U.S., China Trade War Seen as Biggest 2019 Story, Economists Say
With 2019 coming to an end, it’s time to reflect on the biggest stories in agriculture.
It’s been a year full of uncertainty and never-ending breaking news, but here is our list of the year’s biggest ag stories.
It’s a little hard to find a place to start, but we will begin with what we think is the biggest story of the year.
The U.S.-China trade war continued to cause chaos in agricultural markets in 2019. There were frequent whispers and even proclamations that the trade war was nearly ready to end, but through most of the year, little progress was made. China occasionally decided to waive ag tariffs and import some goods, but by and large, the ag trade between these two countries ground to a halt.
Then, an early Christmas present arrived as word came out that a partial Phase One agreement appears to be moving forward. For agriculture, the package is the big shiny box under the tree, but we will have to wait a bit to find out exactly what’s in it.
Details remain murky at best with mixed messages coming from the White House. The USTR is suggesting that China has agreed to purchase an additional $16 billion of goods over the 2017 baseline of $24 billion in each of the next two years. The president is suggesting ag product purchases may hit $50 billion annually. As far as we know the Chinese have yet to publicly confirm the magnitude of planned purchases.
All in all, the deal discussed by the White House would be a lot bigger than the $30 billion deal rumored earlier in the spring, but still leave a lot of questions about how, exactly, China would increase U.S. ag purchases.
Call us a bit skeptical as to whether Chinese ag purchases could reach the $40 to $50 billion levels discussed above. We should also keep in mind that it was December 2018 when the U.S. and China agreed to a truce and a 90-day negotiation period.
In the Christmas spirit, we will remain positive and note that, at a minimum, the announcement avoids a potential escalation of tensions as the U.S. will cancel additional tariffs set to go into effect on Decenber15. The latest news is certainly a step in a positive direction. Just getting back to pretrade war levels would be a very positive step for the U.S. farm economy.
African Swine Fever Spreads
Arguably the second-biggest story of the year also involved China. African Swine Fever (ASF) continued to ravage its pork industry. Keep in mind that China is not just any hog producer and consumer. Its production and demand are massive, regularly accounting for just under half the world’s production and consumption. The USDA estimated Chinese pork production in 2019 was down 14% from 2018. The disease appears to show no signs of relenting as forecasts are that China’s pork production will again fall in 2020, down another 25% from 2019 levels.
Outside China, the disease is spreading around Asia and threatens other nations. Late in 2019 ASF was found in a wild herd of hogs in Poland, just miles from the German border. Germany is on high-alert as the county is the E.U.’s largest producer of pork.
Beyond pork, world meat markets attempt to sort out the full implications. Brazilian beef prices have soared in recent months, up 36% for the year. The U.S. also regained access to China’s poultry market after a five-year ban.
Back in the U.S., the farm economy was clearly feeling the pinch of the trade war. After insinuating MFP would never be used again, it became obvious that another series of payments would be needed to stabilize the ag economy. Despite confusion in early May, the USDA announced another year of MFP payments for 2019.
Producers then had to wait until late July to learn how large their potential payments would be. The prevent plant situation also made it tricky with Secretary Perdue first arguing that farmers would not get a payment if they didn’t plant in 2019. Producers – those who hadn’t already received their maximum payment – had to wait until mid-November to learn about the fate of the second-round payments, and are still waiting on the third tranche.
Farm Economy – Improved but Still Teetering
The farm economy has been in the dumps for a while and 2019 was no different. At this point, things appear to remain stable, in large part to the $20+ billion that USDA has pumped into the farm economy through the MFP program.
USDA’s net farm income estimates turned higher on the basis of MFP payments and cost adjustments. While the uptick in farm income is a welcomed improvement, challenges still remain. Namely, that farm debt continues higher while producers continue to burn working capital. Direct farm payments now represent more than 20% of farm income.
Financial Stress Gets Headlines
The string of low-income years in agriculture has taken a toll on farm financial conditions and the rate of farm bankruptcies rose again in 2019. In percentage terms, the number of filings has grown rapidly, but the number of cases is still below levels seen as recently as 2010. Some of the increase in Chapter 12 filings was likely due to the increased cap on the amount of debt allowed under a Chapter 12 filing. The bankruptcies weren’t contained in the farm sector as the country’s largest fluid milk producer, Dean Foods, declared bankruptcy in 2019.
Farm Program Fail
It was just last year that the 2018 Farm Bill was written, yet one of the big stories of 2019 is that most of the government program payments received by farmers were not authorized under the Agriculture Improvement Act of 2018.
For example, ERS estimates ad hoc 2019 MFP payments at $14.3 billion and ARC/PLC payments at $2.6 billion. When so much of the government program payments are coming outside of the farm bill one has to question whether it is providing the safety net that it is billed as.
To be more direct, consider that soybeans have yet to trigger a PLC payment, yet received $1.65 per bushel under the MFP 1.0 program. Maybe there are some problems with the PLC price for soybeans?
Spring Weather Headaches
Unprecedented spring rains made it difficult for producers to get their crops planted, and nearly 20 million acres went unplanted. By far the highest level of prevented planting observed in recent memory.
Beyond wet fields, Nebraska faced historic spring flooding, and the threat of flooding along the Missouri River continued through the fall.
Arguably behind the proverbial 8-ball after the slow, wet spring, both U.S. corn and soybean crops came in below-trend in 2019. While yields were higher than most might have initially expected, it’s the first time since 2014 that the U.S. crops came in below trend (corn here, soybeans here). The rapidly changing prospects led to some wild markets with corn prices hitting $4.73 per bushel and then falling to $3.52 by early September.
Late Planted = Late Harvest
For many producers, the 2019 harvest was as frustrating as planting. Many headlines have captured the magnitude of more than 1 billion bushels of corn unharvested in early December. Of course, it was just a few months ago that many faced scarce propane supplies for drying their crop.
Ending Stocks Decline but Remain Ample
Mother Nature did her best to try to rally commodity markets, but prices remained less than many hoped or expected. The U.S. ending stock outlook for corn, soybeans, and wheat significantly declined throughout 2019, but the burdensome starting point was difficult to overcome. While many wonder why prices failed to turn sharply higher given the production hiccups, one must also consider where commodity markets would have went if the early outlook expectations were today’s reality.
USMCA: Across the Finish Line?
After President Trump announced trade negotiators in November 2018 reached a deal to improve NAFTA, progress on USMCA continues throughout 2019. Those efforts appear to be bearing fruit as the House prepares to vote on the bill. Of course, the Senate will also have to sign-off on the deal as part of the U.S.-ratification process.
Lower Interest Rates
After four rate hikes in 2018, 2019 got started with the Federal Reserve positioning to again raise interest rates. In reality, however, the Fed lowered its target rate three times throughout 2019.
Unemployment Rates Continue Lower
The U.S. economy continued to add jobs in 2019. Data from November show that the U.S. unemployment rate hit 3.5%, levels last observed in 1969.
Frustration Boils Over
Sadly, during the annual Pro-Farmer crop tour, USDA was forced to remove its employees when one received threats of harm. The extreme nature of this caught us by surprise.
While this was a rare case of someone way out of line, lots of people have been notoriously grumpy about USDA production and demand estimates. Peak grumpiness may have been achieved in 2019. As farmers struggled to plant their crops and growing crops appeared to be struggling, some thought yield estimates would follow even lower.
Just to be clear the current corn and soybean estimates show well below trend level yields for 2019. While nobody knows for sure where the final crop estimates will land, we always point out, “there’s not a lot to be gained by arguing with the umpire.”
Beyond Meat Breaks Out
There have been many potential meat substitutes developed over the years, but Beyond Meat made big news when Burger King announced they would take the substitute nationwide in 2019.
After going public at $25 per share the Beyond Meat’s stock rose 163% on its first day of trading. It then went on a wild ride peaking at $268 per share before trading recently in the $70’s. Other companies are also heading into this space. The impact on demand for real meat is hard to predict but it will be something to watch over the longer run.
While Beyond Meat got all the headlines as something that might disrupt ag markets, keep your eye on the adoption of electric vehicles which we think might have a more measurable negative impact on ag demand (biofuels) in the coming decade.
Fights Intensify over the Renewable Fuels Standard (RFS)
There was a lot of drama around the renewable fuels standard in 2019. The president and secretary of agriculture frequently touted the implementation of the year-round e15 regulations in farm country. The EPA formalized the rule at the end of May, but that was not the end of the story.
Shortly thereafter farmers and others started to understand the extent of the small refinery exemptions (SRE’s) to the RFS that had been granted by the EPA. Then Poet announced it was closing an ethanol plant and directly blamed the administration’s grants of exemptions. From there the administration sought to find a compromise that would please both ag and oil interests. That’s a tall order and we would expect more drama in 2020.
Here’s to Next Year!
Well, there you have it. As we close out the books on another year, we have to admit that turning the page to a new year is somewhat appealing. Here’s to hoping that better things are in store for 2020.
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