The 60th Annual Mid America CropLife Association (MACA) meeting in Des Moines, IA, featured myriad speakers who discussed the major concerns currently impacting the agricultural world. Naturally, one of the major topics of the September 4-6 event was China and its currently strained relationship with the U.S., a key trading partner. According to Dr. Wendong Zhang, Assistant Professor of Economics and Extension Economist, Iowa State University, this long-standing relationship between the two countries promises to get more complicated in the years ahead, especially if the current tariff war between both remains in place for any length of time.
In terms of crop mix, many Chinese growers plant the same key crops that U.S. growers do — corn, cotton, and soybeans, for instance. But according to Zhang, crop yields in China have been significantly lower historically than those of their U.S. counterparts.
“Chinese corn yields are perhaps two-thirds as high as those in the U.S.,” he said. “Soybean yields are roughly half, with the average Chinese farmer getting around 26-bushels-per-acre soybean yield compared with 48 bushels per acre in the U.S.”
According to Zhang, there are many factors that are currently working against Chinese growers achieving higher yields like their U.S. counterparts. This includes traditionally dealing with more adverse climate conditions in China (particularly in the Western part of the country) and having less nutrient-rich soil to work with to grow their crops. “In addition, Chinese farmers don’t have the ability to use genetically modified crops in their fields because they are not approved for use by the government,” Zhang said. “This is another limiting factor in Chinese farmers being able to see higher crop yields on their land.”
Speaking of land, this represents another key difference when comparing U.S. and Chinese agriculture. Although both countries cover approximately the same amount of territory on a global map, and noting that the central part of China lines up on a globe with the U.S. farm heartland of Nebraska and Kansas, China contains approximately half as much arable farmland as the U.S. because of deserts and metropolitan landscapes.
And then, of course, there’s the matter of farmland size to consider. “On average, the amount of farmland a U.S. farmer in Iowa has is around 200 acres,” Zhang said. “In China the average is less than 2 acres.” In part, he added, one of the reasons for this is that Chinese growers are not permitted to own the land they farm. “This is instead owned by the village in which they live,” Zhang said.
Because of all these circumstances, some Chinese growers have recently begun shifting much of their agriculture away from row crops such as corn and cotton. “In the area of China where my family is from, farmers have moved away from these crops to growing specialty crops in greenhouses,” Zhang said. “And the reason for this is simple — they can get 10 times more income by growing these kinds of vegetables for the nearby cities.”
This is part of the reason China will likely find it tough to combat the trade tariffs on goods now being imposed upon the country by the U.S., Zhang said. “China consumes a lot of U.S. agriculture goods, valued between $12 billion to $14 billion per year,” he said. “We sell way more ag products to China than we buy from them. The U.S. sells 62% of its soybeans to China, one in every four rows grown, 75% of the sorghum, and 15% to 20% of dairy products each year. The U.S. buys some fish and fruit from China, which averages less than $5 billion per year.”
Despite these facts, Zhang said both countries will suffer if the tariff war continues for too long. “The Chinese population is gaining more wealth, which means these people want to get more protein into their diets,” he said. “Chinese eat a lot of pork, but the country needs approximately 85% of the soybeans it grows or imports each year as feed for these pigs. Right now, because of the trade war, the Chinese government is promising to pay more than market price to any farmers in the country that switch to growing soybeans. But this will still take time to meet all the current needs.”
In the U.S., growers are also losing out in this tariff dispute. Without a ready-made destination for their crops, U.S. growers have seen commodity prices for crops, such as soybean, dip throughout 2018, down from $9.48 per bushel at the start of the year to $7.83 at present. “For Iowa farmers, this translates into a loss of $551 million for soybeans not being exported to Chinese buyers,” Zhang said.
The Overall Ag Economy
Shifting gears to the agricultural economy, one speaker said the industry will likely need to move from catering to the biofuels sector to livestock. Dr. Michael Swanson, Senior Vice President, Agricultural Economist and Consultant for Wells Fargo & Co., started his talk by citing one of the most popularly repeated reasons why agricultural fortunes will grow in the future — population growth. “We’ve all heard that agriculture will need to feed more than 9 billion people by 2050, and this growth will lead to higher crop prices,” he said. “But historically we’ve already had a rising population, but we’ve not seen continually rising crop prices during this same era. So why would this situation be any different now?”
Part of the reason for this optimism, he says, can be traced back to the boost that crop prices received during the early years of the biofuels movement. “When ethanol began to grow back in the early 2000s, it quickly began using approximately 40% of the U.S. corn crop, which helped push up commodity prices for everything,” Swanson said. “But did ethanol see the fracking movement coming? Today biofuels growth is near zero percent, which is something we haven’t seen since the early 2000s.”
This has led to what Swanson now calls a rebalancing for agriculture. “Biofuels was an unusual way to use U.S. crops,” he said. “We were converting corn and soybeans into fuel. But this wasn’t a normal way to use agricultural products, and the industry didn’t anticipate new technology coming around.”
The other reason Swanson thinks the “growing population equals growing ag profits” equation may be wrong ties back to the growth numbers for the world and agricultural technology themselves. “Right now in the U.S. we have population growth of 0.7%, but that’s falling and is well below the peak of 2% population growth we had back in the 1970s. During this same time, the technology to improve yield growth has gone up 1.6%. In the 1970s we produced more than 800 kilograms (kg) of wheat, corn, and soybeans per person in the U.S. Now, we produce 1,600 kg of grains and oilseeds because of the yield technology gains. So it’s not enough to simply point to more people in the future and say it will lead to better agricultural sales. There’s more to the story than that.”
Overall, these yield gains make the agricultural economic picture going forward even trickier than it’s been in the past. “We are definitely long on grains and oilseeds in the U.S. market,” Swanson said. “We have an extremely lot of product available to us, so what are we going to do with it?”
The future instead will lie in protein demand. According to Swanson, after 2012 many agricultural producers began to shift their corn crop back in the livestock sector from ethanol because the profit margins were showing some improvement. “There will be more people to feed, and many of them will have higher incomes available to them, which means they will look to increase their intake of protein,” he said. “I think we will see more agricultural crops going into the livestock and protein sectors in the future. Why? Because when you think about the value-added process in agriculture, you traditionally look to livestock to provide it.”
As for biofuels, Swanson thinks their future looks a lot less bright, particularly as new technologies keep pushing the transportation industry forward. “Ethanol demand is at zero domestically right now and driving numbers are stagnant, which will plateau gasoline and ethanol demand even further,” he said. “Coupled with this, battery technology for cars is improving each and every year, and you can’t force a Tesla to use ethanol.”
Swanson had a final message for biofuels proponents who might believe the industry will stick around long term. “People just want to get down the road as cheaply and easily as possible, no matter what is providing the power to do so. So for us to assume ethanol will not be displaced by some newer technology like electric is a fallacy,” he said.
The Suppliers/Retailers Take
Finally, it was the turn of several key industry executives to talk with attendees about the many challenges facing today’s agricultural marketplace. And in truth, said Paul Rea, Senior Vice President, Head of the Regional Business Unit North America for BASF, most of these have been challenging the people and businesses that make their living from agriculture for some time now.
“Right now there are five key challenges we all face — economics, trade, regulations, innovation, and digital/technology,” Rea said. “And none of these are new. We’ve all been dealing with them for a long, long time now.”
As has been the case for the past few years, he said, commodity prices have largely driven much of what else goes on in the agricultural market when it comes to spending and crop input usage. According to Rea, net farm income in 2018 is anticipated to drop to $65.7 billion — approximately 14.8% lower than it was during 2017.
“Commodity prices are really depressed, and the short-term outlook doesn’t really show much improvement over the next two to three years,” he said. “There’s no obvious upward pressure in the mid-term.”
Eric Cowling, Director of Sales and Supplier Relations for Helena Agri-Enterprises, agreed with this view. “We’ve been in a downturn for five years or so,” he said. “We can’t control crop prices. Lower commodity prices are severely impacting the ability of growers to buy new equipment and make money.”
Naturally, this lack of income at the commodity/grower level has caused a ripple effect across all of agriculture. In part, BASF’s Rea said, this could be the reason the crop protection/seed business has witnessed a host of consolidations and mergers over the past two years, particularly as the costs of conducting business have increased significantly over the past few decades.
“The crop protection products market growth rate in 1990 was 30% annually,” he said. “Today it’s 1% to 2%. Now 1% to 2% annual growth isn’t terrible, but you have to consider this in relation to other costs. It costs approximately $300 million for a crop protection supplier to bring a new active ingredient (AI) to the market today. In 1995 that figure was about half that, at $152 million.”
Rea also pointed out that crop protection companies are dealing with increasingly negative environments for new AI’s to gain market approval from regulators. This is particularly true in Europe, he added. “In 2001 there were 905 registered AI’s that farmers could use in the countries of the European Union,” he said. “Today there are only 338 left, and this number could drop to as few as 111 by 2021. So the options for European farmers when it comes to crop protection are getting much more limited.”
Virtually all the MACA speakers agreed that the agricultural industry needs to do a better job of telling its story to consumers and regulators than it has done in the past. “There are still not many people telling the good story about agriculture,” Rea said.
Jim Kahnk, Vice President, Procurement and Supply Chain for Albaugh, agreed. “We don’t have as much support in our industry as we need,” he said. “The fake news on agriculture is really hurting us. We have the science on our side, but we are being trumped by scare stories from special interest groups. We have to find a better way to tell our story.”
For suppliers and ag retailers, these major challenges have been complicated by overall changes in the distribution chain, Helena’s Cowling said. “It used to be that you, as a distributor, could just go down to the warehouse any time you needed to get products,” he said. “Everything was just a phone call away. But now the supply chain is much further out than that.”
This, in turn, has meant distributors, such as Helena, have had to become much better at long-range forecasting to satisfy their grower-customers’ needs, Cowling said. “Now as an ag retailer we have to help our customers manage their risk two, four, eight, or 12 months in advance,” he said. “Sometimes this figure needs to go out a full 18 months in advance. Not many of us are good at forecasting 18 months in advance, but it is our job to make sure our customers have the products they need to do their jobs. This is the new normal we all have to navigate through.”
Recently, this need to predict how the agricultural market will be performing more than one year in advance has been made more difficult as the U.S. and China have ramped up their fight over trade and tariffs, which began in early July and has steadily increased pressure on U.S. ag producers.
“I don’t think anybody had in their outlook plan that agriculture trade would be something we would have to deal with in the short term and into the near future,” BASF’s Rea said.
Cowling agreed. “We’ve seen customers making adjustments to their input costs,” he said. “After July 6 the ag economy started to soften even more than it had previously.”
Coupled with this, Albaugh’s Kahnk said, many crop protection suppliers that rely on China for their production needs have been negatively impacted by the country’s efforts to curb air pollution, which has shut down entire manufacturing facilities for violating air quality regulations. “Much of the crop protection system is now dependent upon China for its supply,” Kahnk said. “And this reliance on Chinese supply has become very unreliable.”
In addition, he added, recent price declines for crop protection product manufacturing are probably over. “We are past the low point for prices coming at China,” Kahnk said. “We won’t be going back to that any time soon.”
BASF’s Rea said technology changes across society will likely add to the challenges facing agriculture today and into the future. Based upon the statistics, he said, it took the telephone 76 years to reach 100 million users since its introduction to the world. For the web, this figure dropped to only seven years. “And Pokemon GO only needed two weeks to do this,” he said.
Growers will want to be just as aggressive in their adoption of new technologies, he predicted. “Farmers will be larger and more complex, so they will have a desire for new technology to be productive and sustainable,” Rea said. “Innovations in technology will be key for the U.S. We need to bring new innovations to U.S. farmers over the next five years.”
Speaking of the future, all three MACA speakers believe that providers and suppliers to agriculture over the next few years could look vastly different. “Think about the changes we’ve already seen in other industries on this front,” Rea said. “Uber is the world’s largest transportation provider, and it doesn’t own any vehicles. Facebook is the world’s largest media company, and it doesn’t create any content. Airbnb is the world’s largest provider of accommodations, but it doesn’t own any real estate.”
Albaugh’s Kahnk echoed these thoughts. “I had an old CEO that used to say ‘change is good, but you go first,’” he said. “I don’t know what Uber in agriculture will look like, but it’s probably coming.”
