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Fitch: China tariffs manageable for US agriculture sector

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Fitch: China tariffs manageable for US agriculture sector

Fitch Ratings said on May 22 that trade risks for U.S. protein companies and agricultural processors are manageable as most firms have a diversified asset base and/or flexible risk management practices.

Details regarding a potential U.S.-China trade agreement and tariffs on soybeans and other agricultural products, including beef and sorghum exports, however, are still unclear.

The U.S. exports more than $135 billion worth of agricultural products. Soybeans represent more than 15% of that and China is a top destination, Fitch said, citing the U.S. Department of Agriculture. Although the threat of a 25% tariff in March on U.S. soybean imports placed downward price pressure on domestic soybean prices, these recovered immediately after a May 19 report about a potential settlement.

Chicken and hog producers, Smithfield Foods Inc. and Tyson Foods Inc., are already exposed to a 25% tariff on U.S. pork, said Fitch, but producers' input costs benefited from the recent sell-off in live hog and soybean prices.

Exports make up 25% of Smithfield's fresh pork sales in 2017, and this goes to China, while for Tyson, 10% are export sales, with an insignificant percentage of pork sales to China and Hong Kong. Fitch said the financial impact of China's 25% tariff on U.S. pork will be less than $100 million a year for Smithfield.

Fitch said volatile commodity prices and an eventual trade deal will be net neutral for Archer Daniels Midland Co., Bunge Ltd. and Cargill Inc. Data from SEC filings and Factset show that ADM and Bunge generated 54% and 78% of their revenue, respectively, outside of the U.S. in 2017, and only 5% of that was from China.

Fitch said 50% or more of Bunge's production and storage capacity is in South America and near Brazil, the world's second largest soybeans producer and exporter.

ADM offers a diversified range of commodities, including corn, oilseeds, rice, wheat and value-added specialty ingredients products. Nearly a third of the company's processing plants and procurement facilities are in non-U.S. markets.

Cargill's processing of multiple commodities insulates it from price and volume fluctuations caused by changes in demand and supply disruptions. And Ingredion Inc. does not have products that are subject to retaliatory tariffs by China since its business is focused on corn and corn-based value-added products.