August 26, 2019
The Trade War, or the realignment of fiscal, monetary and trade policy between the U.S. and China, Mexico, Canada, European Union, Korea, Japan, and other trading partners, is punishing U.S. producers and the agricultural sector disproportionally more than many other sectors.
Consider these commodity tariff numbers from CoBank’s Knowledge Exchange:
SOYBEANS to China – China’s imposed tariff of 25 percent, Q4 2017, compared to Q4 2018 shipments declined by 98 percent.
COTTON to China – China’s imposed tariff of 25 percent, Q4 2017, compared to Q4 2018 shipments, declined by 48 percent.
SORGHUM to China – China’s imposed tariff of 25 percent Q4 2017, compared to Q4 2018 shipments, declined by 100 percent.
FROZEN FRENCH FRIES to Mexico - Mexico’s imposed tariff of 20 percent, Q4 2017, compared to Q4 2018 shipments, declined by 26 percent.
ALMONDS to China – China’s imposed tariff of 40 percent, Q4 2017, compared to Q4 2018 shipments, declined by 3 percent.
WINE to China – China’s imposed tariff of 25 percent, Q4 2017, compared to Q4 2018 shipments, declined by 57 percent.
HAM to Mexico - Mexico’s imposed tariff of 20 percent, Q4 2017, compared to Q4 2018 shipments, declined by 31 percent.
PORK to China – China’s imposed tariff of 50 percent, Q4 2017, compared to Q4 2018 shipments, declined by 32 percent.
COOKED BEEF to Canada – Canada’s imposed tariff of 10 percent, Q4 2017, compared to Q4 2018 shipments, declined by 15 percent.
WHEY to China – China’s imposed tariff of 25 percent, Q4 2017, compared to Q4 2018 shipments, declined by 42 percent.
CHEESE to Mexico - Mexico’s imposed tariff of 25 percent, Q4 2017, compared to Q4 2018 shipments, rose by 3 percent.
Tanner Ehmke Manager, CoBank’s Knowledge Exchange, says, “With tariffs on the minds of everyone in agriculture, we set out to answer the question of who pays the retaliatory tariffs on US agricultural exports. CoBank’s knowledge exchange economists analyzed 11 U.S. agriculture commodities representing a cross-section of ag exports. In all but two cases, the U.S., not the importing countries or its consumers, paid much of the cost of these tariffs.
“Bargaining power, or lack thereof, determines who pays the tariff and how much. Factors affecting bargaining power differ by product but ranges from strength of foreign consumer demand for U.S. products, to store ability, to geographic proximity.
“Macroeconomic factors affecting bargaining power include strength of the U.S. dollar and transportation rates. Our level of bargaining power, though, depends on the commodity. To illustrate, we'll discuss four commodity export examples across the U.S. — agriculture soybeans to China, cheese to Mexico, wine to China, and pork to Mexico. For U.S. soybeans, China imposed a 25 percent tariff on the U.S., but shipments fell 98 percent in the fourth quarter. China virtually replaced U.S. soybeans with imports from South America, indicating stronger bargaining power for China over the U.S.”
Kate Linner, economist, dairy, says, “Global demand for cheese has been the bright spot in the dairy complex for the past five years. Consumer demand in Mexico has been particularly strong, but Mexican milk production has not kept up. In response, retailers and manufacturers have turned to the U.S.
“When the Mexican government imposed retaliatory tariffs of 25 percent on US cheese in 2018, export value continued to rise. What drove this consumer demand as well was a geographic competitive advantage of the U.S. dairy industry over key players such as the EU and New Zealand. As retaliatory tariffs have now been removed, we can expect Mexico to strengthen its position as the number one destination for U.S. cheese.”
Crystal Carpenter, senior economist, specialty crops, says, “The value of U.S. wine exports to China quadrupled in the past decade, but the picture may be changing, while the total year-over-year value of Chinese wine imports from all countries was down 22 percent in the fourth quarter of 2018. U.S. wine exports to China were down 57 percent as the U.S. lost market share to Chile in Australia, and while China is a relatively small market for U.S. wine exports, the loss of market share is significant as it represents a key growth market in a time when global wine consumption growth is weakening.”
Will Sawyer, lead economist, animal protein, says, “In the animal protein sector, the retaliatory tariffs of the last couple of years have primarily targeted the most exported animal protein, pork. With more than a quarter of U.S. pork being exported around the world, tariffs, especially from Mexico and China, hurt hog prices and the bottom lines of U.S. hog producers.
“When Mexico levied to 20 percent tariffs against U.S. pork in the summer of 2018, we found it was a U.S. hog producer who actually paid the tariff, not the Mexican importer or consumer. This dynamic reflects our reliance on the Mexican market. Nearly half of all hams produced in the U.S. go to Mexico. While Mexico lifted these tariffs [in the] spring, we expect pork to continue to be the hardest-hit protein industry when trade disputes bubble up in the future.”
For more information see: | CoBank Knowledge Exchange | https://bit.ly/2NDZlEK (3:45 minutes)
Market outlook for the week beginning August 26, 2019
Soybeans. Larger Price Trend Remains Down. The August 23, 2019 close was $8.56 per bushel, down 23.25 cents on the week or down 2.64 percent. Soybean prices likely remain in their2019 trading range of $7.95 to $9.39 per bushel, Charts B10 to B13.
Long Grain Rice. Near Term Price Trend Bearish. August 23, 2019 November close $11.28 per cwt. or $5.08 per bushel. Acreage, yield, and production remain unknown. Prices moving back above $11.43 per cwt. or $5.16 per bushel would allow a return to the near-term bullish price trend, Charts B18 to B20.
Corn. Larger Price Trend Remains Bearish. Corn closed the week of August 19, 2019 at $3.68 per bushel, down 13 cents per bushel for the week or down 3.41 percent. Expect more price weakness than strength until fundamentals are more supportive of higher prices. If corn ends the week of August 26, 2019 above $3.78 per bushel, I will consider a near-term bottom possibly in place, Charts B14 to B17.
Wheat. Near Term Price Trend Remains Down. Wheat closed the week of August 19, 2019 at $4.78 per bushel, up 0.25 cents on the week or 0.05 percent. Wheat prices need to end the week of August 26, 2019 above key resistance of $5.08 per bushel for me to favor additional price strength, Charts B25 to B28.
Cotton. Price weakness remains problematic. The August 23, 2019 close 58.21 cents per pound, down 1.92 cents on the week or 3.19 percent. Cotton prices need to end the week of August 26, 2019 holding above 55 cents per pound or serious price weakness could emerge, Charts B21 to B24.
Interest Rates. 10-Year U.S. Treasury Yield: August 23, 2019 close 1.52, down .03 on the week or 1.94 percent, Charts A1 to A4.
Little support exists for the 10-Year Treasury Yield until the previous low made in 2016 is reached at 1.37, and, given time, further downside to 1.00 or lower now becomes a real possibility. The November 2018 high was 3.24 or 3.24-percent.
Fed Rate. The U.S. Federal Reserve is on course to lower the Fed Rate from today’s 2.25 percent possibly by: first, another ¼ percent to ½ percent in September 2019; second, another ¼ percent before the end 2019; and third, likely another ½ percent or more in 2020.
U.S. Dollar Index. The U.S. Dollar Index lost 0.49 percent the week of August 19, 2019, down 0.48 to close at 97.53. Dollar Bears are anticipating lowering of the Fed Rate at the September Federal Reserve FOMC meeting. Dollar Bulls see money increasingly flowing into the U.S. as a safe heaven, Charts A5 to A8.
Much of the world’s debt is dominated in dollars, especially in frontier countries and emerging markets. Thus, a lower dollar is supportive of U.S. economic activity and global economies in general. A huge negative, a lower dollar may also be supportive of a number of building global asset bubbles.
$WTIC Light Crude Oil. Prices Trading in a Range. August 23, 2019 close $54.17 per barrel, down $0.64 per barrel or 1.17 percent for the week. Present near-term trading range $52.03 to $58.12 per barrel, Charts B6 to B9.
Geopolitical uncertainties and political dynamics, coupled with possible supply disruptions, make this market unpredictable for the world’s most talented analysts, so be highly respectful of price action. Do not try to outthink this market, just follow the price action.
$CRB Index. Sideways with Downside Bias. August 23, 2019 close 168.91, down 1.80 on the week or 1.05 percent. This index needs to close above 183 to regain a bullish bias. The index remains extremely weak.
Why is the &CRB Index Weak? First, global deflationary forces are limiting global growth and demand for commodities; second, many of the world’s commodities remain surplus burdened; third, the ongoing US
/Global Fiscal, Monetary, and Trade Policy realignment is presently limiting commodity demand; therefore, limitations to this index’s near-term upside remain unless oil prices regain an upward advance, Charts B1 to B5.
No Crystal Ball
Since no one has a crystal ball or knows the future, always consult an investment professional or professionals before making investment decisions. The world’s most talented speculators, investors and money managers are challenged by today’s global business environment.
Source: Bobby Coats is an economist with the Arkansas Department of Agriculture. E-mail: [email protected] and is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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