American corn may not be going to China anytime soon. Source: Tristan Taussac/Flickr.
In late 2013, China became upset with America over a trade issue. No news there, perhaps, but it wasn't from dumping allegations for solar panels or tariffs placed on American-made cars. China got grumpy over corn. While that may seem harmless, the events that have unfolded have been said to potentially impact investors -- and even the protocol for how farmers gain access to advanced technologies. If that happens, the impacts could trickle down to all consumers in the form of higher food prices. Should you be worried?
What happened?
Archer Daniels Midland (ADM +3.83%) has joined fellow food processors Cargill and Trans Coastal Supply in suing seed and trait manufacturer Syngenta (NYSE: SYT) for economic losses incurred on shipments of genetically modified corn rejected by China after the voyage across the Pacific Ocean, and later shipments that were never allowed to leave American ports. All three companies have business segments that rely on the logistics of agriculture, from the collection to storage and transportation to export of various foods.
The agitation-inducing corn variety is Syngenta's Agrisure Viptera, which has been approved in the United States, Brazil, and Argentina -- which together account for 67% of global corn exports -- since 2011. It has been very popular with farmers because the corn contains multiple genes, or trait stacks, that protect crops against up to 16 pests without the need for large quantities of insecticides, thus saving farmers money.
Agrisure Viptera offers clear advantages over non-hybrid controls. Source: Syngenta.
However, China has not yet approved the new trait stacks. So, when the corn was detected in domestic ports, it pulled the reins on importing American corn, which nearly ceased altogether earlier this year. Although the ban was targeted at Syngenta's Agrisure Viptera, banning imports of American corn hurt farmers and grain exporters growing and shipping many different varieties.
The ban was later extended to distiller's dried grains with solubles, or DDGS, which is used as an animal feed and remains an important monetized waste stream for ethanol producers. In July, the National Grain and Feed Association estimated that China's ban would cost farmers, ethanol producers, and grain traders about $3 billion.
Who's to blame?
This issue has become confusingly complex. Some say China is overreacting, while others blame Syngenta for selling the seed in the first place. Still others say grain processors such as Archer Daniels Midland should have systems in place for monitoring international regulations in the regions in which they operate.
Farmers aren't sure where to point the finger, either, although farmers in 10 states have filed lawsuits against Syngenta for indirectly "crashing" global grain prices. Meanwhile, some grain processors have stopped doing business in China over fears of further trade disruptions should the country begin targeting imports of corn grain alternatives such as sorghum.
What likely started as an honest mistake is now heating up into a potential agricultural trade war between the United States and China. Trading between the largest global exporter and importer has always been fragile, especially as China seeks to transition its economy to the manufacturing of higher value products. For instance, the United States slapped hefty tariffs on Chinese-made solar panels this past summer, while China did the same to American-made automobiles last year. This could escalate quickly, as the stakes are higher than with solar panels and cars. Simply put, China desperately needs American agriculture to supplement its domestic food supply, but desperately craves a robust, home-grown biotech industry. It will be interesting to see how the two are balanced.
Will the lawsuits be successful?
I don't see any of the lawsuits being successful for several reasons. First, Syngenta hasn't done anything but sell a new and approved tool to farmers, who should have access to new technology. It's not the fault of the company or farmers that several shipments of corn approved in the United States ended up in the port of a country that has yet to approve the variety. If the company misled farmers about approval in China, then, well, that may be a different story.
Second, corn is a commodity, which by definition makes it subject to the ebb and flow of global markets. Suing over incurred losses means you were expecting to make more money from selling a product that has an uncertain price in the first place. Perhaps Archer Daniels Midland can document actual losses on shipments that arrived at Chinese ports and were subsequently rejected, but even then, it's probably impossible to find a single entity to blame.
Third, corn prices may be depressed from their all-time peaks set in 2012, but even recent lows are higher than selling prices realized as recently as 2010. In fact, current corn prices are 50% higher today than the 25-year average from 1985 to 2010. It's also important to remember that the devastating drought of 2013 kept prices artificially high, so not all of the drop in prices can be blamed on China's ban.
Fourth, America's global exports of corn were actually 150% higher in the 2013-2014 harvest year compared to the drought-stricken 2012-2013 harvest. While exports to China are expected to fall to 37% to 2.5 million metric tons for the 2014-2015 harvest, the United States can likely more than make up the difference elsewhere. For instance, Egypt alone grew imports of American corn by more tonnage (2.1 million metric tons) in 2013-2014 than traders will lose from China next year.
Source: U.S. Grains Council.
What does it mean for investors?
The United States is usually the first country in the world to approve a new biotech crop or trait because it's home to one of the largest and most important agricultural industries. That makes it unlikely that this issue will be avoided in the future on the premise of technology approvals alone. However, food processors could enact stricter guidelines for testing shipments of corn before they leave port (or better yet, leave storage for export terminals). Meanwhile, China could restructure its regulatory approval process to reduce the lag time in approvals between itself and its largest agricultural trade partners, namely the United States, Brazil, and Argentina.
For now, investors don't have much to worry about. Archer Daniels Midland has worked diligently to boost profits and margins, which make losing several million, or tens of millions, in revenue to China's corn ban insignificant in the big picture, especially if alternative trade routes can be established. Meanwhile, Syngenta shareholders are also enjoying healthy profits and operations. Couple that with lawsuits unlikely to gain traction, and it's easy to sit back and take a deep breath.
