US Midwestern Farmer Set to Lose in Potential China-US Trade War

“The Chinese people have understood since ancient times that there are no free things to enjoy. To be happy, one must fight for it,” China’s President Xi Jinping told the National People’s Congress last week. Indeed, there are no ‘free things to enjoy’ as China fights for a bigger role in the world economy. Imposing import tariffs on US pork and possibly on US soybeans will likely translate into higher meat prices for China’s consumers.

But happiness looms around the corner. China’s rural economy will likely get a boost because this trade spat reconfirms and has the potential to increase investments to upgrade China’s agricultural industry.

Rabobank estimates that a 25% import levy on soybeans increases the average cost price of Chinese pork with 2.3% and that of poultry with 3.8%. It is likely that, initially, these cost price increases will be passed on to the consumer. In 2016, China slaughtered 683m pigs, which together ate 218m tonnes of feed containing on average 16% soymeal. Feed costs represented 57% of the cost price of Chinese pigs. However, soymeal inclusion in feed used in professional pig production can run as high as 25%, increasing the cost price by 3.7%. Inclusion of soymeal in broiler diets is 25% while feed costs are estimated to represent 60% of the total cost price of Chinese broilers.

In the long term however, China has plenty of opportunities to wean its livestock industry off of US soybeans by investing in its own agricultural industry and by diversifying feed protein sources. Rabobank estimates that China’s soybean demand out of its domestic pig industry will increase from 44m tonnes to 60m tonnes in the next decade. Substantial investments in animal nutrition and farming can decrease the feed used to produce 1kg of pork by 17% and can decrease the inclusion rate of soymeal in pig feed from 16% to 10%. These technological advancements can decrease China’s 2026 soybean demand from its pig industry by 14m tonnes. Add China’s investments in insect protein production to the mix and soybean demand growth stalls. Insect protein can also dent the growth of soybeans in China’s poultry industry, which Rabobank estimates to grow with 13m tonnes from 38m tonnes to 51m tonnes in the next decade.

In addition to these technological advances curbing soybean demand growth, US farmers are likely to see China’s buyers drift towards competitive sources. China’s domestic soybean production will reach 18.9m tonnes in 2020, up from 12.6m tonnes in 2016. Rabobank further estimates that Brazil will raise soybean exports by almost 30m tonnes in the next ten years, providing significant leverage in negotiations with US famers.

Trump’s trade war rhetoric will only make China more determined to reduce its dependency on US farmers for its food supply and instead invest more aggressively in its own agricultural industry and in dedicated ‘south-south’ supply chains.