FARGO - Ag bankers should brace for a "long" ride on a black swan - an unpredictable, unforeseen event with extreme consequences.
The period of soybean price reductions due to the Chinese trade war, initiated by the Donald Trump administration, will have a "long" effect, says a North Dakota State University distinguished professor of agricultural economics.
William Wilson, who consults with agricultural entities worldwide, spoke Sept. 27 at the annual North Dakota Bankers Association's Ag Credit Conference in Fargo at the Holiday Inn.
The average basis for soybeans heading to the Pacific Northwest ports this time of year about $1.30 per bushel on soybeans - that's a premium value over the Chicago Mercantile Exchange price, indicating demand. "Today? Forty (cents). Or, none."
"What's happened as a result of the Trump trade war is the basis in Brazil went through the roof. On average, the basis from Brazil is about 40 cents, indicating weaker demand. Today, it's $2.80 per bushel," Wilson said.
"Because of Trump, or the Trump tariffs ... because of this China tariff thing, is that, as we speak, there are eight new export elevators being built in Brazil," Wilson said.
As the Brazilians expand their export and storage capabilities, they can increasingly store into the U.S. harvest period. "This is a long-term phenomenon."
Chinese soybean imports have grown at a rate of about 18 percent a year, while trade of most agricultural commodities grows at 2 percent to 4 percent per year. "You take China out of the market, we don't have much to sell to," Wilson said.
Winds of war
Wilson said he believes the trade war was conceived in June 2017. "It began to be executed in September when the Chinese began to be more demanding of our quality requirements," Wilson said. The Chinese then started holding ships for testing for things like protein content or phytosanitary standards.
In about December 2017, the Chinese started buying a greater portion of soybeans from Brazil than they normally would, and a less than normal from the U.S. By February 2018, China said that if there were tariffs imposed on other U.S. products, they would impose tariffs on soybeans.
Wilson said the U.S. "would have to capture virtually 100 percent of every other small market to offset what we lost from China, which is impossible. It can't happen."
In an analysis in April 2018, Wilson calculated that soybean prices should be about $13 per bushel in the absence of a trade war, and about $7 per bushel with a trade war. "We're just under $7 per bushel right now," he said.
Wilson, who researches and teaches grain marketing, showed a Thomson Reuters map that plots the physical coordinates of soybean shipments moving worldwide. Trade showed ships going all over the world in December 2016 but in July 2018, no ships were leaving the U.S.
'You can say that'
George B. Sinner, senior vice president of business and ag banking for Cornerstone Bank in Fargo, asked Wilson how long the market impact will last from the tariff issue.
Wilson initially would only say "a long time." When Sinner asked if that was 18 months or five years, Wilson said, "Eighteen (months) to five years, you can say that," Wilson said.
Wilson recalled the U.S. embargo of wheat to Russia 1980 which lost farmers a wheat export market permanently. In 2010, the U.S. marketed the Syngenta MIR 162 GMO trait in corn before the Chinese approved and the U.S. has shipped no corn to China since 2013, he said.
Sinner, who unsuccessfully ran for governor as the Democratic-Nonpartisan League nominee for governor in 2014, said he'd analyzed portfolios of a group of clients across North Dakota. The clients of a marketing company that does cost break-even analysis set up targets on how to manage the markets. Among their efforts is to sell 40 percent of their crop at planting, as Wilson and others advised at the conference.
The 35 clients in Sinner's study average about 7,000 acres each, or a total of more than 200,000 acres. "Their break-even costs this year are between $9 a bushel and $10.50 a bushel on soybeans. They say their average crop is going to be 30 bushels an acre," Sinner said, adding, "Basically we're going to be coming up short between $1.50 a bushel and and $3 a bushel on soybeans."
That's an effect on farmers, and then secondary effects will come to agribusinesses, He concluded: "I'm really scared of where we are. We've got a big problem."