Mother Nature might get a vote on US/China ‘de-coupling’

While a US/China “de-coupling” threatens to permanently shape global trade flows, ag markets are also tracking a pair of developments with potential to provide much-needed reminders of global trade’s benefits.

In late April, the USDA reported that fall armyworm – a crop-eating pest first detected in southern China in January – had spread more rapidly than predicted, already affecting 8,500 hectares and threatening domestic production of corn, rice, wheat, soybeans and cotton, among other crops.

“Experts report that there is a high probability that the pest will spread across all of China’s grain producing area within the next 12 months,” the USDA wrote.

Those concerns echoed earlier warnings regarding the spread of African Swine Fever (ASF) in China, which built from whispers last summer to dire alarms sounded throughout recent months.

Rabobank estimated in April that ASF may cost China as much as 30 percent of its domestic pork production and that the US, EU and Brazil are best-positioned to respond to resulting import demand, though tariffs complicate the prospects of American producers.

While the unprecedented nature of China’s ASF epidemic makes it difficult to say with certainty, ADM chief executive Juan Ricardo Luciano told a conference in New York last week that early indications suggested government culling has already created a pork protein gap of up to 10 million tons – only about one million tons of which is likely to be met domestically.

“The protein gap that exists right now in China will come to benefit the Western world of [soybean] crushing,” Luciano said. “Within the next two months, you are going to start to see prices ratcheting up and you are going to start to see impact in the rest of the world from those imports from China. It’s going to happen in the second half of 2019 and certainly could impact into 2020.”

Luciano highlighted that ASF is likely to also prove a watershed for China’s domestic ag industry, providing an opportunity to systematically reduce the role of small farmers. Over the long term, he added, those changes – combined with China’s desire to keep some of the pollution from protein production outside of its borders – dictate that Beijing’s reliance on protein imports is likely to grow.

Though his expectation is that China and the US will eventually agree to end the current tariff standoff, Luciano also warned he does not expect “complete peace” between the two countries, warning “latent tensions” are bound to linger.

He reminded the audience of the Chinese perspective that sees the past 200 years of Western domination as an aberration and of China’s stated goal to establish a position of greater influence by 2050.

Regardless, President Donald Trump has won concessions from Beijing, according to Luciano, who added Chinese policymakers recognize they will need to augment their behavior as China’s global influence rises.

“How much is China going to change its whole system?” Luciano asked. “Well, maybe not to the extent that Trump believes, but more than President Xi believes.”

Current US-China tensions are the result of structural pressures that have built over decades. Neither fall armyworm worm nor ASF will have any influence on those broader pressures nor on core conflicts over forced technology transfer, Taiwan or the profound insecurity China and the US inspire in each other.

A severe supply disruption caused by Mother Nature could, however, provide an opportunity to demonstrate the role global trade can play in avoiding catastrophe. The value of an international order facilitating trade – which some still think is worth avoiding “de-coupling” to preserve – would then be thrown into sharp relief.

Write to the author at chris.j@peimedia.com