The uncontrollable known

Ag fund managers are hoping for resolution of US-China trade tensions. The savviest will prepare for them to get better and worse.

Those most steeped in the study of China often stress the need for comfort with cognitive dissonance. Accepting that two seemingly contradictory realities can exist alongside each other is an asset for approaching a country both poor and rich, new and old and nominally Communist, but home to an aggressive capitalism with a global influence.

Such comfort has also served those attempting to follow the whims of US/China relations over the past two years, as they have come to drive the direction and tone of ag commodity markets and grown to become the top risk to be addressed by those raising agricultural investment funds.

Last week, for example, began with President Donald Trump indicating a trade deal with Beijing was coming “very, very soon” and ended with a World Trade Organization ruling against $100 billion in subsidies China extended to its grain farmers in 2015. US trade officials had long signaled the case to be a component of the Trump administration’s ongoing efforts to force structural changes onto the Chinese economy.

For those attempting to coax institutional capital into investment vehicles devoted to a sector dependent on trade, the rapid deterioration in Sino-American relations has increased uncertainty and raised important questions about how global trade flows, and agricultural investment opportunities, will be shaped in its aftermath.

The halt of US soybean exports to China, for example, was the single market factor mentioned in the summary of a December presentation to the $1.4 billion City of Cambridge Retirement Board by two Hancock Agricultural Investment Group portfolio managers. The minutes noted the Hancock managers reported concern about the tariffs’ effects and “hoped that a quick resolution would limit losses.”

“Trade was not a risk that any ag fund manager was highlighting up to the end of 2016,” Agriculture Capital vice-president Atish Babu told Agri Investor late last week. “It has become the number one known, but uncontrollable risk. Regardless of what segments of ag or farmland investing that you are in, it is absolutely impacting earning and performance of assets.”

Babu, whose firm focuses exclusively on permanent crops, said that while trade tensions have impacted row and permanent crops differently and neither has escaped unscathed, markets have nonetheless also proved resilient.

Sudden trade shifts caught many off guard in 2017, Babu said, though US-grown produce remains trusted and increasingly sought after. Last year, he said, there were significant efforts by government and agricultural trade associations to help encourage development of export markets in countries including Japan, Korea and Colombia.

“Taking out the second-largest economy in the world means you are going to hamper demand in any crop segment, but it was largely mitigated,” said Babu.

He noted that China’s agricultural tariffs appear to have been designed to disproportionately impact areas of the US thought to house strong political support for President Trump.

“Tree nuts are getting a lot higher tariff and that really impacts growers in the Central Valley of California,” Babu added to illustrate.

Agriculture emerged as the fulcrum of long-simmering tension between China and the US because the sector is the clearest demonstration of comparative advantage and because it plays a unique role in any country’s social stability.

As such, facilitating efficient agricultural trade in a climate-constrained world is destined to be a key test for either a future US-led international order that has accommodated Beijing’s ambitions within its institutions, or an alternative that uses ‘Belt and Road’ initiative-funded roads and ports to ferry imports into China through markets isolated from US influence.

Both outcomes leave opportunity for private investors. Managers who can accept and prepare for each will no doubt have the clearest path forward.

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