Trade Disputes Affect U.S. Ag Economy
By Will Secor, CoBank Grain and Farm Supply Economist
U.S. agriculture is poised for serious challenges for the remainder of 2019. Large grain and oilseed supplies, continuing increases in U.S. and non-Chinese animal protein and dairy production, and major trade uncertainties will prevail for much of the year. At the same time, U.S. and global economic growth rates will slow, requiring significant attention to marketing strategies, cost controls and balance sheet management in the food, fiber and ag supply chain.
Up and down trade negotiations with China will likely carry on this summer, possibly longer. Throughout the talks, China has pledged to buy soybeans and other ag products, and USDA has reported sales of these products are occurring. However, recent news indicates China is stopping those purchases amid what appears to be both sides digging in for a longer trade dispute.
Ratification of USMCA in Congress also continues to be an uphill climb. Recent developments provide mixed signals for its future. The U.S. lifted steel and aluminum tariffs on Canada and Mexico. As a result, Canada and Mexico lifted retaliatory tariffs. Then the Trump Administration threatened Mexico with tariffs unless they reduced the flow of illegal immigration into the U.S.
Commodity markets will remain focused on the potential for progress on the U.S.-China negotiations and weather in North America. Abundant grain and oilseed stocks pull down on prices, but a potential resolution of current trade disputes and U.S. production concerns have eased some of these downward price pressures.
While soybean exports continue to lag behind last year, domestic demand remains robust. With two new plants coming online by the end of 2019 and with crush margins at elevated levels, this robust domestic consumption will likely continue for several months.
Brazil’s soybean harvest wrapped up with good, but not record, production. Dry weather last quarter sapped the top-end potential out of much of the crop. Soybean production for all of South America will likely be higher as Argentina’s crop returns to normal levels. The country’s crop was hit by extremely dry weather last year. Exports have been strong out of South America, and this puts pressure on U.S. exports as the U.S. marketing year moves into its second half.
The wild card for the months ahead will be 2019’s incredibly wet spring. Corn and soybean planting progress was historically slow with corn planting progress the slowest on record. This weather will certainly shift acres out of corn. Some is being placed in prevented planting acres and some likely shifted to soybeans or possibly spring wheat.
The combination of trade disputes and wet weather is creating significant volatility for grain markets. Farmers able to grow a crop and capitalize on high prices may see higher incomes. However, as the U.S.-China trade dispute weighs on prices, farm income generally will remain at levels similar to 2015-2018 and farmland values will risk a downward slide that could put balance sheets in dangerous territory. These risks will be front and center in the coming months.
Will Secor is an economist in CoBank’s Knowledge Exchange research division, focusing on grain, oilseed, farm supply and biofuel industries. Prior to joining CoBank in 2017, Secor was a faculty member in Purdue University’s Center for Food and Agricultural Business. Secor provided this insight May 31, and reflects the trade environment at that time.