Concerns Cloud U.S. Ag Trade Outlook
Published: Friday, November 11, 2022
Top agricultural economists joined the Farm Foundation last Tuesday for a forum to give an outlook on agricultural trade and commodities for 2023. Their top concerns include: the Black Sea export routes, the Mississippi River, trade competition with Brazil and trade with China and Mexico.
The speakers were: Seth Meyer, U.S. Department of Agriculture chief economist; Gregg Doud, ambassador and vice president of global situational awareness and chief economist for Aimpoint Research; and Amanda Countryman, associate professor in the Department of Agricultural and Resource Economics at Colorado State University.
Combined, Russia and Ukraine account for 12% of global agricultural exports, Countryman said.
With Russia's recent announcement to halt its participation in the Black Sea Grain Initiative, those in the agricultural export business are left hanging in the balance.
There are over 100 vessels in the Black Sea, Doud said. Kip Tom of Leesburg, just recently returned from the Ukraine and reported that things are "rather bleak."
"This is really problematic for Ukraine grain coming out of there," Doud said. "The question is in this situation does a vessel owner even want to mess with loading Russian grain? I don't see any resolution to this in any of this in a short period of time, unfortunately."
However, last Wednesday, Russia announced its return to the trade agreement, allowing safe passage for grain exports.
"Equally important, this region also comprises 20% of fertilizer exports in the world. So, they're really important fertilizer suppliers," Countryman said.
Russia and Ukraine also account for 15% of nitrogen fertilizer in the world, 14% phosphate and 19% potash, making the region a key source of fertilizer.
Grain and fertilizer prices skyrocketed after Russia invaded Ukraine. The real price index for food and fertilizer, based on constant USD prices with a base of 100 which represents the average between 2000 and 2020, shows that grains and fertilizer were at the 125 and 100 approximation marks, respectively. After Russia invaded Ukraine, grain prices rose to 151 and fertilizer rose to 231.
Import costs were amplified due to the Ukraine-Russia conflict, and commodity price levels are still significantly higher than they were in 2021, 2020 and 2019, Countryman said.
"We've seen commodity prices rising basically since the fall of 2020; first, on demand, then some weather-induced supply shocks and then, what you can clearly see, war effects," Meyer said.
The Black Sea passage issues have caused a fluctuation of top commodity origins. Ukraine went from being a top corn exporter in March to being the lowest corn exporter in July.
Meyer echoes Countryman in his concerns for the risks involved in food and fertilizer movement from Ukraine and Russia.
Another issue concerning grains and fertilizer, he noted, is the drought encompassing the Mississippi River Basin.
As a result, the river has experienced extreme lows and there have been changes in price for inland and barge rates. Farmers receiving $3 per bushel discount relative to export price areas along Mississippi are particularly hurting.
The other side of it, Doud says, is getting fertilizer back up the Mississippi in time for spring planting.
The fertilizer situation is an extreme concern, according to Countryman. Countries that are political allies are ensuring their access to fertilizer, creating stronger competition for it, she said.
"We need this La Nina to croak out," Doud added. "It's just cost prohibitive right now to move a barge down the Mississippi and be competitive in the world marketplace."
However, both Doud and Meyer find it unlikely the low waters will persist past mid-February.
The Mississippi's drought is also happening during the U.S.'s most dominant export window, causing challenges that will force the U.S. to export during the time others are also exporting, creating competition.
"If we can't get this stuff down the Mississippi by the middle of February and get it loaded on a boat, we're going to miss our window, the Brazilians are going to take over and there are going to be some really disappointing trade numbers here by the time we get to the middle of next year. There's no question about it," Doud said.
Meyer said a good crop out of Brazil is needed to balance global food supply. Rising prices are blocking the U.S. from participating in trade with countries in need of U.S. exports due to the strength of the U.S. dollar. This is assisting other countries to rise into competition with U.S. trade.
"I think 2023 will be really remarkable if we look ahead a year from now in the size and scope of farm production in Brazil," Doud said.
He predicts soybean acres in Brazil to rise 4% and the U. S. Department of Agriculture predicts 47 million tons of corn exports in Brazil and 55 million tons out of the U.S.
Regardless of who is president in Brazil, Doud believes agriculture has, and will maintain, the upper hand.
"Brazil is going to be absolutely just busting the bins next year as we get into the middle of the year," he said.
Doud believes the U.S. will see demand destruction in 2023 of world supplies due to competition and the strength in value of the dollar.
Agricultural exports in the U.S. for 2022 have been good, according to Countryman, who said trade forecasts predict $193.5 billion in exports and $197 billion in imports. However, as the strength of the dollar increases, the farther the U.S. is removed from trade with developing and import-dependent countries.
"The U.S. isn't doing great, but we're doing a lot better than everyone else," Doud said in regard to the strength of the U.S. dollar. "I think it will be a challenge for us in certain parts of the world."
"We are expensive origins in wheat and corn and other export commodities," Meyer said. "Given dollar strength, there are some import-dependent, developing countries that the dollar strength does inhibit our ability to export, which also contributes to us being some of the higher priced origins at the moment."
Top agricultural exports for the U.S. by commodity include grains and feeds, followed by oilseeds and products, livestock, dairy and poultry, and horticultural products.
Key agricultural trade partners include: China, Canada and Mexico. Horticultural products are the largest U.S. imports commodity, and key import partners include: Canada, Mexico and the European Union.
However, the United States is facing struggles with both China and Mexico.
"The U.S. worked very hard to get a phase one trade agreement with China in response to the trade war that emerged in 2018 between the U.S. and China," Countryman said.
Meyer says there has been a strong rebound due to phase one agreements. He sees a strong growth in ag trade value and expects it to hang in there in the future.
"The current state of the trade war is that September 2020 tariffs were cut in half. Previous rounds of tariffs remain, but there are important exclusions for key agricultural imports into China, including U.S. agriculture," Countryman said.
Several agricultural exports have had exclusions due to this. Currently, 58.3% of U.S. exports face retaliatory tariffs.
China is the No. 1 agricultural export market for the U.S.
Mexico is the second largest trade market for the U.S. for yellow corn, Doud said. However, the use of biotechnology in food sources is an issue that President Andres Manuel Lopez Obrador (AMLO) of Mexico seems to feel very strongly about, he added.
According to Doud, this is an important topic in trade policy for early in the year.
"This is one of those things where AMLO has dug in. So, were really going to have to bear down with Mexico and work through this. It is a very high-priority topic between the U.S. and Mexico and agriculture and, as this deadline he has set approaches, this is going to get serious," he said.
Brian Kuelh, director of government and public affairs at Pinion and moderator of the forum, agreed. The question, he says, is why? The likelihood of AMLO backing down and removing his ban on biotech corn, depends heavily on the answer, according to Kuehl and Doud.
"I really don't know whether, early next year, his self-imposed deadline for all of this potential stopping of U.S. imports of corn is going to happen or not," Doud said. "It certainly wouldn't be in Mexico's best interest were that to happen. We'll have to see."
Due to the strains in the United States' relationship with China and Mexico, Doud, Meyer and Countryman urge the expansion of the U.S. commodity market. A total of 60% of U.S. soybean exports go to China. The top three destinations for U.S. corn (China, Canada and Mexico) account for 70% of U.S. exports. They encourage increased diversification in export partners.
"We have to engage with African countries on the regulatory and SVF side of the equation. And I think they want to pursue that with the U.S. and we need to show more leadership in that regard," Doud said. "The potential for trade is there, but it's on down the road."
"Without question, I think yes, the U.S. should continue to try to expand competitiveness everywhere," Countryman said.
Inflation here in the U.S. is currently greater than 8% due to the war in Ukraine, strains with China, uncertainty for U.S. global trade policy and persistent supply chain issues. Without expansion, the U.S. may continue to struggle with trade agreements.
The U.S. is not a part of the Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Agreement for Trans-Pacific Partnership
(CPTPP) or Assn. of Southeast Asian Nations (ASEAN), three key trade agreements in the Asia Pacific. In response to this, the U.S. has moved forward on the Indo-Pacific Economic Framework for Prosperity which includes 13 countries not including China.
"I think it's absolutely critical that the U.S. is moving forward in the Indo-pacific economic framework (IPEF)," Countryman said.
A focus on IPEF would give the U.S. a foothold for further discussions concerning trade and trade policy, and increase exports in that region for the U.S.
Doud agrees that the U.S. needs to continue to focus on Southeast Asia.
"I think we ought to be looking for export markets for the future of this sector and not just be thinking about how tight we are today," Meyer said.
Meyer does not see the commodity prices "cooling down" because there are still strains in trade agreements with China, the effects on agricultural trade due to the war in Ukraine and changes happening in Brazil.
"I have cautious optimism. The U.S. is faring well relative to other sectors, ag exports for the U.S. continues despite the strength of the dollar, but we have potential for shocks from all of these things we've talked about," Countryman said.
"The issue going forward next year is going to be Mexico," Doud said. "We're going to see the rubber hit the road."
Other topics discussed included the imminent damage of a potential rail strike, trade with India and the effects of the local soybean demand on the U.S. global trade market.
The forum was hosted by Shari Rogge-Fidler, president and CEO of Farm Foundation and a fifth-generation farmer. On Dec. 6, the Farm Foundation will host another forum focusing on the 2023 Farm Bill, which will begin at 9 a.m. (CTD).
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