In the past couple of weeks, President Trump has announced new tariffs on imports. In early March, new tariffs of up to 25% on steel and 10% on aluminum were put in place to protect and revive American factories. Within a few days, U.S. Steel announced bringing back workers in Illinois plants because of the expected need for more domestically produced steel.
The impact should help producers of the metals, but could raise prices on manufacturers who use the metals and ultimately, the consumers who buy the products. Last time I checked, there seems to be quite a bit of metal that is used on farm equipment, so expect some higher prices there.
The tariff announcements continued. On March 20, President Trump announced as much as $60 billion in tariffs on Chinese goods. These are a response to the $500 billion trade deficit we have with China and the theft of intellectual property has occurred from one of our largest trading partners. The move sparked concerns of a possible trade war. Some news outlets believe that if there is a response from China that it will be “targeted”.
One major concern is the impact any trade disruption will have on agriculture. Foreign markets are important to keep open as viable places to sell the products farmers and ranchers produce. The USDA reports that in 2017, the top ten food and ag products accounted for 58% of all U.S. ag exports. King of the list by far was soybeans at $21.6 billion. This was followed by corn at $9.1 billion, tree nuts at $8.5 billion, beef at $7.3 billion, and pork at $6.5 billion. Rounding out the bottom five are wheat, prepared food, cotton, dairy, and fresh fruit.
China is expected to import nearly 3.5 billion bushels of soybeans in 2018 and this is expected to increase by around 140 million bushels annually for the next five years. This growth is partially because of a decrease in Chinese domestic soybean production as profits have been higher for crops like corn and rice. Soybean demand is high and China is the largest soybean importer in the world.
But even before the recent tariff announcements, there was already some hostile moves by China against U.S. bean producers. On December 20, 2017, Bloomberg reported the USDA agreed with a request from China to impose stricter standards on U.S. soybean shipments to China, while these same standards were not placed on Chinese imports from other countries, like Brazil. At the same time, China increased its soybean purchases from Brazil in the first quarter of 2017-18 by over 7 million metric tons while cutting purchases from the U.S. by 5.37 million metric tons. So even before the tariff announcements, it appears that China had begun making steps against U.S. producers.
So as a lender, what should you watch out for to protect your institution and your producer? First, watch the position of international trade and its impact on the U.S. farmer. Agriculture is dependent heavily upon the world market demand to purchase a large portion of supply that is grown in our country. Tariffs from other countries against U.S. products, or as in China’s case, additional requirements that are placed upon imports from the U.S. will have a negative impact on prices, which decreases the top line revenue to your producer. Also, understand that these principles impact all commodities and not just soybeans which have been discussed here.
Secondly, watch the weather. Several decades ago, the farmer was only concerned if there was good growing conditions in his area. Since agricultural products have grown into worldwide commodities, there is concern for growing conditions around the globe and, in turn, the impact on supply. A drought in Argentina that lessens the soybean crop while our crop is not impacted will drive overall prices higher. At the same time, if the Brazil crop is extremely plentiful due to good growing conditions, and the Chinese see Brazil beans as a good substitute for buying U.S. soybeans, demand and the price for U.S. beans will fall.
The third factor is interest rates. It appears that the Chinese and other countries may be curbing their appetite to purchase U.S. government debt. Lowering the demand for U.S. debt will result in the debt needing to be sold at a higher interest rate. This will impact the interest rate to your producers. Also note that the new supply of government debt is plentiful as displayed in recent Congressional spending bills.
Most news articles I read from experts believe that we are at a lower part of the price cycle for many agricultural commodities and will continue there for the next few years. The impact of trade and tariffs from all sides, could produce stronger headwinds the farmer and rancher will have to face.