Ongoing measures to limit the spread of the coronavirus (COVID-19) are impacting global trade of agricultural products and will be a significant factor in whether China will meet its phase one trade commitments with the United States.
To reach the target, China must double the $5 billion of US agricultural products it imported from January through March every quarter for the next three quarters, said Joe Glauber, senior research fellow at the International Food Research Institute during a farmdoc webinar.
“We probably won’t meet those targets,” said Glauber, who is a 30-year veteran of the US Department of Agriculture including as its chief economist. “I think we’ll be lucky to get to the 2017 levels. There are some encouraging signs. We have made some sales of pork, cotton, wheat, corn and sorghum but it is at a very slow pace.”
As part of the phase one agreement, China has agreed to purchase $36.5 billion in US agricultural products in 2020 ($12.5 billion above the 2017 baseline) and $43.5 billion in US agricultural products in 2021 ($19.5 billion above the 2017 baseline).
Glauber noted there have been recent Chinese purchases of US soybeans, but he added China wasn’t likely to begin buying US soybeans in significant volumes until late summer. Until then, Brazil was expected to be China’s primary source for soybeans.
Terms of the US-China trade agreement include that purchases would be made at market prices based on commercial considerations, and that market conditions may dictate the timing of purchases. In other words, China indicated it would buy products when the price was right and that it would not necessarily discriminate against other suppliers.
The composition of those products China buys may look different than in the past, said Wendong Zhang, assistant professor and extension economist at Iowa State University, during a separate farmdoc webinar.
Protein, mostly pork and beef, and consumer-oriented products such as vegetables, fruit, wine and infant formula, will be two groups that will see significant growth as a result of the trade agreement, he said. Soybeans, however, are not expected to see a big increase as China continues to purchase from Brazil and other nations. US purchases are increasing and comparable to 2019 levels, but are not exceeding that, he said.
“China has the potential and capacity to increase ag exports from the US despite delays due to the coronavirus,” Zhang said. “We may not see a repeat of what we have been seeing in terms of the composition of what we’re selling to China. This will also be a more balanced portfolio when we are looking at US agriculture trade.”
Significant growth is expected in the protein market, in part because African swine fever has wiped out 40% of China’s hog inventory. Rising incomes also are leading to an increase in per capita beef consumption. COVID-19 has not changed China’s protein appetite or eliminated the comparative advantage for US agriculture, Zhang said.
The Chinese middle class will continue to surge. About 88% of the next billion entrants into the middle class will come from Asia, Zhang said, including China and India.
COVID-19 could create deglobalization or localization pressures when companies and countries want to diversify and shore up the weak points in their global supply chains, he said.
Impact on global trade
The COVID-19 pandemic’s impact on world agricultural trade is uncertain, but the World Trade Organization has made initial forecasts for world gross domestic product and global trade, including trade in agricultural and processed foods, for 2020 and 2021 that take into consideration effects of the pandemic under three different economic recovery scenarios, Glauber said.
Much depends on how long world economies will be slowed and how quickly they recover, he said. Using the Great Recession of 2008 for comparison, he noted agricultural trade did not fare nearly as poorly as did trade in manufactures or in fuel and mining products.
Glauber pointed to trade data for 2008 and 2009. The overall decline in global trade in agricultural products to 2009 from 2008 was 12.1% in terms of value and 1.8% in volume. In comparison, the 2009 global trade in fuel and mining products dropped 35.8% in value and 5.4% in volume from 2008. And 2009 global trade in manufactures declined 19.9% in value and 15.3% in volume compared with 2008.
The narrow decline in trade volume in agricultural products in 2009 from 2008 reflected the truth that no matter what else happens in trade and economies, people have to eat, Glauber said. The relatively large decline in the value of world agriculture trade in 2009 reflected in good measure lower prices in view of an increase in global supply of grain and oilseeds that year following two years of excruciatingly tight supplies.
The WTO recently forecast the global impacts on GDP and trade under three scenarios, Glauber said. The first considered a V-shaped economic recovery from the pandemic, which entailed a large percentage of workers staying at or working from home for three months and then returning to work. Under this scenario, global GDP was forecast to decline 4.8% in 2020 but rebound 4.2% in 2021.
The second scenario was a U-shaped recovery in which much of the workforce stayed at or worked from home for six months. In this case, global GDP was forecast to drop 9.2% in 2020 but rebound 8.1% in 2021.
The third scenario was an L-shaped recovery involving much of the workforce remaining at or working from home for 12 months. In this case, global GDP was forecast to drop 11.1% in 2020 and rebound a weak 2.8% in 2021.
Glauber said current thinking is that a V-shaped recovery was too optimistic and out of reach, and that a U-shaped recovery was more likely.
Ethanol free fall over?
Ethanol, one of the hardest hit agriculture sectors, may have seen the worst of the impact from stay-at-home orders and a reduction in gasoline usage, barring a resurgence in the pandemic.
“I think we’re in a build and strengthen mode,” said Todd Hubbs, who is clinical assistant professor, agricultural commodity markets, University of Illinois, during another farmdoc webinar.
In the last six weeks, ethanol production had dropped 50% as gasoline demand dropped off due to measures taken to limit the spread of COVID-19. Plants were shuttered or drastically reduced capacity with production per day dropping to 537,000 barrels, he said. Last week, that picked up to 617,000 barrels and he expects it to go higher again this week.
Gasoline demand also is increasing from a low of just more than 5 billion barrels per day to around 7.4 billion barrels now. That’s still down from the 9.5 billion barrels typical for this time of year.
“Gasoline demand is picking up quickly as we start opening up the economy,” Hubbs said. “That’s a good thing for ethanol if we can continue this pace.”
Lincolnland Agri-Energy’s ethanol plant in Palestine, Illinois, US, has been operating at a reduced rate since March, said Eric Mosbey, general manager of the facility.
“We tried to match our production to demand and cut costs as much as we possibly can and then see how that plays out,” he said. “Things changed almost weekly throughout the last part of March through April. Now it’s starting to feel more stable as we start to see demand come back and customers talk about what their needs will be next month. May will be the low water mark for production, but hopefully it comes back in June and the summer, as we start to see driving increase.”
It is always a shock to the economics of a plant when prices are in free fall, especially when there is inventory on the books, Mosbey said.
“But there’s another side to that when recovery comes,” he said. “We’re starting to see customers increase their orders.”
Mosbey said the industry was struggling before the pandemic, but it kept production high even as demand faltered.
“It’s going to be really interesting to watch how the ethanol industry responds throughout this recovery,” he said. “Will we see companies blow through to their old production or will they take a more measured and disciplined approach? I’m hoping for the latter.”
Even with ethanol production falling, stocks have still ratcheted up. The market will have to work through some of those stocks to get back to normal levels, Hubbs said.
Ethanol prices fell to unheard of lows of 60¢ to 70¢ per gallon, said Scott Irwin, University of Illinois farmdoc economist. Prices have started to move above a $1, so some ethanol plants are beginning to reopen.
As the pandemic developed, the price of corn dropped dramatically toward $100 per tonne while DDGS, a co-product of ethanol production, skyrocketed to $200 per tonne.
“It was way beyond anything we have seen historically,” he said. “The price relationship is returning more back to normal but there are still historically high DDGS prices.”
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