Poking the dragon could scar the agriculture sector

By poking the sleeping Chinese dragon US President Donald Trump may wake something that could be difficult to deal with later at the negotiating table.

The US and China are each other's largest trading partners with bilateral trade totaling $598 billion in 2015, and the US facing a trade deficit of $366 billion.

Of the $116 billion worth of goods exported to China during 2015, agricultural produce accounted for $20 billion, or about 17%, including $11 billion worth of soybean.

China is pursuing greater negotiating leverage in international trade. It completed 15 years of WTO membership in December 2016, and has asked the US and EU to fulfill what it claims was their promise to grant it "market economy status" at the WTO.

The US and EU oppose such a move because this would make it harder for developed economies to initiate anti-dumping cases against China.

Related: Find more content about Trump's administration in our news and analysis feature.

Trump has made it clear that he sees China as a threat to American business. And Chinese premier Xi Jinping said in Davos that "no one will emerge as a winner from a trade war" -- a signal of Chinese intent.

DDGS, ethanol provide example for US

To gauge the impact of a trade war on US agriculture, one needs to look no further than the dried distillers grains, or DDGS, and ethanol.

In January, China raised anti-dumping tax on US DDGS imports, an ethanol byproduct used for animal feed, to 53.7% from 33.8% along with an increase of 12% countervailing duties from 10.7% earlier, effectively shutting US DDGS out of its domestic market.

While not a welcome development for US DDGS producers, the announcement was not a surprise. China's imposition of anti-dumping tariffs in September had already dragged down prices, market sources said.

On January 11, S&P Global Platts assessed CIF New Orleans DDGS barges at $118/st, a far cry from their assessed value of $157/st in early September, before the primary ruling.

With China -- the top buyer of US DDGS with $730 million of purchases in 2015-2016 -- out, brokers and producers have been looking at other markets in Southeast Asia and Latin America.

"Vietnam will come back someday, but right now, the market is Mexico with a little Southeast Asia thrown in," a market participant said.

Ethanol, another major US agriculture export to China, which raked in $322 million during 2015-2016 (September to November), has also taken a hit with Beijing imposing a 30% duty on denatured ethanol imports.

Soybean prime target

Another agricultural commodity that is particularly vulnerable is soybean. According to the US Department of Agriculture data, China accounts for 60.78% of US soybean exports over January-November 2016, worth $11.922 billion.

"[There is a] potential for the domino effect, and soybeans are top of the list for retaliation targets," Tom Hance of Gordley Associates said during the 2017 National Biodiesel Conference last Wednesday in San Diego.

China is expected to import 86 million mt of soybeans during 2016-2017, according to the USDA. In 2015-2016, China imported around 83 million mt of soybeans, with about 28% coming from the US.

The recent abandonment of its one-child policy should lead to a Chinese population bump in the next decade, which will need to be fed, said Kelvin Chow, food and agri business analyst at Rabobank Singapore.

However, even a 2 million mt drop in soybean exports to China would hit US farmers quite sharply. The US Midwest -- the center of the US soybean industry -- was key to Trump's election, and is a constituency that he would be wary of upsetting.

Trade group already in talks

The US Grain Council, a trade association that represents corn, sorghum and barley producers and agri business organizations, has for years had discussions with China about its trade policies, and is hoping relations will not get worse.

CEO Thomas Sleight said that the US Grain Council has been holding talks with China on agricultural issues, including corn supply and prices, quotas for wheat and rice, and biotech approvals.

"There's a whole roster of issues in agriculture that we've had discussions with them about," he added.

The US Grain Council had already approached the new administration to discuss the trade relationship with China to head off any impact on domestic agriculture, Sleight said.

"Agriculture is often the first sector to feel [the retaliation]," he added.

Read our related blog post - Trump trade policy: China speaks softly and carries a bigly stick