Many Americans may not realize it, but an agricultural war is brewing between the U.S. and Asian markets, and it could put many U.S. farmers out of business while also sending food commodity prices spiraling down as early as next year.
For traders, this could lead to huge profits or losses depending on their position.
I recently conducted an agricultural analysis for the non-profit organization, New Market Labs, looking for new market opportunities. In the process, I noticed a disturbing trend that has substantial ramifications for our food prices, U.S. farmers and the U.S. economy as a whole.
China is buying land throughout Africa and investing heavily in production and manufacturing of emerging markets on that continent. The Chinese government is also training locals on how to grow food crops that they are buying from U.S. farmers.
When these farms are completed, this will create new market competition for U.S. farmers who rely heavily on China for agricultural profits.
The U.S. is the largest agriculture exporter in the world, relying almost entirely on the Chinese market. Even as China's economic growth cools off, the demand for soybeans will only rise.
Currently, 60% of all U.S. soybean exports go to China, while close to 80% of all U.S. soybean exports go to Asia. Soybean exports from the U.S. to China are larger than the two other largest arga-exports, corn and wheat.
Organisation for Economic Co-operation and Development data and reports show that soybeans are the No. 1 agricultural export by the dollar, totaling $24 billion in exports in 2014.
This represented 1.7% of total U.S. exports across all industries and is more than the two second-largest agricultural exports in the world -- corn ($11.4 billion) and wheat ($8 billion) -- combined.
Africa is ideal for soybean production. It has plenty of land and very inexpensive labor.
Infrastructure is being developed at a galloping pace, and China is heavily investing into its emerging markets. As early as next year, Chinese investors will begin to reap the benefits of their investments into Africa and will start to shift their imports to closer ports with cheaper prices.
The demand for U.S. soybeans will drop significantly when this happens, not only because African soybeans are cheaper but because their farms are closer and supply lines are under more Chinese control.
Many analysts may argue that Africa isn't a viable competitor in the soybean market because the continent isn't made sustainable yet on their own and that it will take years before Africa can export.
There is a logical flaw in this argument. These agricultural investments weren't created to feed the continent's population.
Chinese investors turned to Africa for its inexpensive land and low labor rate. Soybean production and transportation costs are also lower in Africa than exports from the U.S.
Portable technology is also allowing this new agricultural market to flourish, short-circuiting the traditional infrastructural requirements.
China already possesses another inherent interest in Africa by investing heavily into African education.
For example, Makere University in Uganda is one of 20 African Universities that partner with 20 Chinese Universities. The training of Africans by the Chinese is sponsored and supported by the Chinese government.
Last year, Chinese President Xi Jinping committed 40,000 training programs, 30,000 different government scholarships, and $60 billion in funding earmarked for Africa. Parts of these programs are agricultural development projects in 100 African villages.
The soybean markets are trading off their 2014 highs. The markets still expect strong Chinese demand and no production from Africa.
Within the next few years, soybean production in Africa will increase, and Chinese investments will pay off. Soybean prices should become more volatile as this unfolds, but U.S. farmers should consider diversifying their crops.
U.S. investors also can't overlook Africa as an excellent investment potential.
This article is commentary by an independent contributor.