Grains of truth about U.S. ag trade – Twin Cities

Is U.S. agriculture losing out globally? Yes and no.

Global grain and oilseed markets are in flux because of a sort of quadruple witching hour of short- and long-term factors: currency exchange rates, global unrest, changing political alliances, technologies and land use priorities.

All this affects Minnesota because agriculture remains a major economic sector in our state and is the primary one for economic conditions in most communities outside of the Twin Cities and other metro areas.

We grow large volumes of internationally traded commodities. We are home to two major commodity-trading businesses, Cargill and CHS. Storage of crops and their transport by truck, rail, barge and ocean shipping employs many thousands. Supplying and maintaining farm inputs — from million-dollar tractors and combines, seed and fertilizer, and data services — employs thousands more.

So world agricultural trade is very much a local issue.

So what is going on?

Concerns center on whether the United States is losing — or has already lost — its long-held dominance in global agricultural trade. Our outputs of crops continue to grow, but much less rapidly than competing nations, especially Brazil and others in South America’s southern cone. We continue to export large tons to Asia, including China, but that nation increasingly buys from other sources and cozies up to them, while cold-shouldering us. Our share of overall world ag commodity trade is shrinking even though this U.S. sector is not diminishing in absolute terms.

Why is this happening? That is the key question with the frustrating answer, “Well, for a lot of reasons.”

The first cut is a familiar one for economists: Is this a cyclical or a structural phenomenon? “Cyclical” means related to the business cycle of expansion and contraction of output and employment, of boom and bust. Cyclical downturns eventually turn around. “Structural” refers to change caused by some long-term or permanent shift in technology or social or political institutions. Unless markets adjust, structural downturns are here to stay.

Layoffs in the auto industry as consumer spending fell during the 2008-09 Great Recession were cyclical. Layoffs and plant closings in Detroit while new plants were being opened in subsidy-brandishing, right-to-work southern states were structural. Rural southerners lacking money to buy food when cotton prices collapsed after World War I was a cyclical problem. Tens of thousands of Black sharecroppers moving to northern cities in the 1950s, as mechanical pickers displaced back-breaking labor, was a structural one.

One aspect of our export problem right now is that the U.S. dollar has gained “strength,” or become more costly, relative to the currencies of major past commodities customers and relative to those of export competitors such as Brazil and Argentina. Due largely to the Federal Reserve raising interest rates, this is cyclical. Interest rates will come back down. Money fleeing conflicts in Ukraine and the Middle East right now is structural, and markets have yet to adjust

But consider: While U.S. yields are rising due to better technology, especially GPS-tracked “precision farming,” we don’t have much more prime land to plant. Brazil has lots of land, in and out of the Amazon basin. Their planted acreages continue to grow. Argentina has made a dramatic transformation from its “wheat and meat” economy of 150 years to corn and soy. It has grazing land that can be planted, as does Uruguay across the River Plate. Paraguay, like Brazil, has virgin lands that could grow soybeans. This is all structural.

This distinction can even be useful when considering China’s import levels. China shut its economy down more tightly to deal with COVID than any other nation, slowing its economy, curtailing household incomes, reducing imports, including food and commodities. That, in itself, was a cyclical short-term event that would resolve as the epidemic faded.

China turning back to central planning under Xi Jinping, however, after 35 years of trending toward market forces, is a structural event.

Then there is the useful idea among economists of “exogenous shocks.” Exogenous means coming from outside the system, as opposed to “endogenous,” or within the system. Germany surpassing Britain in steel production at the end of the 19th century was structural and “endogenous.” But an unstable Bosnian Serb shooting an Austrian archduke and his wife in 1914 was an exogenous shock that still reverberates in 2023.

The inexorable growth of Brazilian farm output over 60 years is endogenous to Brazil and too slow and predictable to be a shock. Donald Trump declaring a trade war on China was exogenous and a shock. So was Vladimir Putin’s invasion of Ukraine and the subsequent crimping of the world grain market. Moreover, shocks can cascade. Putin’s “special military operation” has turned a searchlight on Taiwan. Xi’s increasingly bellicose pronouncements about Taiwan prompt stalwart promises of defense from the U.S. and other allies. China snubs offers of U.S. grain and calls Brazil.

Note, however, a few things. Crop products remain exemplary “fungible commodities.” To users of a given standard grade of corn or soybeans, it doesn’t matter if the ship on which they arrived was loaded in New Orleans, Paranagua, Brazil, or Buenos Aires. Nor does it matter to farmers in Jackson County, Minn., whether their particular beans get crushed in Mankato or Rotterdam or northern China. As long as they get paid.

If consumers flock to Toyota and Tesla and don’t look at Fords, that latter company suffers. Cars certainly are not fungible. But if China gets beans from Brazil instead of the U.S. and U.S. beans flow to Rotterdam rather than Dahlien, U.S. farmers may not be hurt at all.

But if a price differential opens between what Brazilian farmers get versus U.S. farmers, that is a problem. There were strident warnings that would happen after Trump opened fire in 2017 but little harm actually materialized. The extent to which it is going on now is confused substantially by fluctuating exchange rates. These are complicated by the economic-political crisis in Argentina and the economic aftermath of Luis Ignacio da Silva regaining Brazil’s presidency by defeating Jair Bolsonaro in a very contentious election. Evaluating any economic windfall for Brazilian growers or slump for U.S. ones needs its own column.

Also understand that the large grain companies like Cargill and CHS operate worldwide. Shifts in where large importers source their purchases may not change their overall business. Cargill has a train-loading elevator on the BNSF line south of Pipestone, 20 miles from my family’s farms. And it has an enormous facility at Santarem, on Brazil’s Amazon River, a day and a half from the Atlantic, but capable of loading enormous bulk-carrier ships with beans grown 1,000 miles south. “Don’t cry for me, Argentina!”

Now consider the strength of the U.S. dollar and money fleeing violence and instability in Eastern Europe and the Middle East.

Because of the changing currency exchange rate, if a bushel or corn or beans is at exactly the same dollar price as 12 months ago, it nevertheless costs 16% more to a Chinese processor. That alone is a big deal. How big for China compared with Brazil’s prices depends on adjusting for that nation’s higher inflation rate than those of the U.S. or China. All that and the possibilities and problems of South American agricultural expansion and how it will affect us must wait for another day.