Agricultural Trade and Trump

Many agricultural producers have expressed concern over the direction of executive branch trade policy since January.   These apprehensions may not be universally shared in all quarters of Rural America; however, tariffs and other trade restrictions are important considerations for U.S. agriculture.  Today’s update looks at recent news items on trade, with a focus on corn exports, ethanol byproducts and beef.

Background: Farmers Worried About Trade Policy

Shawn Donnan reported earlier this week at The Financial Times Online that, “Whether it is in the trade deals such as the Trans-Pacific Partnership that the US president has scrapped, the trade wars with China and Mexico he still risks triggering, or the immigrants his administration is targeting, [Kansas farmer, and Trump voter Mike Rausch] sees a growing list of reasons to worry. More than that, as someone who relies on the land — and exports — to eke out a living, he has begun to see Mr Trump and his administration as a threat to his bottom line.

“‘I’m dismayed,’ he says. ‘I’m puzzled by some of the decisions he has made. It’s hurt me.'”

The FT article explained that, “The dependence on trade in rural areas such as Kansas illustrates the challenges and constraints the businessman-president faces as he decides how best to deliver the nationalist ‘America First‘ economic agenda that helped him narrowly win crucial industrial states such as Ohio and Michigan.”

Donnan added that, “Kansas is dependent on agricultural exports and stood to benefit greatly from the TPP, which Mr Trump pulled the US out of on his third day in office. But the TPP was about future gains. Any disruption to Nafta would mean a hit to existing business, with more than a third of the $10.2bn in beef, grains and other goods that Kansans exported last year destined for Canada or Mexico.”

This week’s FT article also pointed out that:

With commodity prices still low and many farmers struggling to recover costs, the only thing now saving US farming communities from a re-run of the downturn they saw in the 1980s, [Zippy Duvall, who heads the American Farm Bureau Federation] argues, is low interest rates, though they too are now rising. A trade war that saw farmers shut out of China and other markets would therefore be disastrous.

Although the Trump administration’s harsh trade rhetoric and actions on NAFTA and TPP have been unwelcome developments for many in the agricultural sector, for others in Rural America, these executive branch actions may not seem as draconian.

Recall that a FarmPolicyNews update back January pointed to a news article which stated that, “Wisconsin’s rural voters were far more opposed to trade deals than the state’s suburban or urban voters: 64% said trade pacts with other countries take away jobs, compared with 26% who said they create jobs, according to exit poll data provided by Edison Research.”

Although lower farm prices are a negative variable for the U.S. agricultural economy, only 6% of the rural population lived in farming-depenent counties in 2015, while 22.5 percent of the rural population lived in manufacturing-dependent counties (“Rural America at a Glance, 2016 Edition“).

And, with rural employment rates lagging urban areas, not all non-metro voters may share the same positive perspective on trade agreements.

Despite the potential nuances between “farm” voters and “rural” voters in “red” States when it comes to trade politics, there are specific segments of the U.S. agricultural economy that are impacted by trade policies.

NAFTA- Corn Tariffs

Mary Amiti and Caroline Freund indicated recently in a New York Federal Reserve Blog update (“U.S. Exporters Could Face High Tariffs without NAFTA“) that, “Without NAFTA, Mexico would have more freedom to raise tariffs on its imports under international rules than would the United States. The reason is that Mexico’s bound rates—the maximum rate a WTO member can impose—are well above its applied MFN [“most favored nation”] rates.”

Amiti and Freund explained that, “In another example of the potential harm to U.S. interests, it is worth recalling that NAFTA’s liberalization of U.S. corn exports was strongly opposed by Mexican growers twenty-five years ago.

The bound rate on corn—one of the largest U.S. exports to Mexico and a crop considered to be a national heritage in Mexico—is 37 percent. Thus Mexico could raise its tariff on U.S.-grown corn to 37 percent without breaching any international rules.

“Put simply, Mexico has a lot of room to raise tariffs, up to its bound rates of about 35 percent. In contrast, the United States has less room to adjust its tariff rates without breaching WTO rules because the U.S. MFN tariff rates of about 4 percent are already at their bound rates. Thus, for U.S. exporters, NAFTA offers a valuable insurance policy against Mexican tariff hikes.”

China- Dried Distillers Grains (DDGs)

Meanwhile, in Friday’s Omaha World-Herald, Russell Hubbard reported that, “Concerns over an expensive trade spat with China have come true and crushed U.S. shipments of a cattle feed that is one of the top exports of Nebraska and Iowa.

“The product is called dried distillers grains — the fat, protein and fiber that is left over after the starch is removed and corn is distilled into ethanol. Nebraska and Iowa, as the nation’s top two ethanol producers, churn out mountains of the stuff that is prized by cattle feeders worldwide because it keeps and ships well and heifers, steers and other livestock lap it up with gusto.

“But the largest buyer — China — has dried up. Exports to the world’s second-largest economy by gross domestic product fell 70 percent from September 2016 through February, according to the U.S. Grains Council, an industry trade group.”

The article noted that, “The reason: the kind of international trade tiff that erupts from time to time over many types of commodities. In this case, China last year started objecting to imports of the U.S. grains, saying they were being sold below the cost of production, a violation under international trade law called dumping.

“The Chinese Commerce Ministry, in a bid to protect domestic producers of the cattle feed who are benefiting from a record Chinese corn crop, in January imposed tariffs as high as 54 percent on U.S. imports, saying they are so cheap because of U.S. government subsidies. The U.S. ethanol industry calls the claims bogus.”

The World-Herald article summarized the impacts of this trade issue by stating that, “But for now, the cattle feed known as DDGs in the biz are verboten in China, and that has caused a secondary effect. With China out of the market, there is a surplus, and in the textbook supply-and-demand scenario, that means producers are getting rock-bottom prices. Nebraska and Iowa plants have been quoting spot prices in recent weeks of $100 per ton, down 13 percent from a year ago and 40 percent from April 2015.”

Beef Issues

Tom Lutey reported earlier this week at the Billings Gazette Online that, “Within a few months, U.S. beef could be in China supermarkets for the first time in 13 years, U.S. Sen. Steve Daines, R-Mont., said Monday.

“Daines traveled to China during the congressional Easter break to talk beef with China Premier Li Keqiang. China last fall agreed to lift its 13-year-old U.S. beef ban, which was prompted by the 2003 discovery of bovine spongiform encephalopathy, better known as ‘mad cow disease,’ in a Washington dairy cow.”

The Billings Gazette item added that

Daines said the two nations are close to normalizing beef trade, which is significant to Montana ranchers because China is the second largest beef-consuming nation in the world. China imported 825,000 tons of beef in 2016.

“Premier Li Keqiang told Daines that China has terms drafted, but is waiting for the United States to seat its new agriculture secretary before presenting plans,” the article said.

And beyond China, Anna Fifield reported yesterday at The Washington Post Online that, “The United States wants ‘stronger and more balanced bilateral trade relationships’ with countries including Japan and South Korea, Vice President Pence said Tuesday, raising the prospect of opening bilateral talks with Tokyo and reviewing a deal already struck with Seoul.”

With respect Japan and agricultural trade, a CNBC news clip from yesterday (video below) indicated that, “The U.S.beef industry wants to make sure any new trade deal is at least at good as the one they have in the Trans-Pacific Partnership, reports CNBC’s Ylan Mui.”

More broadly, The Washington Post article noted that, “The White House had asked Japan to open bilateral trade talks at this week’s first meeting, part of the administration’s efforts to rectify what it says is a trade imbalance. But Japan rejected the idea of starting bilateral trade negotiations, the Asahi Shimbun reported last week.

“A bilateral deal would likely require Tokyo to respond to politically sensitive demands like removing trade barriers on cars and agriculture.

“Instead, Tokyo is looking at reviving the TPP without the U.S.”