on farmers and ranchers in the Pacific Northwest, but sources say that the uncertainty in itself has its own impact.

“If it seems like things aren’t going to get better, the market is going to react to that,” Dale Thorenson, assistant director of the U.S. Canola Association, said. “If it looks like in the near future we aren’t going to be making a deal, if we’re not going to be negotiating, if we’re not going to resolve this trade dispute, that means there won’t be sales. The market will price that in.”

On Monday, China’s Ministry of Commerce announced Chinese companies would stop buying U.S. agriculture products. The announcement came in response to the Trump administration’s decision last week to impose additional tariffs on Chinese goods and to designate China as a currency manipulator.

The tit-for-tat announcements are the latest development in an ongoing trade war between the two countries.

Sources say the wording of the ministry’s announcement was vague, implying the ban extends to all purchases of U.S. products. But, they say, it appears the announcement only applies to China’s state-operated industries and that sales to private importers are not impacted.

The American Farm Bureau Federation expects the policy will affect soybeans and grains that are usually bought by state-owned companies but isn’t sure that’s where its impact will end, said David Salmonsen, the group’s senior director of congressional relations.

Anecdotally, there is precedent for the Chinese government to pressure private companies to stop buying certain foreign products, so U.S. producers will have to monitor what’s getting in and what isn’t, he said.

“Everything’s a little opaque in dealing with them,” Salmonsen said.

Potential impacts

Commodity groups are still assessing potential impacts.

“I’m not really sure there’s going to be an added consequence,” Marc Beck, executive vice president and strategic adviser for the U.S. Dairy Export Council. “The damage is sort of already done.”

China’s punitive tariffs are already having a material impact on U.S. dairy exports, which are down 50% or more for some products, he said.

Total volume of U.S. exports of major dairy products to China was down 44% year over year since China’s retaliatory tariffs were implemented and dropped from about 19% of total exports to 11.5%, according to USDEC.

For beef producers, the effect of China’s policy will be muted because they’re already selling so little product into that market, said Kent Bacus, international trade director for the National Cattlemen’s Beef Association.

China lifted its restrictions on U.S. beef related to bovine spongiform encephalopathy, or mad cow disease, in 2017 but then effectively shut down access again by raising the base tariff rate from 12% to 37%, he said.

The country has also imposed barriers to beef produced with hormones and other veterinary products that are common in the U.S., which has probably had an even greater adverse effect than tariffs, Bacus said.

“We just have not been able to develop that market due to all these restrictions,” he said.

Specialty crops

Specialty crop producers hope to be spared. While it’s possible that private Chinese companies won’t immediately cease imports of U.S. hazelnuts, almonds, grass seed or other specialty crops, exporters fear that may happen if the ongoing trade dispute escalates.

“It could definitely get a lot more intense, so we’re hoping the resolution comes sooner than later,” said Larry George, president of the George Packing Co., a hazelnut packer.

Though George is operating under the assumption that his company will be able to send hazelnuts from the 2019 crop to China, it’s possible the government may also block shipments to private buyers by refusing to clear containers through customs, he said.

“People obviously don’t know where this trade dispute is going to go next,” George said.

Pennington Seed has a shipment of grass seed that’s expected to arrive on China’s shores imminently which it hopes won’t be sent back to the U.S., said Mike Baker, the company’s vice president of strategic procurement.

“As you can imagine, I’m a little nervous about that,” he said.

Grass seed has until now largely been spared from the tariff hikes that afflict other U.S. farm products, since China doesn’t have many readily available alternatives, Baker said.

Chinese companies are major buyers of U.S. hides and skins, which they turn into leather products, and a cancellation of all orders would have “massive” impacts, said Stephen Sothmann, president of the U.S. Hide, Skin & Leather Association.

“There would not be another place for that. We’d have to compost the hides, basically,” he said, noting that such a development would also hurt prices for U.S. cattle.

However, Chinese hide buyers have so far indicated they won’t have to stop their orders, Sothmann said. “At least initial reports show we’re not going to be impacted.”

Almonds are likewise typically purchased by private Chinese food manufacturers, unlike bulk crops such as soybeans, said Jonathan Hoff, CEO of the Monte Vista Farming Co., an almond producer in California.

“We’re not fulfilling government tenders with massive steamships full of commodities,” he said.

Hoff said he doesn’t think the U.S. farm industry has clarity on what the Chinese government’s announcement will mean, though he expects it will only apply to government-controlled entities.

Even so, high tariffs and uncertainty have already convinced the Monte Vista Farming and other almond producers to seek alternative markets, he said.

The announcement will affect oilseed farmers on a “macro” perspective, pressuring prices, said Sam Ohden, oilseeds merchant for Columbia Grain in Portland.

“You’re going to find Canadian canola looking for new homes and flowing in places you might not normally see it, such as Europe or flowing down to the United States crusher,” he said. “Just how much of an impact is impossible to quantify, but it’s certainly not bullish.”

Ohden said it’s tough to say whether planned sales to non-government buyers are going through.

“When this business gets done directly with the exporter, it’s difficult for the market to know,” he said.

China is the largest importer of U.S. soybeans, with China and Hong Kong representing roughly $2.9 billion in 2019 so far, according to the USDA Foreign Agricultural Service.

Soybeans took the first hit. But the entire oilseed complex has been under pressure due to large global stocks for the last several months, Ohden said.

China had purchased 35 million metric tons of soybeans before the trade war began, then dropped to 25 million metric tons last year. This trading year will be considerably less, said Dale Thorenson, assistant director for the U.S. Canola Association.

It may take a decade to get export volumes back up to where they were a year ago, Thorenson said.

“Even as you get all these issues resolved, there’s still been a disruption in the market,” he said. “We’re not considered a reliable supplier at this point, so we’ll be the residual supplier. We’ve spent 30 years to build our exports up and they’ve all kind of gone sideways.”

Forage

Alfalfa is the only forage product approved for import to China, and the majority of alfalfa for export is grown in the western U.S. and shipped through West Coast ports.

“China is a big player for U.S. alfalfa exports,” John E. Gombos, vice president of operations for The Gombos Co., said.

When the trade dispute started in July of 2018, the reaction of end users in China was to stop everything until things were worked out, he said.

“Exports went from good cash flow and good pace to shutting off completely,” he said.

Before the trade dispute, China was importing about 1 million to 1.3 million tons a year from the U.S. The trade war took that volume away with a significant reduction, he said.

Most export markets are mature, and exporters can’t just shift their hay to other countries, Gombos said.

“A lot of companies built their business around the China surge, and it was taken away from us overnight,” he said.

Tree fruit

Sales of Pacific Northwest apples to China from last year and cherries from this year are virtually done, but the industries are uncertain about the effect of China’s agricultural ban on the coming season.

Apple harvest begins this month but sales to China usually don’t begin until November.

China has banned only government-owned entities from buying U.S. agricultural goods.

“So what that really means we don’t know. Importers are concerned. Most of the customers we work with in China are private and I would guess that’s true for most of the exporters from here,” said Tim Evans, general sales manager of Chelan Fresh Marketing, one of the Washington’s largest fruit sales companies.

Mark Powers, president of Northwest Horticultural Council in Yakima, said it’s hard to know what private importers will do.

Evans said Chelan Fresh has a limited volume of cherries still en route to Hong Kong and that he doesn’t anticipate any problems.

“We are hardly shipping any apples or cherries there now so the immediate impact is fairly minimal,” Powers said.

“The rest is hard to know. The two countries are still talking. I think there will be fewer apples going to China this coming season because of a larger China crop and other countries competing against us without tariffs will take our market share,” he said.

Pacific Northwest sweet cherries will be damaged more than apples or pears by the loss of China as an export market. The U.S. exported $121.6 million worth of sweet cherries to China in 2017, the last full year before the trade war began a year ago. Most of that was from Washington with some from Oregon and California. Washington’s crop is valued at about $470 million annually.

The Pacific Northwest shipped 3.2 million, 20-pound boxes of cherries to China in 2017, 1.6 million in 2018 when a tariff was implemented mid-season and is at 1.3 million with this year’s season just now ending.

The 2018 loss has been estimated at $60 million to $106 million and complete market loss would be about $121 million. China was the top export market for PNW cherries in 2017 but is no longer.

U.S. pears to China peaked at $4.8 million in 2012, were at $916,000 in 2018 and averaged $1.7 million the three prior years, according to Pear Bureau Northwest. It has been stifled by competition from Belgium and the Netherlands and China’s own production of Asian pears.

Washington apple exports to China reached 1.7 million, 40-pound boxes in 2017. It was developing toward a 2-million-box market valued at roughly $50 million and the industry once figured it could grow to a 10-million-box market worth about $250 million.

So far this year, Washington has shipped 800,000 boxes of apples to China, which has been the industry’s sixth largest apple export market and about 3% of state apple exports, said Toni Adams, Washington Apple Commission spokeswoman.

It’s a value market in that China has been willing to pay good prices for quality apples, which improves grower returns, Adams said.

Hong Kong was a backdoor conduit of apples to China for years and could be again, or perhaps not given political turmoil there, Desmond O’Rourke, a retired Washington State University agricultural economist, said.

Clarity elusive

For the time being, producers and exporters are feeling their way through the dark. It’s unclear if private buyers in China will follow the government’s lead, whether shipments already en route will be turned back or signed contracts will be honored.

It’s also unclear whether the trade war will further escalate or a deal will be reached.

The larger-term ramifications of the escalation of the trade war between the U.S. and China is not being able to trade in the largest global market.

“We seem to be getting further apart with no resolution in sight,” Beck, of the U.S. Dairy Export Council, said.

The U.S. and China could still reach a trade deal, said O’Rourke, the economist.

“I think we might get the trade deal sorted out, like soybeans and tariffs. President Trump has the right goals but his tactics in dealing with China and, with the weakened allies we have, has not been very effective.”

“Any time that there is a ‘ban’ on something, it affects the movement of trade,” said Mike Miller, Washington Grain Commission member and Ritzville, Wash., wheat farmer. “Anytime you’re not able to ship something, it’s going to impact supply.”

What is clear is that exports are vital to U.S. agriculture.

Half of U.S. production is exported. Any decline or loss of exports market is a concern, because farmers can grow more than the country can consume, Thorenson, of the U.S. Canola Association, said.

That’s why U.S. farmers worked so hard to cultivate overseas markets, he said, stressing the importance of trade deals with Mexico, Canada and Japan and resolving issues with China.

“We as producers can drown this country in grain if we don’t export it,” he said.

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