As Margins Tighten, Eyes Turn to China

As Margins Tighten, Eyes Turn to China

U.S. farm profits hinge, in part, on Far East economic growth

Everyone wants to be China's pal these days, and for good reason. Exports to the Far East will be a lifesaver for some farmers, as more global regions increase grain production despite narrower margins. China is making aggressive moves across the globe to secure food for its burgeoning populace, including a 5% stake in prime Ukrainian farmland.

Source: Feedstuffs

Those of us who want to be China's top ag provider need to consider our competitive advantages and disadvantages. Consider Brazil – the elephant in the grain room, so to speak. It still has up to 250 million acres available for expansion says Rabobank economist Renato Rasmussen, based in Sao Paulo. Of course, many of those acres have environmental restrictions on them – in some areas only 20% production is allowed. Instead Brazilian farmers look to boost yield through double cropping corn after beans.

"The growth of grain (corn) is positive but much of the production is 1,200 miles from port," says Rasmussen. "It's become clear we can drastically increase production, but logistics remain the challenge."

With corn prices off, we expect Brazil to drop 2014 corn production. But Brazilian farmers see double cropping as a way to leverage land assets. In Mato Grosso, Brazil's second largest soy state, 80% of the soy acres are being double cropped now says Rasmussen. "They like how double cropping allows them to get more out of their assets," he says. "We're getting increasingly better soy varieties, so the farmers have less to worry about in delayed corn planting. Corn production in Brazil is here to stay."

Brazil is also promoting pasture renovation as a way to boost returns. The idea is to put cattle back on rejuvenated pastures and free millions of acres to be converted to grain production. "This conversion will start happening even if corn is at $4.25 per bushel,' says Rasmussen.

While Brazilian law forbids large foreign land holdings, that has not stopped China from major investments in Brazilian infrastructure. Earlier this year the China announced they would build Brazil's largest crushing plant ever, in Bahia, an area ripe for grain transport development.

Argentina surges

"Through 2030 Argentina expects to see a 20 to 30% increase in production of soy, corn, wheat and other grains," says Rabobank economist Paula Savanti.

Argentinian farmers have also responded to higher corn prices, but production is biased toward soy because it is cheaper to grow and more resistant to drought; plus, government policies favor soybeans. "Argentina has an export tax of 35% on soy and only 20% on corn and wheat, but there are limits to how much corn and wheat can be exported," Savanti explains. "There's no limit on how much soy gets exported."

RELATED: Argentina, Part One: Land of Lost Opportunity

China has moved to normalize relationships with Argentina. The first shipment of Argentine corn shipped to China earlier this year. "This has opened the door to more exports," says Savanti. "China likes to keep its options open – to source from Argentina, Brazil or the U.S."

Yet, some of the comments Chinese officials make about South America investments never go anywhere, Savanti says.

"They said they were going to rent an entire province and produce there, but it never happened," she adds. "We think it's more about developing trade relationships and not as much about investments. But the cultural differences between Latin America and China are a huge factor."

Bottom line

Clearly U.S. farmers need to understand China's goals. Chinese leaders are highly motivated to keep their populace well fed. If they do, they get to stay in power. At one point the country was building a new KFC and McDonald's every day.

China's government is trying to make its agriculture more automated and efficient. The country is working to move 70% of its hog herds into modern confinement systems and away from the millions of small, backyard farms. This effort, along with the purchase of U.S.-based Smithfield last spring, is part of the drive to boost phytosanitary and solve food safety concerns. China is the largest potato producer in the world, but they import a lot of fries due to inefficiencies. Eventually they will produce all their own fries. Barring any economic catastrophe, it will keep making those changes in every sector of their economy.

It's certainly got a ways to go. While the country had a big corn crop last year, much of it went spoiled. This week the country got its first shipment of U.S. sorghum, so the spending spree for grains continues.

Both Brazil and Argentina will compete with the U.S. over the next two crop cycles, but in the long term there will be plenty of opportunity for everyone as long as China's economy continues to grow.

Food for thought

We've always had a competitive advantage over South America in one regard: political stability. Political upheaval in Brazil and Argentina has led to national strikes, currency exchange upheaval, rampant inflation and dampened export potential.

With what's been happening in Washington D.C., I'm wondering: Do we still have that advantage?



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