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Farm-sector depression in play if full-scale trade war breaks out

Farm-sector depression in play if full-scale trade war breaks out
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In response to the administration’s tariffs on selected products, especially steel and aluminum, China, Canada and Mexico have announced increased tariffs on a range of goods produced in the U.S. The European Union will also respond to increased U.S. tariffs.

Farm products and products processed from agricultural commodities, such as wine and whiskey, have been singled out. As things currently stand, with the exception of pork and sorghum, the impacts should be manageable.

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However, if the situation deteriorates, and a full-scale trade war breaks out, the farm sector could fall into a full-blown depression. The farm sector has slowly been recovering from a period of low prices and incomes during the mid-2010s, and the current dispute and concerns about a widening trade war has added uncertainty in agricultural markets.

 

Exports are critical to agriculture and U.S. farmers face increasing competition for markets from a number of countries, such as Argentina, Ukraine and Russia.

For example, generally 15 percent of the U.S. corn crop, 50 to 70 percent of the sorghum crop, 20 percent of pork and 70 percent of almonds are exported. Overall, 20 percent of all farm commodities produced in the U.S. are exported.

Given the nature of the supply and demand for farm commodities, small changes in demand will lead to large changes in the price — especially in the short term.

Mexico, Canada and China are of particular importance, because they are the three largest markets for U.S. agricultural exports. In 2016, agricultural exports to Canada were $20.4 billion, exports to China were $19.2 billion and exports to Mexico were $17.6 billion.

These three countries accounted for more than 44 percent of U.S. agricultural exports. If the trade dispute spreads to the European Union, more than half of the total U.S. farm exports could be adversely affected.

Tariffs on farm products are popular with these countries because there are alternative suppliers, and many congressional districts and the vast majority of senators have farmers as constituents. The pain of tariffs on farm products are spread throughout the country.

Implications

Feedgrains are often used in trade disputes because there are often multiple substitutes, both in terms of commodities and countries. This gives countries like China the flexibility to effectively shut down sorghum exports from the U.S.

China has already encouraged domestic producers to increase soybean production and the developing trade tensions may encourage China to increase its investments in Africa and southwest Asia in order to reduce its need for U.S. commodities.

China has placed a 25-percent tariff on pork, and Mexico has placed a 20-percent tariff on some pork cuts. These two countries are the largest markets for U.S. pork. If the current situation continues, pork producers will likely go from a break-even position to a loss.

Reduction in access to the Chinese market is of particular concern because Chinese consumers use parts of the carcass that American consumers do not consume.

China also instituted a 15-percent tariff on wine and some fruits and vegetables. The U.S. will likely lose market share to Australia and, to a lesser extent, New Zealand. Mexico has also placed a 25-percent tariff on cheese, Tennessee whiskey and a 20-percent tariff on apples and potatoes.

Canada has responded to the U.S. tariffs with 10-percent tariffs on yogurt, ketchup, quiche, pizza, maple syrup, cucumbers and other products, most of which are processed food products.

For the most part, these tariffs are designed to match the tariffs the U.S. placed on steel and aluminum and are not designed to further provoke the U.S. administration.

However, the decline in the value of the peso, driven in some degree by U.S. policy and public statements, has made all U.S. goods more expensive in Mexico and Mexican goods less expensive in the U.S. A declining peso improves the competitiveness of the Mexican economy.

Overlooked considerations

One major overlooked consideration is the impact of the trade dispute on the farm bill. As things now stand, the impact on government farm support will be limited.

However, if the situation deteriorates and the Chinese place tariffs on major farm program crops like wheat, corn and soybeans, farm bill negotiations will become more complicated and difficult. Also, payments to farmers will increase, which will have an adverse impact on the size of the budget deficit.

China has already announced potential tariffs on soybeans, cotton, corn and wheat. Soybeans are of particular importance because approximately two-thirds of all farm exports to China are soybeans.

A complete loss of this market could cause soybean prices to fall about $1 a bushel; this would reduce U.S. gross farm revenue by about $4.2 billion. While farmers have become less dependent on subsidies, they will look to taxpayers to offset the loss due to fewer exports.

Tariffs on major crops would reduce prices to U.S. farmers. Given the size of the Canadian, Chinese and Mexican markets, it would be difficult to replace these markets with exports to other countries. Also, once a market is lost, it takes time to reclaim it and could be lost forever.

This is especially true of China, which is already pursuing policies that will make it less dependent on U.S. farm products. This will have spillover impacts on related industries, such as shipping, farm input supply firms and trading and brokerage firms.

Like real wars, trade wars are destructive, and like real wars, fighting a trade war on multiple fronts reduces the likelihood of victory, however it is defined.  If the situation does not deteriorate, the farm sector should be able to adapt, although the pork industry is already facing losses.

A full-blown trade war, especially if it expands to Europe, would be disastrous for the U.S. farm sector and all the businesses related to it.

William Knudson is an agricultural economist at Michigan State University.