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Trade war could reduce US role as agricultural supplier: Olam
TIT-FOR-TAT trade measures against agricultural products could shrink the United States' role as a global agricultural supplier, and push its customers to diversify away from US agricultural exports, according to Olam International.
The agri-commodity firm noted in its annual report published on Tuesday that China's anti-dumping probe into imports of sorghum from the US, as well as retaliatory action threatened by the European Union against the US, have increased the odds of a potential trade war.
Besides the probe aimed at sorghum imports announced in February, China last week also said it will impose a 25 per cent retaliatory import tariff on US soybeans.
Canada, China and Mexico are the top three importers of US agricultural products, accounting for 42 per cent, of US$58.7 billion worth of US exports. China alone accounts for over 30 per cent, or US$14.9 billion.
Targeted agricultural tariffs are likely to be a tool of choice for countries looking to counter the protectionist trade moves by the US, said group chief executive Sunny Verghese. This is because the extent of the retaliation can be more accurately measured, and agri-commodity products are easier to substitute.
Agriculture tariffs could also apply more political pressure on the US administration since these products come from rural districts that are more likely to have voted for the Republican administration, he added.
"These developments could potentially shrink the role of the USA as a global agri-supplier and allow its global customers to diversify away from US agri-exports."
These measures and counter measures will also slow down global trade and therefore pose a "significant headwind" for economic growth, said Mr Verghese.
To navigate the trade tensions, Olam is focused on staying diversified across key producing countries for the products it supplies. The firm is generally present in 80-90 per cent of the originating countries for its products.
The group will also participate more in domestic trade flows, beyond its traditional focus on export trade flows, he said.
A quarter (25.2 per cent) of Olam's traded volumes of 22.5 billion tonnes was sourced from the Americas region last year. Europe was the group's largest origination region, at 36.1 per cent, while Asia, Australia and Middle East made up 26.2 per cent and Africa 12.5 per cent.
The group recorded net profit of S$580.7 million last year, up 65 per cent from the previous year as revenue rose 28 per cent to S$26.3 billion.
The 2017 annual report marked Olam's first in providing insight into how the group creates financial and non-financial value over the long term. It includes details on the management's approach, and risks and opportunities for non-financial capital.
Separately, brokerage CGS-CIMB said in a note last week that China's proposed 25 per cent import tariff on US soybeans could hit profits at Wilmar and Golden Agri which own soybean crushing plants in China.
The tariff is potentially negative for Chinese soybean crushers as it will increase their raw material costs, even though it could be positive for crude palm oil demand in the medium term, said analyst Ivy Ng. She estimates it will reduce Wilmar's pre-tax profit by up to 10 per cent and Golden Agri's by 1-2 per cent.
Nevertheless, RHB analyst Juliana Cai, noted that it remains unclear when the tariffs would come into effect. She believes Wilmar may see some short term upside after soybean prices decline following the recent news.