As the smoke from barbeques and fireworks clears, the tariff picture is coming into focus, and it appears to be full steam ahead.
Mexico is slated to join Canada on Thursday in placing new tariffs, and increasing others, on a number of U.S. agricultural goods in retaliation for U.S. duties on steel and aluminum. And with no high-level trade discussions planned between the U.S. and China, the likelihood of a last-minute ceasefire seems unlikely.
The Trump administration is set to impose $34 billion of tariffs on Chinese goods at 12:01 a.m. EDT on Friday, and Beijing is expected to retaliate with increased tariffs on a lengthy list of agricultural goods, including soybeans, pork, poultry, dairy products, grains, fruits, nuts, vegetables and more.
“President Donald Trump’s threatening another $200 billion of tariffs if China does respond that way, with the bigger picture being: Where is this headed?” asked DTN Analyst Todd Hultman. “And what’s it going to mean? Will it have long-term ramifications for soybean demand from the world’s largest soybean buyer? To me, that is the big, big question, and may not be answered tomorrow. But as things get more hostile, it continues to scare buyers away from the market and is keeping soybean prices at their lowest November prices in over two years.”
November soybean futures prices dropped to $8.61 at midday on Thursday. Wednesday’s DTN National Soybean Index dropped to $7.87, the lowest level since December 2008.
Hultman said the immediate impact has been on demand.
“There’s some cash, physical demand, but as far as investors helping out prices, forget it. Commercials did turn long in last Friday’s CFTC report for the first time since February. That’s a good sign of recognizing that soybeans are at cheap values, but I think we’re going to need to see more confidence from the investment side to help prices come out of this hole. If we didn’t have this trade issue going on, I would say that’s a great sign of support and we’re probably near a market low, but in this political environment, I don’t think you can step out and say that,” he added.
Purdue University agricultural economist Brent Gloy said the administration’s political choices are hard to predict, piling additional uncertainty on the market.
“It’s not just China. We’re picking trade fights with everybody we can,” Gloy told DTN. “For most Americans it, honestly, doesn’t make that much difference. But for those of us in an export-dependent sector, it’s a big problem.”
He also cautions that tariffs will have an impact over the long term, even if our trade disputes resolve relatively quickly. “There are serious costs on the trading system that are imposed by the tariffs. It’s going to incentivize production in other places, Brazil particularly, at the detriment of us. The more you do that, it’s just not ideal.”
Mexico has already raised some tariffs in response to U.S. steel and aluminum tariffs, and is poised to raise or place new tariffs on 16 agricultural products, including cheeses, pork hams and shoulders, apples, sausages, frozen potatoes, frozen cranberries, orange juice and whiskey on Thursday.
According to a recent post by American Farm Bureau Federation economist Veronica Nigh, these goods had an 87% average market share.
Mexico buys about a quarter of all U.S. dairy exports, and the tariff rates on those products could rise as high as 25%.
“After rising during the spring, dairy futures markets and the farm-level milk price outlook for the rest of 2018 have deteriorated significantly in recent weeks, in reaction to the prospects of lost dairy export sales,” Jim Mulhern, president and CEO of the National Milk Producers Federation, said in a letter to the White House last week. “No one wants to see lasting damage to our farmers result from lost access to our top foreign market. That’s why resumption of tariff-free trade between the U.S. and Mexico is so critical.”
It’s not the first time dairy found itself in the middle of a trade dispute with Mexico.
Under the North American Free Trade Agreement (NAFTA), the U.S. and Mexico agreed to phase out restrictions on cross-border cargo services, but the U.S. left trucking restrictions in place. A NAFTA dispute settlement panel determined the U.S. was out of compliance with the trade pact, and after a few years of negotiation, the two countries agreed to a demonstration program. When the U.S. cancelled that program in 2009, Mexico used a carousel approach to rotate different products on and off the retaliation list.
Shipments of U.S. dairy to Mexico declined 26% during the 14-month dispute. Tariff levels were similar at 25%.
In all, seven of the goods on Mexico’s current retaliation list were a part of the 2010 trade row.
“If the U.S. learned anything from the last trade dispute, it is that Mexico knows how to maximize the impact of a retaliatory tariff list,” AFBF’s Nigh said. “The U.S. agricultural industry should expect that the number of agricultural products on the list will both increase and change.”
TRADE TAKES TOLL ON PROFIT POTENTIAL
For U.S. farmers, the escalating tariff fight has already taken a toll on farmers’ bottom lines.
After years of belt-tightening, farmers had finally gotten their cost structure low enough to be profitable at a number of different price and yield combinations.
“The profitability picture has swung substantially,” Purdue’s Gloy said. “You have a crop that seems to keep getting bigger, and then you throw on top of that the question of where are we going to sell it, and what are the terms of that going to be? You have a recipe for a major shift in crop price.”
According to Ohio State University’s calculations, farm incomes in the Buckeye state could decline by as much as 59%. Iowa farmers could lose more than $624 million dollars of business.
For farmers, the impact on their income could come down to marketing decisions made in the spring.
A poll of 422 DTN readers at planting time found 25% had already forward contracted or priced between a quarter and half of their anticipated soybean production. Twenty-one percent had already marketed more than 50% of it.
Gloy said he’s seen a number of similar surveys, and they all show a range of sales, with some farmers pricing a lot and others marketing very little. Hedging will boost those farmers’ bottom lines, but those that weren’t as proactive shouldn’t lose hope.
“We’re on what I call a knife’s edge,” Gloy said. “Small swings can be the difference between economic profits and economic losses, and we just need to keep that in mind. It wouldn’t take a huge swing to put us right back where we were, where we could have economic profitability…. It’s not like we have to have corn prices go up a dollar for everybody to make money. So, they’re within the realm of feasible.”
Gloy said it’s easy to fall into a trap of thinking down markets will always keep falling, just like it is to think rising prices will keep going higher.
“It’s good to remind people to remain vigilant. Remain focused. Make good decisions through all of this uncertainty. Keep it calm, and make good, rational decisions. We’ve got a lot of growing season left.”
Katie Dehlinger can be reached at Katie.firstname.lastname@example.org
Follow her on Twitter @KatieD_DTN