Will Trade Create Trouble or Treasure for the American Farmer?

A ripple in world trade could cause tsunami impact on the U.S. farmer.  In 2017, U.S. agricultural exports totaled $140.5 billion, as reported by the USDA, to the third highest year on record.  It is one area of our economy that boasts a trade surplus of over $21 billion.  Exports are responsible for 20 percent of U.S. farm income and drives rural economies which support over a million jobs on and off the farm. 

China is the largest buyer of U.S. farm products, with shipments totaling over $22 billion.  Canada was a close second with $20.4 billion, Mexico third with $18.6 billion, and Japan with $11.8 billion.  By far the largest export was soybeans at $24 billion.  Other products of corn ($9.7B), tree nuts ($8.1B), beef ($7.1B) and pork ($6.4B) are dwarfed by the mighty soybean. 

The largest customer for U.S. soybeans is China with $14 billion in sales.  Mexico imported $1.5 billion of our bean crop.  Bloomberg reports that China picked up a third of the entire U.S. crop last year, which it uses to fee 400 million pigs.  The land is not very favorable for soybean growth and pork is a huge part of the Chinese diet. 

President Xi Jinping is studying the impact of restricting soybean imports to retaliate for U.S. tariffs on washing machines and solar panels.  Potential tariffs on foreign steel and aluminum are also a concern.  Any sort of Chinese action against soybeans would have a dramatic impact on American producers.  These concerns are echoed in rural America which has seen an erosion of commodity prices in the past four years. 

But one also needs to see the impact on the Chinese hog farmer.  China will not easily replace U.S. supply, even Beijing has sought to diversify.  Last year, China imported 51 million metric tons of beans, a 33% increase from Brazil, and another 33 million metric tons, a 3.8% increase from the U.S.  Other factors that complicate a switch away from the U.S. would be weather which has not always been kind this year to the South American farmer.  The fact remains that the American soybean farmer and Chinese hog producer have strong ties to each other that are not easily broken.

Large increases in pork prices in China are sensitive to the Communist Party, which came to power in 1949 partially in the wake of hyperinflation.  Strong price increases in the late 1980s also lead to unrest in the run-up to the Tiananmen Square protests.  Yet, there have been some reports that China has stopped purchasing U.S. soybeans but most of this is a result of seasonal factors.  Very little soybeans are shipped between April-August.

Trade concerns do hit both ways.  U.S. producers may not be as willing to ship beans to China if they fear a serious trade war, even if there are willing buyers on the other end.  Last year, many U.S. shipments of sorghum were turned away at Chinese ports or rerouted at sea.  Sorghum now has a 178.6% tariff in China. 

The key here as a lender is to keep an eye on international trade as ripples here can create giant income swings to your producers.  Remember the impact of the U.S. wheat embargo to the Soviets during the Carter Administration.

But non-ag lenders need to have their eyes opened as well.  We recently had a commercial construction project that went back to the architect’s board because of huge differences in the original estimate and the final contract price.  One of the culprits was a strong increase in steel prices with the extra cost of steel in the U.S. market after announcement of possible tariffs.  That combined with an increase in labor primarily associated with the steel has the sponsors looking at different configurations to lower the cost. 

Quick Bite:  Financials Institutions Looking at Robots:  A Swiss bank was forced with the choice to have seven employees work for three days on a project to transfer 5,000 securities positions to a different IT system or use five software robots to do the job.  They chose the latter in a pilot program with a cost of around 25,000 Swiss francs.  A bank VP noted the cost will go down if the bank opts to use this for other projects.  Much of the original cost was one-time in nature.  He thinks the use of robots can be used to forgo costly and expensive software interfaces for communication between the two systems which can cost millions of francs. 

A 2017 study by GFT Technologies SE showed that technologies and artificial intelligence have the potential to revolutionize the financial sector.  Nearly 300 retail bank leaders in eight European countries were interviewed by market researcher Frost & Sullivan.  Around 94% of participants saw direct added value in employing artificial intelligence solutions as a replacement for tasks once completed by humans. 

Robots are also being used for customer facing jobs.  In Japan, several branches of the Bank of Tokyo are using a two-foot tall robot named Nao as a concierge at the bank.  The red and white humanoid answers questions about bank services in several different languages. 

Customers gawk at Nao as it introduces itself, gestures, blinks its eyes, dances, and does tai chi.  Tokyo is hosting the 2020 Summer Olympics and the bank plans on using the multilingual robot to serve a growing number of foreign customers coming to the games.