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12 CapitalPress.com January 27, 2017 Experts disagree about degree of risk facing U.S. ag CHINA from Page 1 U.S. commodities have mixed experiences in China down domestic crop prices, experts say. This scenario would be particularly dangerous if a crumbling Chinese economy were to coincide with a polit- ically motivated trade dispute between the Chinese and U.S. governments. By DAN WHEAT and TIM HEARDEN Capital Press Ag bears brunt “Ag does end up bearing the brunt, particularly the ini- tial blows, of any of these kinds of trade disruptions,” said Bob Young, chief economist for the American Farm Bureau Feder- ation. Given the Chinese econom- ic system’s lack of transparency and the unpredictability of the Trump administration’s trade stance toward the country, ex- perts disagree about the degree of risk facing U.S. agriculture. Jim Budzynski is a pessi- mist. As managing principal of Macrogain Partners, a compa- ny that advises on agricultural investment, Budzynski is trou- bled by the trillions of dollars in debt that China’s government and corporations have taken out to keep the economy growing. “It’s going to be very dif- ficult to unwind,” he said. “They’re in a very precarious situation.” The current state of affairs in China is similar to the U.S. before the housing-induced fi- nancial crisis nearly a decade ago, Budzynski said. Chinese banks are dis- guising loans as investments in “wealth management” en- tities, circumventing govern- ment limits on debt, he said. The Chinese government tolerates this deception be- cause it needs to pump money into the economy to keep it growing, Budzyski said. As with the U.S. finan- cial crisis, the danger is that eventually these entities will become insolvent and fail to repay debts, sending ripples through the entire Chinese fi- nancial system, he said. Such unraveling could re- sult in a worse global finan- cial catastrophe than seen in 2008, since off-balance sheet debt has mounted since then, Budzynski said. “At some point, you have to stop digging” deeper into debt, he said. “We keep dig- ging.” Exactly how quickly such pressures could reach a break- Associated Press A cargo ship loaded with containers calls on the Port of Qingdao in China. About $20 billion in U.S. agricultural goods were sold to China last year. ing point is tough to forecast, said Desmond O’Rourke, a re- tired Washington State Univer- sity agriculture economist and world apple market analyst. “Certainly the system could collapse. However, like our housing bubble, bubbles can continue for a long time and it is difficult to predict when they might burst,” said O’Rourke. China is borrowing 250 percent of its annual gross do- mestic product compared to 100 percent for the U.S., he said. Anything over 50 to 60 percent is considered unsafe. Flight of capital Experts are also worried by wealthy Chinese compa- nies and individuals who are trying to get their money out of the country — both be- cause it signals internal eco- nomic anxiety and because it can lead to further weakening of the financial system. “There is the potential for a huge looming crisis to oc- cur,” said Piegza of Stifel Fi- nancial Corp. Such flight of capital has another impact. When inves- tors take their money out of China, they must convert the Chinese yuan into U.S. dol- lars or another foreign curren- cy, said Fred Gale, a USDA economist who studies China. Quickly selling a large amount of currency has the same effect as unloading large quantities of any other com- modity. The sudden surplus drives its value down, he said. In effect, the Chinese yuan is devalued by capital flight, which is bad for U.S. farmers because their crops become more expensive in that coun- try as the dollar strengthens, Gale said. The dynamic also under- mines the resiliency of Chi- nese banks. “If you have lots of peo- ple doing the same thing, the currency reserves of the Chi- nese banks go down,” he said. “That means they have less cash on hand to back their li- abilities. It puts them in a per- ilous state.” However, the Chinese gov- ernment can counteract the devaluing of the yuan by sell- ing its reserves of foreign cur- rency, said Piegza. By trading foreign currency for yuan, China buys its own currency to boost its value. Ultimately, China must re- assure investors about the sta- bility of its economic system to avoid volatility in financial markets, which could cause the flow of credit to freeze, Piegza said. That would cur- tail global spending on com- modities, hurting crop prices. “How do you invest in something if you don’t know what’s happening there?” she said of the Chinese financial market. Reassurances For some analysts, recent history provides some reas- surances. Dan Kowalski, research director at the agricultural lender CoBank, said China is in for “a bumpy ride,” but the previous financial crisis showed it’s equipped to deal with volatility. The Chinese government then injected roughly $600 billion in capital into the economy, but the situation is less severe now — roughly $200 billion to $300 billion would suffice, he said. “They’re going to do what- ever is necessary to shore the system up,” Kowalski said. “I don’t think a major crisis is coming.” Some experts say that friction between the Trump administration and Chinese leaders is perhaps a greater concern for agriculture than its slowed economic growth. “It’s to be expected that China is not going to go back to growing at 10 percent (a year). Are they still going to grow? Probably. Are they still going to buy stuff? Yeah,” said Daniel Sumner, direc- tor of the Agricultural Issues Center at the University of California-Davis. President Donald Trump made getting tough on China a key point in his campaign, but former President Barack Obama’s administration also took several steps that could complicate relations, Sumner said. The U.S. recently filed a World Trade Organization complaint against China over its aluminum subsidies, while outgoing USDA Secretary Tom Vilsack criticized the pace at which China has ap- proved genetically modified crops. Capital Press reporters Tim Hearden, Matthew Weav- er and Dan Wheat contribut- ed to this story. Two years ago, when the U.S. apple industry gained full varietal access to China, economist Desmond O’Rourke warned that the Asian nation might not be the O’Rourke panacea it appeared for apples, citrus, nuts and other commodities. O’Rourke called China “extremely unreliable” for its ability to cut off trade, as it had for all U.S apples for two years on phytosanitary grounds. In time, Washington ap- ple exporters hoped China would grow from a 3 mil- lion-box, $60 million annual market to a 10 million-box market worth $200 million. After the ban was lifted, Washington sold 2.9 million boxes of apples to China and Hong Kong from the 2014 crop. But sales dropped to 1.9 million boxes from the 2015 crop and, as of Jan. 3, were 1.2 million boxes this season. The drop in 2015 was caused by China’s economic troubles, more high-quality Chinese Fuji apples com- peting against Washington apples and Washington’s supply being lower and pric- es higher, said Lindsey Hu- ber, international marketing specialist at the Washington Apple Commission. California farmers shipped more than $2 billion in agricultural goods to Chi- na and Hong Kong in 2014, according to the California Department of Food and Agriculture. Almonds were the lead- ing commodity at $402.2 million, followed by pis- tachios at $362.8 million, dairy products at $239.1 million and walnuts at $181.9 million, according to the CDFA. While overall exports to China have been trending downward since 2013, Cal- ifornia commodity groups aren’t very concerned — at least yet. “It still remains strong for us,” said Michelle Mc- Neil Connelly, the Califor- nia Walnut Commission’s chief executive officer. “Year to date, we’re down just slightly ... but de- mand has been strong. ... The Chinese New Year is just around the corner, and that’s a peak consumption season for us.” In the 2016-17 fiscal year, almond shipments to China are up 49 percent from this point last year, making China the largest export market for California almonds, followed by India and Spain, said Julie Ad- ams, the Almond Board of California’s vice president of global, technical and reg- ulatory affairs. “The China government has expressed the priori- ty of maintaining stability for 2017, which would be important for continued de- mand for imports such as almonds,” Adams said in an email. For pistachios, China is the No. 1 export market. In the current fiscal year that started in September, Chi- na is buying as much as what the U.S. is shipping to the rest of the world and consuming domestically combined, said Richard Ma- toian, executive director of the Fresno-based American Pistachio Growers. “It’s pretty incredible,” Matoian said. “China just seems to be going like gang- busters for us.” Fruit producers are also optimistic that China will remain a key market. For citrus fruit, China and Hong Kong combined were the No. 3 destination behind South Korea and Japan in 2015 with about $130 mil- lion in purchases, said Bob Blakely, vice president of California Citrus Mutual. “Citrus is something that they really like and actually, their buying power has in- creased,” Blakely said. “We haven’t seen an indication that that’s being affected.” Even without TPP, wheat industry has traded with other countries TPP from Page 1 ensuring we do not lose the ground gained — whether in the Asia-Pacific, North Ameri- ca, Europe or other parts of the world.” Any renegotiation of NAFTA must assure that U.S. agriculture trade with Canada and Mexico remains strong, Duvall said. The U.S. wheat industry also supported the TPP, say- ing it would have provided a level playing field and re- duced tariffs imposed on U.S. wheat. The National Associa- tion of Wheat Growers and U.S. Wheat Associates is- sued a joint statement calling Trump’s decision “inevita- ble.” “It is disappointing, how- ever, that until an alternative trade policy is established, ex- port opportunities in the prom- ising Pacific Rim markets that could help U.S. wheat farm- ers at a time when they need it most are very much at risk,” the statement says. Trans-Pacific Partnership Free Trade Agreement partners TPP partners Alaska (U.S.) Canada U.S. Hawaii (U.S.) Mexico Peru Japan China Thailand Cambodia Malaysia/ Singapore Vietnam Brunei-Darussalam Australia Chile New Zealand Source: aflcio.org Alan Kenaga/EO Media Group Wheat prices have been low the past year. “Without TPP or alterna- tive agreements, U.S. farmers will be forced to the sidelines of trade while losing market share to competitors, including Australia, Canada, Russia and the European Union, which have current agreements or are negotiating new ones with countries outside the network of existing U.S. trade agree- ments,” said NAWG president Gordon Stoner, an Outlook, Mont., wheat farmer. “Obviously, we’re sup- portive of trade,” said Glen Squires, CEO of the Wash- ington Grain Commission. Roughly 85 to 90 percent of wheat produced in Washington is exported. “Moving forward, we’re still going to be support- ive of trade.” Even without TPP, the wheat industry has traded with other countries, Squires said. “If it’s not there, we still have to try to compete the best we can in all markets,” he said. Others in agriculture wel- comed the news. National Farmers Union president Roger Johnson said in a statement that he was pleased by Trump’s decision. “For too long, our nation’s trade negotiators have prior- itized a free trade over fair trade agenda, leading to a mas- sive $531 billion trade deficit, lost jobs and lowered wages in rural communities across America,” Johnson said. “It’s time our country refocuses the trade agenda to prioritize bal- anced trade, U.S. sovereign- ty and U.S. family farmers, ranchers and rural communi- ties.” Shawna Morris, vice pres- ident of trade policy for the National Milk Producers Fed- eration and U.S. Dairy Export Council, said the TPP had valu- able gains, but wasn’t a perfect agreement for dairy producers, particularly for market access. Dairy producers see Trump’s decision as an op- portunity to directly engage key Asian markets and estab- lish export advances in Japan, Vietnam and Southeast Asia, Morris said. “Certainly what we can’t see is a situation where the U.S. effectively sits back now and lets our competitors run the board in Asia by sew- ing up all of their own trade agreements without us being at that table,” Morris said. Tracy Brunner, president of the National Cattlemen’s Beef Association, criticized the withdrawal. “Fact is, American cattle producers are already los- ing out on $400,000 in sales every day because we don’t have TPP, and since NAFTA was implemented, exports of American-produced beef to Mexico have grown by more than 750 percent,” Brunner said in a prepared statement. “Sparking a trade war with Canada, Mexico, and Asia will only lead to higher pric- es for American-produced beef in those markets and put our American producers at a much steeper competitive dis- advantage.” R-CALF USA, an inde- pendent ranchers’ group, ap- plauded Trump’s order, say- ing TPP would have put U.S. livestock producers at a disad- vantage. “It’s really a huge relief that now the president of the United States is saying exact- ly what we’ve been saying for 20 years,” said Bill Bullard, CEO of the organization. Agreements require Scotts to provide technical assistance to affected farmers SCOTTS from Page 1 lays out the company’s con- tinued responsibilities for help- ing control the bentgrass. As part of the agreement, the company has agreed not to commercialize the plant, which was being developed for use on golf courses. Jim King, senior vice pres- ident of corporate affairs for Scotts, said the golf course industry has changed dramati- cally since the company started developing the plant and the marketplace for that product is no longer viable and shrinking. “Economically, it makes no sense to commercialize it,” he said. The company opted to con- tinue to pursue deregulation because it felt it needed an an- swer from USDA on whether a product Scotts invested tens of millions of dollars in should be approved, King said. USDA has a regulatory road map that allow companies such as Scotts that are in the busi- ness of innovation to know if a certain product should be ap- proved, he said. “We had a legitimate pe- tition in front of USDA, we wanted an answer and they fi- nally provided the answer,” he said. Lori Ann Burd, director of the Center for Biological Di- versity’s environmental health program, said the decision to deregulate the bentgrass means the agreements covering the control of the escaped crop are no longer valid. She pointed out that the word “regulated” appears be- fore “glyphosate tolerant creep- ing bentgrass” each time Scotts responsibilities are laid out in the agreements. The responsibilities “apply exclusively to regulated (bent- grass),” she said. But even if that’s not the case, she said, the agreements only require Scotts to take min- imal action. Burd said USDA’s decision leaves her group no choice but to explore legal options to challenge it. The agreements require the company in 2017 and 2018 to provide technical assistance to affected farmers and irrigation districts and pro- vide incentives for the adoption of best management practices to control the grass. Scotts will pull back a little after that but still con- tinue to analyze the situa- tion, educate growers and provide technical assistance. Coker said the agreements “remain in effect regardless of the deregulated status of (the grass) because the compliance incidents predated the deregu- lation.” King said Scotts will honor the agreements “and, if we have to, we’ll do more. We consid- er those to be documents that were negotiated in good faith ... and we have every intention of living up to everything we said we were going to do.”