The last installment of this report took a contrarian view to the belief that a Pacific war is inevitable. If peace prevails, your author believes, many Chinese businesses, including agribusinesses that are discounted for geopolitical reasons will climb in value relative to their Western peers. The report examined a number of Chinese firms including Alibaba Group Holding Limited (BABA), Foshan Haitian Flavouring and Food Company Ltd. (603288.SS), Inner Mongolia Yili Industrial Group Co., Ltd. (600887.SS), Muyuan Foods Co., Ltd. (002714.SZ), Origin Agriculture (SEED), Shineco, Inc. (SISI), Sinofert Holdings Limited (WCQ1.F), WH Group Limited (0288.HK), Want Want China Holdings Limited (0151.HK) and Yum China (yumc).
In this report, we consider the opposite: How a hot Pacific war might unfold and the ramifications for agriculture markets. In a May 19 analysis, the Financial Times reported a clash between the world’s top two powers – China and the United States – over Pacific territory would trigger the biggest international crisis since the second world war. Both world wars caused shifts in the economic landscape of global agribusiness. Thus, we’ll start this report by reviewing how those wars affected farm commodities.
- World War I: For farms and other agribusinesses in non-combative regions, the Great War vastly improved economics and profitability. As agriculture began to collapse across Europe in 1915, commodity prices rose dramatically, reaching peaks from 1918 to 1920. Ultimately, farmgate prices in the United States rose by more than 250 percent. Though, some crops, like cotton, saw fivefold increases in price, rising from $0.07/lb. in November 1914 to $0.38/lb. in April 1920.
The unexpected burst of prosperity set off unprecedented investment in agricultural regions around the world, including Canada, Australia, New Zealand, and rural America. Argentina became one of the world’s wealthiest countries, outgrowing Canada and Australia in population, total income, and per-capita income.
But, as European production returned in 1919 and 1920, farmgate prices began to fall. Agribusiness investors who had backed capacity expansions were caught off guard. Cotton, which was the world’s most valuable commodity at the time, fell in price by 75% by mid-decade. Other farm commodities fell by an average of 50%.
The commodity price crashes of the 1920s were followed by the Great Depression in the 1930s, which fueled societal transitions, including the Great Migration of African Americans from the South to the industrialized North. In 1937, farmland that had sold in 1920 for $300/acre could be purchased for as little as a dollar. In Argentina, the economy collapsed to such an extent that a military junta took control of the government. That country has never fully achieved the economic prosperity it once had during World War I.
- World War II: While price rises during World War II were not as dramatic as those during World War I, the Second World War proved to be a boon for farmers in non-combative regions as well. Near the beginning of the war in 1942, the United States exported about $1 billion worth of food and agricultural products worldwide. By 1945, exports doubled to $2 billion. Corn and cotton prices increased on average by 50% to 100% while production volumes increased by a fifth. The prosperity set off another wave of rural investment that lasted until 1950.
World War III: ‘It’s all about the missiles’
In thinking about correlations between the first two world wars and what agribusiness might expect from a broadscale Pacific war, one must keep in mind the military advancements over the past eighty years. Since World War II, at least a dozen types of missile systems have been developed, including air-to-air, air-to-surface, surface-to-air, intercontinental ballistic, anti-ballistic, naval strike, anti-tank, hypersonic, anti-satellite, land-attack and subsonic cruise. According to the D.C.-based Arms Control Association, a national nonpartisan member organization, an estimated 12,100 missiles worldwide can carry nuclear warheads. More than a hundred thousand non-nuclear military-grade missiles have been deployed as well.
Eric Heginbotham, a Massachusetts Institute of Technology security expert and co-author of a Taiwan war game, told the Financial Times in its May 19 analysis that the outcome of a Pacific matchup between China and its allies against the United States and its allies would depend heavily on missile systems. “It’s all about the missiles,” Heginbotham said. Short, medium, and long-range missiles and even intercontinental nuclear warheads could determine the outcome. Each country in the region, including Japan, the Koreas, the Philippines, China, the United States, and Taiwan, is increasing its system capabilities.
Taiwan now has domestically developed missiles with ranges of up to 2,000km (just over 1,240 miles), and it has set a target of producing 1,000 missiles this year. Moreover, Taiwan has purchased 29 U.S. truck-mounted HIMARS rocket launchers, which can carry up to six rockets each. M142 HIMARS are manufactured by Lockheed Martin Missiles and Fire Control at an export cost of $19m-20m per launcher and carrier. Each M31ER GMLRS missile is reported to cost $434,000. Missiles often cost more than the target they destroy.
Japan is also expanding its arsenal. With U.S. Patriot surface-to-air missiles, its islands will host anti-ship missiles and 400 ground or sea-launched Tomahawks to be delivered in 2025. The Philippines is purchasing Indian-Russian made supersonic anti-ship cruise missiles, called BrahMos. In 2016, the Philippines and the U.S. agreed to five locations for military bases for American troops and their weaponry under the Enhanced Defense Cooperation Arrangement (EDCA). In 2023, another four locations were added. All nine sites are intended to augment missile bases in Southern Japan, South Korea and Guam, which is where the U.S. Army will deploy its Dark Eagle hypersonic missiles this summer. These rockets will be able to hit Chinese positions at 3,000km.
China Invasion: 2027-2030
The window of opportunity that military planners have identified for the potential invasion of Taiwan by China is 2027 to 2030. “At the 2027 People’s Liberation Army Centennial, President Xi will be in the final year of his third term and 73 years old,” according to Major Kyle Amonson, US Army, and Captain Dane Egli, US Coast Guard, retired. “He will likely be voted into a fourth term at the age of 74, with a military capable of a swift overpowering invasion.”
Many wargame scenarios run by Western planners indicate Beijing will be unsuccessful, though. China will be unable to hold Taiwan. One wargame co-developed by Heginbotham with the Center for Strategic and International Studies (CSIS), a Washington think-tank, determined that the People’s Liberation Army invasion would fail, but at high costs to the United States and its allies. The United States alone theoretically would lose between 200 and 400 aircraft on carriers and at air bases. Another wargame conducted by the CSIS in what it claimed to be the most extensive simulation ever conducted concluded that the militaries of the United States, Taiwan, Japan and China would incur thousands of casualties but prevail over China in Taiwan. The US military would be left in as crippled a state as the Chinese forces it defeated, but China’s modern navy, currently the largest in the world, would be in “shambles.”.
Differences from the first two world wars:
From wargame summaries and analytical reports from military analysts, your correspondent offers six observations from an agribusiness point of view:
- Given the use of hundreds of launchers firing thousands of missiles, the escalation speed of a war for Taiwan would exceed that of the two previous world wars.
- World commodity markets would be caught off guard by the war’s intensity, causing unprecedented volatility. Given China is the world’s largest importer of corn, soy, rice, cotton and wheat, these commodity prices might ultimately fall, not rise.
- The effect on the agribusiness industry will be larger than either of the previous world wars. Should India become involved, almost half of the world’s population would be caught in open conflict. Shipping lanes into the region, especially between China and North America, would be closed, straining shipping capacities and raising rates. Spare parts for equipment would become scarce. Transport from Australia, New Zealand, Southeast Asia, and the Indian subcontinent would be rerouted west across the Indian Ocean around the Cape of Good Hope into the Atlantic. Meanwhile, ag exports from South and Central America into China would close. Western militaries would attempt to blockade Chinese ports from energy and food deliveries, pressuring China to intensify its campaign to take Taiwan as quickly as possible.
- China would blockade Taiwanese ports. Trade with Japan and South Korea would be threatened by long-range Chinese missiles.
- U.S. investments in China would be seized, as would Chinese investments in the United States. Trade sanctions would virtually halt all trade between the two countries and their allies as it has between Russia and the West over Russia’s invasion of Ukraine.
- Conversely, once the conflict resolved, de-escalation could be swift. If the first two world wars are an indication, agribusiness leaders would need to brace themselves for even further depressed prices and sluggish markets for decades.
Conclusion: Nothing changes the landscape of agricultural economics more than war. The most prosperous periods for agribusiness during the last century were from 1915 to 1920 (WWI), 1942-1949 (WWII and its aftermath) and 1973-1979 (Arab oil embargo). Following these periods of price escalation, though, were even longer periods of oversupply and price depression: 1921-1938, 1950-1971, and 1980-1998.
The same has been true for the 21st century with the war in Ukraine and the soft embargo by China’s government of U.S. farm goods. Thus far, U.S. farmers have borne the brunt of the ongoing trade war between China and the United States, much of it spurred by tensions over Taiwan. In 2018, the U.S. was China’s largest agricultural supplier, but by 2021, China had redirected much of its supply lines to Brazil, which provided 20% of China’s total ag imports. Russia’s invasion of Ukraine in 2022 mollified the effect of reduced Chinese demand for U.S. farm products by driving up global commodity prices.
Yet, by 2023 ag commodity prices fell again. U.S. ag exports to China fell 11% in 2023, reducing U.S. ag revenues by $21 billion relative to 2022. Nearly $12 billion of it was due to decreased soy and corn exports, hitting Midwest farmers hard. Since then, 2024 has compounded the commodity price declines. By June, average wheat prices had fallen another 19.3%. Average soy prices were down 16%, corn prices down 7%; cotton prices down 25%, and rice down 13%, leaving farmers no choice but to seek niche non-commodity markets and alternative forms of business. Those processors capable of making branded high-margin products from low-margin commodity products benefit from the depressed farm commodity prices. With this in mind, your author holds Alibaba (BABA), BASF (BASFY), Benson Hill (BHIL), Conagra (CAG), Dow (DOW), Fresh Del Monte (FDP), Flowers Foods (FLO), Ingredion (INGR), Origin Agritech (SEED), UGI (UGI) and Valmont Industries (VMI) among other non-agribusiness investments. Covered calls are sold to earn extra income in sluggish markets.
This is not an equity research report, only a commentary on selected market trends. Nothing herein should be considered investment advice. Your author does not necessarily represent the opinions of Kevin Van Trump, The Van Trump Report or its affiliates. With any investment decision, independent due diligence and professional advice is recommended. Happy returns!
