March 29, 2024

Let’s make a deal

Ag leaders hopeful a new trade deal is on the horizon

Despite widespread skepticism that the United States and China will reach a trade deal this month, some are cautiously optimistic.

Curt Mether, Iowa Corn Growers Association president, said most farmers realized something had to be done; and not only do they continue to support President Donald Trump in his attempt to negotiate a favorable trade deal with China, but they are willing to wait.

“Farmers wait a whole year for a crop, so they ... are willing to wait awhile for Trump’s negotiation style to work,” said Mether.

Trump orginally said, should a trade deal fail to happen by March 1, he planned to increase tariff rates on more than $200 billion worth of Chinese imports – an increase from 10 to 25 percent – which would hit Iowa farmers hard. However, he has since postponed the increase crediting “substantial progress” in trade talks with Beijing.

Tariffs affect commodity prices

Lindsay Greiner, Iowa Soybean Association board president, said soybean prices are much lower today than this time last year.

“I think that soy beans in particular have taken a hit on this trade dispute with China,” said Greiner. “...almost $2 a bushel less today than they were a year ago.”

Should the trade dispute rally on, not only will the price of grain continue to drop, but there is fear of it affecting the price of other commodities.

Mether said the removal of a third of the market in a free-market system destroys the price of everything.

“That’s what it’s doing to soybeans ... that has affects on corn acres for next year, because they plant more corn, and that could hurt the price of everything,” said Mether. “Just take off the top 20 percent of demand and that’s a big issue.”

Iowans can expect to see the prices of some items that were once exported go a bit lower, but other prices will go higher. While the impact the tariffs have on farmers is not easy to predict, commodity prices will be one of the first places it will be noticed.

The ISU study shows that Iowa’s soybean industry could lose between $159 million and $891 million, and the state’s corn industry may lose between $90 million and $579 million. Ethanol producers are estimated to lose $105 million. However, the Iowa hog industry is expected to face a loss of up to $955 million.

Even if a trade deal is made, a climb in commodity prices are expected to show slow gains.

“We’re not going to see a rebound in soybean prices in the absence of a deal with China,” said Greiner. “So were going to look at prices that are break even at best, if not lower than break even.”

Although some farmers have taken some risk-management steps to stay ahead, such as selling off grain early, what happens in 5, 10, 20 years should a trade war continue?

Long-term reduction in market share

In the 1980s, the U.S. enacted a grain embargo against the former Soviet Union and U.S. farmers in the U.S. felt the sting of falling commodity prices as they watched the European farmers gained much of the trade American farmers lost. In 2009, a trade dispute with China resulted in the U.S. losing a significant portion of its China poultry trade to Brazil and the European Union.

Today, soybean producers are facing a similar situation.

“Brazil is starting to combine beans, and now they have another supply,” said Mether. “There was a short window for three or four months where we were their market. That has disappeared. That’s going to keep the price of soybeans down for awhile, I’m afraid.”

Dealing with loss

As the nation’s second-largest agricultural exporter, after California, Iowa leads the nation in corn, soybean and pork exports. Therefore, Iowa farmers are expected to receive approximately $550 million in direct aid from the USDA’s Market Facilitation Program (MFP), to help offset export losses due to the tariffs.

In an interview with Wallace’s Farmer, Kirk Leeds, Iowa Soybean Association CEO, said the $1.65 per bushel USDA is offering soybean farmers through the MFP will help but doesn’t compare to the amount farmers would get from the U.S. settling the trade war with China and other countries.

However, there is hope that a trade deal is nearing.

USMCA

After 13 months of negotiations, the governments of the United States, Canada and Mexico announced a trilateral free-trade agreement on Sept. 30. The agreement, called the United States-Mexico-Canada Agreement (USMCA), is intended to replace the North American Free Trade Agreement (NAFTA) and create a modernized free-trade system between the three parties and address critical issues, such as the harmonization of regulatory systems, e-commerce and the protection of intellectual property.

Additionally, the USMCA changes some rules and processes governing how certain goods are traded within North America and the mechanisms available for how trade disputes are resolved.

“We do feel really good about the USMCA,” said Mether. “We got that done. It still has to go through congress yet, and hopefully it will get approved. And it should.”

USMCA was signed by all three parties on Nov. 30 at the G20 Summit in Buenos Aires.

On Dec. 2, Trump announced that he would begin the 6-month process to withdraw from NAFTA, adding that Congress needed either to ratify the USMCA or else revert to pre-NAFTA trading rules.

Despite the lack of a trade agreement, Greiner said certain activity appears to be a sign of positive things to come and gives him hope that an agreement is coming.

“The Chinese have agreed to purchase an additional 5 million metric tons of U.S. soybeans, which I think is a good sign,” said Greiner. “It still doesn’t get us even close to what we were selling to them before the trade dispute, but any little bit is good. Not quite as good as we’ve been hoping for, but there’s progress.”

The USMCA Agreement, also referred to as NAFTA 2.0, is currently awaiting the approval of Congress before it can be ratified.

Mether said farmers are giving Trump more time, but are growing impatient.

“If he doesn’t get them to work, I think he’ll lose their support pretty quickly. But they are still thinking that he’s going to get something done in the next couple of months,” he said.