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- DTN Headline News
ADM CFO Sees Challenges Ahead
Monday, July 22, 2019 12:34PM CDT
By Katie Dehlinger
DTN Farm Business Editor

KANSAS CITY, Mo. (DTN) -- Archer Daniels Midland Company Vice President and Chief Financial Officer Ray Young said he's confident the U.S. will come to a trade agreement with China.

"The issue is when we'll get towards a trade deal, and that's the uncertainty right now," he said at the Kansas City Federal Reserve's annual Agricultural Symposium this week. "With a trade deal, we do believe that China will buy significant quantities of U.S. agriculture products and also corn-based ethanol."

Going into the trade war, many in the industry thought China couldn't manage without buying U.S. soybeans, but that hasn't been the case, in part due to the African swine fever (ASF) outbreak, he said.

Before the trade war, ASF and the recent Chinese economic downturn, ADM thought China would import about 100 million to 105 million metric tons (mmt) of soybeans. Of that, the U.S. would have contributed about 35 million to 40 mmt.

Now, Young said ADM thinks China will import around 80 million to 85 mmt, with Brazil supplying 70 mmt and the rest of the world covering the remainder.

"What we discovered in the back half of 2018 is they can manage without buying anything from the United States. I think that's a wakeup call for China and for us in U.S. agriculture," he said.

ADM is the largest U.S. exporter to China, Young said, but it also has a diverse global sourcing footprint and responded to the trade war by adjusting its supply chains to send Brazilian beans to China while the U.S. backfilled other orders.

"For a big company like ADM and trade wars, we can manage through these issues. The people who get hurt in a trade war are the U.S. farmers," he said. "For the longer term, U.S. agriculture will have to be less reliant on China as a destination for soybeans and other agricultural products.

In the near term, that means finding new buyers, but over the long term, he thinks it's important to develop new uses, like plastics made from corn, and expand some current uses, like soybeans for biodiesel.

"One of the greatest potential benefits of a U.S.-China trade deal is the export of U.S. ethanol," he said. China has a 2.5 billion to 3 billion gallon deficit between the amount of ethanol it produces domestically and what it needs to meet its mandated blend rate. For perspective, the U.S. produces about 17 billion gallons of ethanol a year.

While the trade dispute is reshaping global grain flows, Young said the ASF outbreak is doing the same thing to meat. China's facing a 10 mmt shortfall of animal protein, Young said. To put that in perspective, annual U.S. pork production is about 13 mmt.

"What it means in the near term is there is going to be significant demand pull from China for meats around the world. That will benefit the animal protein industry outside China, and it will benefit companies like ADM, because we provide the feed for all of these animals," he said.

He thinks China will realize it doesn't need to raise all of its own meat and can rely on its supply chain to meet their protein needs. That would also address China's environmental issues by exporting them to countries like Brazil and the U.S.

Geopolitical disruption is only one of the challenges the U.S. will face as the global population booms to 10 billion people by 2050. American agriculture will have to ensure their competitiveness through investments in technology -- both digital and genetic -- and infrastructure.

"In an era of increased global competition, when net farm incomes are actually coming down and bankruptcies are increasing, technology isn't a luxury. It's actually a necessity," he said.

Because Brazilian farmers can grow two crops on the same acre of land in a year, their production costs are significantly lower, but Young said they give it back in the form of infrastructure. It costs eight times as much to move a bushel of soybeans from Mato Grosso to the Port of Santos as it does from the interior U.S. to the Port of New Orleans.

"Brazil is aggressively addressing that issue," Young said. It's almost done paving the main highway connecting Mato Grosso to ports along the Amazon River, although parts will need to be rebuilt, according to a former Brazilian transportation official at the meeting. There are also significant investments in railways and toll roads, some with backing from China.

At the same time, the Mississippi River has been plagued by structural problems like mechanical failures of locks and bridges, silting and outdated lock sizes. "All of that adds costs and erodes the advantage that we have as a nation in terms of moving agricultural products to the export ports around the country," Young said.

The U.S. agriculture industry is also going to need to adapt to changing consumer tastes like increased desire for alternative meat and milk products and foods that are lower in fat and sugar, as well as for products that are considered more sustainable or traceable.

"The world does need the United States to provide food in order to meet the growing needs of the global population, but the U.S. needs to adapt in order to make sure we don't lose market share, and frankly lose global relevance," Young said. "We have to continue to invest, leverage technology, increase productivity, become even more cost competitive so our farmers can earn a good income and do this important work."

Katie Dehlinger can be reached at Katie.dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN

(BAS/ES)


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