VietEcon

California had many years of drought recently (now hopefully broken), and so there were a ton of “deep dives” into where water was going into the state. It turns out that most of the water was going into agriculture, California sun and such. A large portion was being used to grow alfalfa. In fact it was the third largest crop in California by acreage in 2018, after almonds and grapes, and at one point it was #1.

Alfalfa is a thirsty crop: “It’s a plant that’s going to yield pretty much proportional to how much water we’re able to get to it.”

So why was alfalfa being grown so much during drought times. Mostly economics driven by water and export costs. As Peter Culp and Robert Glennon characterized it in the WSJ: “In 2012, the drought-stricken Western United States will ship more than 50 billion gallons of water to China.”

It was economical to export alfalfa for two main reasons:

California has/had very antiquated water rights, and so farmers were not paying “market prices” for water. Alfalfa needs a lot of water, but it is good for the soil, is easy to grow and there can be as many as eight harvests a year.
Also, freight costs to China were very low. Cargo containers were going back empty to China, and the cargo companies needed something to fill the space at almost any cost. See, China had such a big trade imbalance with the US that 1 in 2 containers were being sent back empty. By the time Culp and Glennon were writing (October 2012), the cost to ship a ton of alfalfa to China was less than to ship it from southern California to the Central Valley.

Source: General Statistics Office of Vietnam

Now, why am I writing so much about this? Well, we are starting to see the same issue with Vietnam. It is difficult to find something to put in those containers (or planes, in this case) from the US to Vietnam. So the cargo companies stop in Singapore or elsewhere close by and then come to Vietnam before heading back to the US.

And it is going to get worse. Freight volumes are rising like crazy. Since 1995, they have grown 10x for a CAGR of more than 10%. That’s faster than GDP growth.

And that is just internal freight (which likely captures trips from the factory to the ship, but not all of the traffic from ships going to the US). “AirBridgeCargo (ABC) saw a 53% increase in Vietnam volumes so far this year, after upping weekly lift from Ho Chi Minh City and Hanoi to two and three flights respectively.”

But Vietnam is now committed to increasing imports from the US. Potential imports are energy, as we talked about with the LNG export contract (Sept. 19, 2019, scroll down). That will be good for the trade deficit. The second is agriculture, which is a perennial contender, since the US is quite good at producing agricultural products. There are already reports that American apples and cherries are reaching Vietnam.

It’s kind of weird to think of a country like Vietnam, which is not as developed as the US, exporting high-value goods to the US, while the US exports apples. But this is what happened with China, so it’s not new.