You’ve all seen the headlines: “China is hitting the U.S. where it hurts: Soybeans,” and “China takes aim at America’s soybean farmers,” and “Soybean farmers are still paying for Trump’s trade war” (all from CNN).
The popular narrative goes that because President Trump launched a trade war against China, China has retaliated by tariffing America’s chief export to China—agricultural products—which happen to mostly come from red states that voted for Trump. China is “crushing prices” with its retaliatory tariffs, says HBO’s Vice News. In other words, the media narrative goes, China is punishing Trump voters for being dumb enough to vote for a trade warrior.
Before the midterms, the media took its narrative one step further. Just about every mainstream media publication ran a story that said farmers may abandon Republicans because of Trump’s trade war. Quartz, for example, wrote: “New tariffs on pork exports have forced some U.S. hog producers to liquidate parts of their farming operations. One farmer who spoke to Reuters said Trump’s trade war with China cost him $200,000 this year, and that he regretted voting for Trump in 2016. He isn’t alone”
In other words, “When will the dumb Trump-supporting farmers realize that they have been conned?” You can rest assured that this narrative will once again surface before 2020’s election. Except that none of it is true. American farmers are certainly hurting, but little of this is due to the trade war. The media is trying to take advantage of American farmers’ pain for political purposes.
China Has Long Restricted U.S. Ag Trade
First of all, China long ago restricted imports of U.S. pork. According to Bloomberg, since 2011, America’s share of China’s pork imports fell from about 50 percent to less than 13 percent by 2016. China blamed this on “unsafe” U.S. pork, because most American pork producers supplement pigs’ diets with ractopamine, a safe additive fed to hogs several weeks before slaughter to help them bulk up with more lean meat.
Really, there are plenty of safety concerns with Chinese pork, and American pigs are raised and slaughtered in much more clean, controlled, and humane environments than are their Chinese cousins. In other words, China was long ago playing protectionism and attempting to boost its own hog production—so even here, Trump had a point all along.
Next, there’s a big reason that China is buying less soybeans, and it has nothing to do with the trade war. China’s pig population is being rocked by a terrible pig disease called African Swine Fever (ASF). What is ASF? ASF was first detected in Africa more than a century ago, but it has been spreading like wildfire in China since at least last year. There is no cure for ASF, and it kills well more than 90 percent of the pigs it infects in less than a week, via massive hemorrhaging. This is a gross, messy disease—think of Ebola, but for pigs.
Experts say it could take years to control the disease in China. It spreads easily between pigs, and historically Chinese pork producers have used cheap feed that contains pork meat, which spreads the disease even further. The combination of these bad pork production practices, bad incentives provided to farmers, a cover-up culture, and corruption and mismanagement at the local and national government levels have impeded China’s ability to control the disease.
Already, China, home to about half of the world’s pigs, has lost about a third of its hog population—the size of the entire pig population in the European Union. The problem could even be worse, but it is impossible to trust Beijing to honestly report how bad it really is. China’s Ministry of Agriculture and Rural Affairs says the disease is “under control,” but there is much evidence to the contrary.
The Pig and Soybean Stories Are Connected
Because pork is such a staple in China, food inflation is going through the roof, which is a real problem for Chinese consumers and the communist government. It’s also a problem for the world’s soybean producers, because a staple of pigs’ diets is soybean meal.
Quite obviously, if oodles of Chinese pigs are slowly exploding, China is going to need less soybeans. If anything, China’s demand for soybeans has been temporarily supported by Chinese farmers switching away from cheap pig feed—which as mentioned earlier is contaminated with pig meat—to feed based solely on soybean meal.
But as the ASF problem in China worsens, the need for more soybeans is running out. Last month, it was reported that China’s imports of soybeans from Brazil (the alternative supplier of soybeans in lieu of America) have plummeted because of ASF.
By the way, China promised at the G-20 summit several weeks ago to buy more U.S. soybeans in exchange for Trump going easier on Chinese telecoms giant Huawei. But China hasn’t bought significantly more soybeans since that time, precisely because it doesn’t need them.
On the other hand, China is upping its purchases of supposedly unsafe U.S. pork—again, because so many of its own pigs are dying. In fact, U.S. pork exports to China hit a record high earlier this year, even though China is levying a 62 percent tariff on pork from America.
The Fed Is to Blame for the Weak Business Cycle
But the media narrative gets even more dishonest. Sure, even though China is buying less soybeans overall, it is still buying more of its soybeans from countries outside of America, especially Brazil. And once trade tensions worsened, soybean prices did fall by about $2 per bushel, although they have recovered about half of those losses since. Especially in certain parts of the country, farmers really are hurting.
But that’s not the end of the story. The drop in soybean prices because of the trade war is nothing compared to the drop in soybean prices that occurred in 2014. In mid-2014, they were at almost $15 per bushel before dropping precipitously, by more than $5 per bushel in a matter of four months.
By October 2014, they were at the “nine handle,” or priced just above $9 per bushel. That’s just about the same level they sit at today, in spite of the trade war. In fact, soybean prices today are about where they were in 2016.
If one looks at a chart of corn prices, a similar drop is seen, also in 2014.
It also just so happens that if one looks at a chart of the farm default cycle, it also began to increase steadily since 2014. What gives?
The corn and soybean price changes are almost entirely explained by U.S. monetary policy. For the first half of this last decade, the U.S. Federal Reserve (“the Fed”) kept interest rates ultra-low, and embarked on three separate rounds of quantitative easing, or QE, a fancy term for money printing at the Fed to buy U.S. government bonds and mortgage-backed securities. People thought QE would cause massive inflation, but it is more accurately described as artificial credit creation.
But under QE the dollar did get less valuable, because the world had more dollars, and global growth was artificially boosted. Because commodities are priced in dollars, a weaker dollar means less buying power for a given commodity, which means higher commodity prices measured in dollars.
After the Fed embarked on three rounds of QE, it ended its third round—dubbed QE3—in October 2014. In the opposite effect of embarking on QE, ending QE meant the dollar became scarcer, and thus had greater purchasing power as investors anticipated earning a higher yield on dollar assets and thus wanted to hold more dollars. The increased value of the dollar and the anticipation of higher real rates in America meant that one dollar had more purchasing power, globally, so the price of commodities measured in dollars went down. It wasn’t just agricultural goods that were hit. Commodities from oil to copper plunged.
But the problem wasn’t that the Fed ended QE, it was that the Fed began QE in the first place. During QE, not only were commodity prices pushed up, but borrowing costs were dirt cheap. It made sense during the time for farmers to borrow heavily to binge on land and equipment, in order to meet the “demand” for soybeans or other goods that was being signaled to them by higher prices.
The problem is that this increased demand, signaled by a higher price, was an illusion created by QE’s temporary effect on the dollar and global credit creation. And because QE made borrowing cheaper—make something less expensive and you’ll get more of it—too many farmers took on too much debt, dangerously overextending themselves.
Of course, without the Fed’s intervention, the business cycle would still exist, and there would still be farm defaults. But this is a good example of how, contrary to popular opinion, the Fed’s attempts to fix the problems that it created during the previous business cycle only exacerbate the next business cycle—which makes booms and busts more pronounced, painful, and less redistributive than would exist in a free-market capitalist system.
Whether or not you agree with any of this, the charts don’t lie: the huge price drop in soybeans and the bottom in the farm default cycle have everything to do with 2014, and little to do with Trump.
The Corporate Media Gets It Wrong Every Day
To recap, AFS is the primary reason China is buying less U.S. soybeans. Why isn’t the media reporting on this, and the risk that this disease comes to America? What is your congressperson or the White House doing to make sure contaminated Chinese meat—through accident or even sabotage—doesn’t harm the U.S. pork industry?
Next, the big drop in soybean prices was in 2014, not 2018. Farmers truly are hurting, and that is almost entirely due to the consequences of the Fed’s QE programs. First, the Fed made it too easy to borrow and tricked farmers into thinking that long-term demand for their goods was much higher than it really was. Later, when QE ended, farmers were left overextended.
The amazing thing is that a chart of commodity prices doesn’t lie. But the corporate media insists on only telling a tenth of the story, if that. They don’t give a hoot about farmers, they are just looking for any way possible to hurt the president. If you haven’t learned this already, that tells you something about the corrupt state of the East Coast corporate media. You can’t believe anything they say.