Of soybeans, sugar and coconuts: Will PHL farm sector gain from US-China trade war?

July 2, 2020
Jasper Y. Arcalas  (Business Mirror) | https://bit.ly/3fbnmy1

THE trade war between Beijing and Washington has shaken up the world market since it started in 2018. A part of the economic disputes between the world’s two largest economies involve millions of farmers: “Escalation of a trade war between the United States and China can throw a monkey wrench in the gears moving agriculture trade.

To date, the two countries, which serve as important hubs in global value chains, have brokered a Phase One trade agreement but implementation has yet to be seen.

A full chapter Chapter 3 of eight chapters has been devoted to the “trade in food and agricultural products” in the economic and trade agreement between the US and China. About 17 annexes set out further commitments between the two countries, including on rice and pet food.

The chapter on food and farm products has the same number of pages of discussion as the chapter on “Expanding trade.” Nonetheless, this chapter on trade (Chapter 6) also mentions agriculture commodities of additional US exports to China on top of the 2017 baseline: oilseeds, meat, cereals, cotton; other agricultural commodities (from alfalfa to wine); and seafood (including lobster).

The trade in these commodities, however, has been thrust into the unknown because of the trade war.

With President Duterte in a pivot to China as an ally, how will the Philippines stand to benefit from such trade war?

Favoring PHL

FOR Stephanie Nicole S. Garcia of the Philippine Association of Feed Millers Inc. (Pafmi), the possible impact of the US-China trade war to the Philippines is “two-pronged.”

“We expect prices of commodities to go down like soybean and soybean meal whenever China stops buying from the US and purchases from other sources like Brazil and Argentina,” Garcia, Pafmi president, told the BusinessMirror in a phone interview. “This [shift] favors the [local] feed millers and livestock sector.”

However, she emphasized one problem: “China is not buying the hogs and the chicken from the US.”

According to Garcia, “these meat products are now diverted to the Philippines and [that practice] becomes ‘a sort’ of dumping.”

Still, she noted that China is a huge buyer of soybean products from the US, particularly soybean seeds, which American farmers use to produce tofu and soy sauce, which are widely used in China.

On the other hand, the Philippines buys other soybean products such as soybean meal, for its animal feed requirements, Garcia explained.

Agreement compliance

ACCORDING to Garcia, the price of soybean meal mainly used for livestock feed has dropped by P2 per kilogram since the escalation of the US-China trade war. The price drop, Garcia said, has helped keep local feed prices in check and reduced production costs of domestic meat products.

“It is really more about price volatility,” she said. “Every time they do not comply with their agreements, world market prices go down.”

For example, if China proceeds with buying more soybean products from the United States compared to its annual volume pre-trade war, then world market prices may climb due to supply tightness, Garcia said.

Nonetheless, if this happens, Garcia doesn’t see the US reducing its soybean meal exports to the Philippines, as the country is the US’s top market for soybean meal.

“I doubt that they will run out of supplies for us. The US would like to remain the biggest supplier of soybean meal to the Philippines and keep their 90 percent market share,” she told the BusinessMirror.

“I think if prices go up they will find ways to keep their market share,” Garcia added.

Rapeseed, fish meals

ACCORDING to the US Department of Agriculture (USDA), the Philippines’s soybean meal imports next year is projected to reach a record-high 3.095 million metric tons (MT) from this year’s estimated 2.95 million MT on the back of the expanding livestock and poultry industries.

“Despite African Swine Fever’s spread and reduced hog output, greater poultry production is offsetting the decline, as consumers shift away from pork to poultry meat in market year 2019 to 2020,” according to a Global Agricultural Information Network (Gain) report by the USDA Foreign Agricultural Service in Manila.

Garcia said if world soybean meal prices become too high then local feed millers can opt to source other substitutes like fish meal and rapeseed meal. Aside from the US, Argentina and Brazil also supply soybean meal to the Philippines.

Meat prices

UNFORTUNATELY, the observed decline in feed prices did not directly translate to lower meat prices domestically due to various factors.

For one, Garcia explained that soybean meal only accounts for 20 percent of the whole composition of animal feeds.

Second, retail pork prices do not reflect any changes at the farm-gate level due to a disconnect between the two, with traders mostly making the profits, she added.

The Pafmi executive also noted that China’s ongoing push to be self-sufficient in soybean seeds could greatly change the landscape of the global soybean market.

“It will favor us if China can supply their own soybean seeds and meal; and it is only a matter of time,” Garcia told the BusinessMirror.

Encouraging shift

OPPORTUNITY is what Cocoy Barrera of the Philippine Sugar Millers Association (PSMA) sees from the soybean issue.

Barrera, who is executive director of PSMA, said the shifting by Brazil sugarcane producers to soybean is an opportunity for the local sugar industry.

Brazil tried to fill China’s demand for soybean products after Beijing reduced its purchase of these from the US. In doing so, Brazil sugarcane farmers were encouraged to shift to soybean to meet the high soybean requirements of China.

“Brazil is the second-largest country in terms of soybean production and it is also the largest exporter of sugar. Most likely, if the trade war escalates, it will affect Brazilian sugar production, prices and exports,” Barrera said.

“China’s soybean requirement is around 100 million tons a year that Brazil cannot produce at current areas; so they may have to divert sugarcane areas to soybean,” he added.

Reduction in supply


BARRERA explained that a reduction in Brazil’s sugar supply may cause tightness in the world sugar supply. The tightness, he said, could result in higher prices that the Philippines could take advantage of if it decides to sell more sweetener to the world market.

“We are expecting that world sugar prices will go up,” Barrera said. He noted that prices started rising late last year until before March 1.

“Until the Covid-19 pandemic [and the lockdowns] disrupted trade,” he added.

The Philippines usually exports sugar to the world market during times of a domestic glut to arrest or avoid a plunge in mill-gate prices.

Barrera said Brazil’s conversion of sugarcane areas to soybean plantation could also result in tight supply of ethanol in the world market since it is a major player in that industry.

“Sugar mills in Brazil can easily switch to produce sugar and ethanol. And ethanol is largely sugarcane-based. If [they reduce sugar output] then it may also affect ethanol production,” he said.

Barrera added that the United States’ move to halve the tariffs slapped on Chinese sugar to 7.5 percent will not affect the Philippines’ sugar exports to Washington since Manila has an assured annual quota.

‘Stable’ trade

THE American Chamber of Commerce in the Philippines-Agribusiness Committee (AmCham-AC) said it has not observed the US-China trade war to have “any major effects” on Philippine agriculture, stressing that trade between the two big economies have remained stable.

“Both markets remain major origin and destination markets for our agricultural sector and trade flows seem to have remained stable,” said an AmCham-AC statement e-mailed to the BusinessMirror. “[The] same trend seems to be the case for investments into the local agricultural space as well.”

The statement said the AmCham-AC foresees potential opportunities or tailwinds for the Philippines “emerging from this trade war, particularly in the agricultural products that [the] US and China sell to each other.”

The group said the Philippines could position itself as a supplier of certain farm products that the two countries would not anymore buy from each other.

“As they mutually increase tariffs, the natural tendency is for these two countries to redirect sourcing to other third countries offering better terms,” the AmCham-AC said. “The Philippines can, therefore, be a potential beneficiary if it is able to capture some of this redirected trade flows.”

Right setting

ACCORDING to the AmCham-AC, “pork and poultry products are some of the main US exports to China, while fresh and processed fruits and vegetables are some of US imports from China.”

But in order to capitalize this opportunity, the Philippines should identify the supply gaps between the US-China farm trade and improve its competitiveness in these food products, the group said.

“To win from this ongoing trade dispute, the Philippines must find a way to discover these potential gaps that may need filling on both sides of the fence and boost its competitiveness to service these requirements,” the AmCham-AC said. “Setting up our ‘sails’ right to take advantage of these ‘tail winds’ will be key.”

An industry source, who follows the developments of US trade with the Philippines, concurred with AmCham-AC’s statement. The person familiar with the matter added that Manila may even sell more food products to the US if Washington opts to purchase lesser volume from China.

“China may not buy more from the US because their demand plunged. I think the Philippines may be able to sell more to the US, especially its top agricultural exports if the United States buys less from China,” the source said.

Exports, imports

BESIDES cheaper soybean, the Philippines also stands to benefit from more affordable dairy and meat products from the US if China buys less of these food products from Washington, the source said.

In 2018, the United States’ total export of agricultural products to China amounted to $9.3 billion, making China the fourth-largest agricultural export market for American farm products, according to the US Trade Representative (USTR).

The top farm products exported by US to China during the period include soybeans ($3.1 billion) and pork and pork products ($571 million), according to the USTR.

China is the top importer of US soybeans, the third-largest importer of US dairy and poultry products and fourth-largest buyer of American pork, beef and processed food, USDA data showed.

Based on the USTR report, US agricultural imports from China in 2018 reached $4.9 billion, making it its third-largest supplier of farm products.

Per the USTR, the US top agricultural imports from China are: processed fruits and vegetables ($1.2 billion); fruit and vegetable juices ($393 million); snack foods ($222 million); spices ($167 million); and, fresh vegetables ($160 million).

Very expensive

THE AmCham-AC said the US-China trade war, nonetheless, remains as a “matter of concern to the global trading system.” The group told the BusinessMirror they hope for a “general de-escalation of the situation.”

“Rising tensions can easily spiral into a tit-for-tat escalation of trade barriers, with a growing tendency towards protectionism and possibly polarization of shared trading partner,” the AmCham-AC said.

“We thus hope to see a general de-escalation of the situation, with both sides continuing constructive dialogue, as we had seen in the Phase I deal last year and whose progress we applaud and support,” it added.

Still, Philippine Institute for Development Studies Senior Research Fellow Roehlano M. Briones described as “limited” the opportunities for the Philippines from the US-China trade war, since agriculture commodities traded with the two countries “are not really in our trade basket.”

“I do not see any opportunities arising from the trade war for us. Airlifting high-value products via air cargo like fruit is too expensive and there’s no way to make it economical,” Briones told the BusinessMirror.

“The only way is to transport it through passenger plane but flights are still suspended; and even if they resume they would still be limited,” he added.

Outbreak of Covid-19

EVEN after a Phase One trade agreement was brokered earlier this year, the future of the US-China trade war remains uncertain, especially in light of the Covid-19 pandemic and the strict measures states imposed to contain it.

An agriculture expert who asked to remain anonymous for being involved in government trade negotiations said the implementation of the Phase One trade deal will push through this year relies heavily on politics involving the two big economies.

Since the outbreak of Covid-19, no less than US President Donald J. Trump has blamed the spread of the new coronavirus on China.

“As I watch the Pandemic spread its ugly face all across the world, including the tremendous damage it has done to the US, I become more and more angry at China,” Trump said in a Twitter post on July 1. “People can see it and I can feel it.”

Garcia said the US-China trade war has been overshadowed by the Covid-19 pandemic, leaving the two big economies at a new stage of their disputes.

Garcia added that whichever country gets to discover a vaccine against Covid-19 first could have the biggest leverage in moving forward the bilateral trade between the US and China.

“They will shift priority to focus on rebuilding their own economy. Anything outside of that will be secondary,” Garcia said.

Letting up

GARCIA believes the tide of war will change when a vaccine for Covid-19 is discovered.

“The next battle would be who makes the vaccine first; this might change the whole landscape,” she said. “It will be a very good leverage in moving forward their trade talks.”

Nonetheless, Garcia said they are in a “wait-and-see” mode as US and China have refrained from issuing “sweeping” statements regarding the matter.

Briones said he doesn’t see the US-China trade war escalating soon given external factors hounding the two countries such as the Covid-19 pandemic, Trump’s re-election bid and China’s issue with Hong Kong. Due to these, the Phase One trade agreement between US and China is effectively sidelined, he explained.

“Its biggest impact is that it could worsen existing global crisis. We know Covid-19 has caused vast economic contraction worse probably than the 2008 crisis,” Briones told the BusinessMirror. “And if that’s the situation, you do not want any other issues or challenges to compound it.”

He added that Trump is “hell bent” on winning his re-election and will utilize anything and everything, including whipping out anti-Chinese sentiments just to secure his win.

“There seem to be no signs of letting up with the trade war. Instead of having negotiations and making a deal, Trump is just making tirades to boost his base and get votes,” Briones said.

Trade beyond ‘war’


LOOKING beyond the trade war, economist Pablito M. Villegas said the Philippines could use coconut oil as leverage to improve its exports to both countries if the food product is proven to be effective against Covid-19.

“Both these countries are looking for a cure against Covid-19 and the Philippines could be the one providing them with that through coconut oil,” Villegas said.

“That could be an anchor for us to expand trade with the two countries if the results that coconut oil is effective would be true. It is just a matter of time,” Villegas added.

In a report to the United Nations Conference on Trade and Development Commission on Science and Technology for Development, the Philippines said it is currently conducting three separate studies that seek to determine the efficacy of coconut oil against Covid-19.

The Department of Science and Technology is currently supporting the three studies.

The first one seeks to determine the efficacy of virgin coconut oil in improving the condition of confirmed and probably Covid-19 patients.

The second study, which is spearheaded by Ateneo de Manila University experts, aims to test whether certain coconut oil components can diminish or prevent the infectivity of SARS-CoV2, the causative virus of Covid-19, according to the report.

The third study assesses the possible benefits of VCO if given to patients with moderate to severe Covid-19, in addition to the drugs being assessed in the clinical trials, the Philippine report added.