August 6, 2018
TRADE WARS AFFECT FARMS
The United States has been experiencing a decline in trade relations with several nations in recent months, which has now reached a point of what many economists are calling an all-out “trade war”. The trade war is being played out on many fronts, with the most highly publicized being the added tariffs that were imposed by the U.S. and China in early July. However, in recent weeks, there have also been new tariffs added on goods traded with Canada and Mexico, the partners with the U.S. in the North American Free Trade Agreement (NAFTA). China, Canada and Mexico account for approximately 44 percent of all U.S. ag exports on an annual basis.
In many instances when we listen to the national media, we think of trade policy and tariffs being played out by Presidents and government leaders, and only having an economic effect at a “macro level” on a national basis. In reality, the impacts of tariffs and declining trade relations are more likely to affect individual farmers and businesses that rely on export markets to sustain their businesses. The negative profit margins can force some farms and businesses to reduce or discontinue their operations. These policies also have a major impact on individuals who work in industries that support those farms and businesses, and the families and communities that depend on this economic base.
In July, the U.S. trade war with China escalated, with the U.S. implementing new duties on $34 billion worth of Chinese goods being imported into the U.S. China responded by adding new tariffs on U.S. soybeans, corn, pork, poultry, and fruit products being exported to China. The Trump administration has now threatened to add more tariffs in the coming weeks on Chinese products coming into the U.S., and the Chinese government has indicated that it will retaliate with additional tariffs on U.S. products coming into China, again likely impacting agricultural products quite significantly.
It is estimated that soybeans represented over 40 percent of the value of the added tariffs that were implemented by China on U.S. exports in July. The value of U.S. soybean exports to China has grown from $414 million in 1996 to over $14 billion in 2017. China accounted for about 60 percent of U.S. soybean exports in 2017, with the Chinese importing about one out of every three rows of soybeans raised in the U.S. The July USDA Supply and Demand Report projects total U.S. soybean demand for 2018-19 at 4.2 billion bushels, with exports accounting for nearly 50 percent of that demand. Obviously, major disruptions to soybean export markets could reduce the export volume in the coming year, as well as result in increases in U.S. soybean supplies and lower soybean market prices.
NAFTA talks have stalled out in recent months, and U.S. trade relations with Canada and Mexico have deteriorated. In early July, the U.S. announced tariffs on Canadian steel and aluminum, along with other products being imported into the U.S. Canada responded with additional tariffs on U.S. steel and aluminum products being shipped to Canada, along with U.S. beef, agricultural chemicals, and whiskey. The U.S. has a trade surplus with Canada of about 50 percent on U.S. iron and steel products, and Canada accounts for about 50 percent of U.S. steel exports.
The U.S. has also implemented new tariffs on steel and aluminum being imported from Mexico. In early July, Mexico retaliated by implementing additional tariffs on many U.S. products being exported into Mexico, including certain pork products, cheeses, produce, and whiskey. Mexico imposed a 10 percent tariff on certain U.S. pork products in June, which was doubled to 20 percent in early July. Mexico is also threatening tariffs as high as 25 percent on U.S. dairy product exports.
Just the threat of a trade war with China, Canada and Mexico has caused ag prices to decline in recent months. From late May to early July, when trade talks between the U.S. and China deteriorated and the proposed tariffs started becoming a reality, November soybean futures dropped by nearly $2.00 per bushel. Cash soybean prices for harvest delivery in 2018 declined by over 15 percent during that time period, with some soybean price bids at the local level falling to near $7.50 per bushel.
It is estimated that farm operators in Southern Minnesota need close to $9.00 per bushel for soybeans to cover crop input costs, land rent, and overhead expenses at average yields (55 bushels per acre). That increases to about $9.50 per bushel, if that producer includes a $50 per acre return for labor and management. The soybean price decline since late May has reduced the gross income potential by nearly $100 per acre, or $100,000 for a farmer raising 1,000 acres of soybeans. This rapid price decline, together with some crop production issues in some areas, could create some serious financial challenges for some farm operators later this year.
Some producers took advantage of favorable soybean prices earlier this year to “lock-in” profitable prices on a portion of their 2018 soybean production, which may help soften the impact of the significant price drop. However, even for those producers, it is difficult to plan ahead from a farm profitability standpoint for 2019 and beyond, if there is a long-term impact on soybean export markets.
Pork producers have also felt the initial brunt of the rapidly escalating trade war, with some analysts estimating a loss as high as $150 million to the pork industry over a 12-month period. About one-fourth of the pork products in the U.S. are exported to other countries, with China and Mexico accounting for about 40 percent of the export market. China and Mexico purchase a lot of pork products that do not have much demand in the U.S., such as raw hams and “variety meats”. It may be difficult to find other markets for these products, which add considerable value to pork carcasses. One study estimated that the added tariffs to China and Mexico will cost pork producers approximately $18 per head for every hog produced, resulting in negative profit margins for most producers in 2018.
The Trump administration has announced a plan to provide support to farm operators that are impacted by the escalating trade wars. This support will likely include direct payments to farm operators, commodity purchases, and trade enhancement programs. Soybeans, corn, wheat, pork, and dairy were mentioned as commodities to receive support, and any direct payments could come later this year. The exact payment formulas for those payments have not been announced. While the added direct payments will assist income levels for farmers in 2018, those payments will not solve the ag trade and farm financial issues for 2019 and beyond.
The agricultural trade agreements that we currently have took decades to become a reality. Farm organizations and ag commodity groups have dedicated millions of dollars of financial and personal resources into developing the strong agricultural export markets that currently exist with China, Canada, Mexico, and other countries. Most farm operators and others in the ag industry favor maintaining and enhancing strong trade relations, which are a key to future farm profitability and rural economic stability in the U.S.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — email@example.com)