Market Reacts to Proposed Tariffs

Source: Ben Brown, Program Manager- Farm Management Program, College of Food, Agricultural, & Environmental Sciences, Department of Agricultural, Environmental, and Development Economics

Here is an update on where we stand today on corn and soybean exports and how the markets are responding to the tariff announcements between the US and China. Several of you have probably followed the story in the news and are already aware of what’s going on.

Quick recap of the timeline- The Administration imposed a 25 percent tariff on steel and 10 percent tariff on steel and aluminum imports for all trading partners and then started to provide exemptions for countries that were willingly working on a free trade agreement. The United States is a net importer of steel with most of our imports coming from Canada and the European Union. China is the world’s largest producers of steel but only 2% of their product is exported to the United States. President Trump removed the steel tariffs on Mexico, Canada, Kora, EU and some of the other trading partners but left the tariff on China. This accounts for about a 3-billion-dollar loss to the Chinese. On Monday the Chinese announce tariff on U.S. pork imports at 25%. This is a huge blow to an industry that was already seeing breakeven to negative per head returns. Our estimate given current budgets was a loss of about 10 dollars per head.

Yesterday the Administration announced proposed tariffs on intellectual property rights and other Chinese products to the tune of about 50 billion dollars. That was met with response today with China announcing tariffs on 100 plus agricultural good at a rate of 25% to be enacted the day the U.S. enacts their tariffs. Important to note that the tariffs are not in place, but the market is reacting to uncertainty.

That brings us to where we are today. Half of the U.S. soybean crop is exported and 62% of the exports go to China, meaning that one third of the U.S. production of soybeans goes to China. Given tariffs at 25%, my estimate from the model shows that we could lose 60-70 percent of our export market to China. That means that if these tariffs go into effect only a fifth of our soybean production would go to China or 1 in 5 soybean rows. Those soybeans will need a buyer. Some will be kept in the United State and fed for feed grain and some will be exported to other world markets because of the lower price.

Argentina has mostly harvested their crop and while it was down in total production due to a drought, they will pick up some soybean market share in China. The big winner is Brazil. They had a relatively strong soybean crop and will be ready to export soybeans. Their second growing season this year is in large percentages corn, but they will also have some soybeans harvested in a couple of months. Like the U.S. drought of 2012, the U.S. will lose market share of soybean exports and it is not certain when we could gain that back. The lower soybean price will lower cost for hog producers and my estimate is now a 7 dollar per head loss.

The United States exports very little corn to start with, only 15% of production not taking into account ethanol exports, and of that the bulk goes to Mexico and Japan. The 25% Chinese tariff won’t affect the corn price as much as the soybean price. However, with a lower world soybean price an incentive to grow corn presents itself. More corn acres would pull down the price of corn. Right now the corn market is down about 7 cents but has been down 12 cents. The perspective planting report that came out Thursday showed an intention by U.S. producers to plant 88 million acres of corn or roughly 2% less than last year. Weather will be the big player between now and June when the next planting report comes out as a wet spring will push some corn acres into soybeans. Even with the tariffs on corn today, I’m still optimistic for a rally in corn prices this summer into harvest. I think we will see an increase in the marketing year average price for corn next week in the WASDE based on the assumption that our feed usage of corn stays between 35 and 40% for the second half of the marketing year.

To the average U.S. consumer these tariffs could cheapen food products at the expense of higher manufactured goods like technology imported from China. Food consumption makes up a relatively small portion of our expenditures meaning that the higher manufactured goods could be higher than the gain from cheaper food.

From a farm management stand point, this could mean higher equipment and input costs along with lower output prices. A double whammy for farmers.

In Ohio we saw a decrease in the amount of corn held in storage which likely means a weakening of basis while soybean on hand was larger signaling a strengthen in basis.

All in all, the markets are reacting to uncertainty. However, if the Administration does move forward with the tariffs we could continue to see decreases in soybean prices and possibly modest decreases in corn prices. The futures market for soybeans is down 38 cents right now but was 60 cents down when I woke up this morning. I look for a little bit of a rebound later today and tomorrow as I think the markets over reacted to some extent, but will not return to the level they were prior to today.

This will also complicate the farm bill adding another hurdle to the already narrow window that existed of getting it done this year.

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