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Will trade deals jumpstart ag economy?

Trade war no more: How China, Japan and USMCA might move the demand needle for U.S. farm exports.

The importance of trade is something that weighs on Illinois farmer Stan Born’s mind most every day. After all, six of every 10 soybean acres he grows ultimately goes overseas.

On the heels of major updates to trade deals with China, Japan, Mexico, and Canada, Born says he can breathe a little bit easier these days. After all, the pre-trade war tally for those four countries combined includes 52% of all U.S. corn exports and 67% of all soybean exports.

“It’s a relief that this is finally coming to a conclusion,” he says.

Perhaps the entire ag economy can brief a sigh of relief, too. While short-term outlook may be bearish due to big expected crops this spring, long-term gains in overseas demand could lift all boats.

Here’s a look ahead at how these agreements might move the needle on demand for your farm products.

Start with Japan

The ball started rolling last September when the U.S. and Japan inked a trade agreement that sought to address more balanced trade and to bring back measures that had already been agreed to under the Trans-Pacific Partnership (TPP), which the United States left in 2017.

According to the Office of the U.S. Trade Representative (USTR), more than 90% of U.S. food and agricultural products sold to Japan will now either be duty-free or receive preferential tariff access. The goal is to keep the U.S. on the same playing field as major TPP competitors like Canada and Australia.

Critics note there are plenty of exclusions missing from the deal, including certain dairy products, fresh poultry, and some high-value specialty crops.

“Given the breadth and depth of U.S. export interests in agriculture, these exclusions are important not only because these products will not gain new market access into Japan, but also because future trading partners may see the exclusion of these products as a signal that the United States is willing to exclude products in future deals,” according to Darci Vetter, global lead of public affairs and vice chair of agriculture and food at Edelman U.S. Public Affairs.

But there’s no denying that this trade agreement could still have a big impact on agricultural trade, says Floyd Gaibler, director of trade policy with the U.S. Grains Council, citing a stop to “market erosion,” especially for livestock and dairy producers.

“This rights the playing field and gives us a chance to catch up,” he says.

And although livestock producers stand to reap the most immediate benefits, any uptick in demand should flow through to grain producers, Born points out.

“The Japan deal is an important deal for my largest customers, feeding animals,” he says.

Gaibler adds that just as with China, the U.S.-Japan trade deal is a phased agreement, with negotiations likely to resume in April or May.

Fragile China

Arguably the biggest news headline came with January’s signing of a phase-one trade agreement with China, marking a cease fire to a trade war that had dragged on for nearly two years. The trade war, in part, caused U.S. soybean exports to China to tumble 72% year-over-year.

Exports to China moved noticeably higher last year, reaching 812.1 million bushels, but that remains 18% below the prior five-year average.

The phase-one agreement seeks to correct that trend, with China promising an additional $80 billion above baseline in U.S. agricultural exports in 2020 and 2021. However, the agreement also stipulates this lofty pledge is dependent on “market conditions,” which gives China more than a little wiggle room to dial back sales, especially as it deals with ongoing demand concerns sparked by the African Swine Fever (ASF) and coronavirus. Those factors have tempered some expectations for now, according to Eric Bohl, director of public affairs and advocacy for the Missouri Farm Bureau.

“Like most people in agriculture, our members are fairly skeptical,” he says. “Our growers will likely abide by our state motto – Show Me. They want to see products accepted for delivery. There’s a lot of hope, but we’ll believe it when we see it.”

There are a lot of potential outcomes for the time being, according to Farm Bureau economist Veronica Nigh, but even the worst-case scenario is an improvement from the current situation, with an additional $12.5 billion in exports above the 2017 baseline amount this year and $19.5 billion more in 2021.

And what would the best-case scenario look like?

“The U.S. and China will carry the momentum of $50 billion in average U.S. ag purchases the next two years into 2022 and beyond,” she says. “We hope that the improved standards of trade negotiated under the deal will enable robust, long-term growth in ag grade between the two countries.

Export promises represented only a modest portion of what was covered in the 86-page trade agreement. Many other concerns between the two nations were also hammered out, including phytosanitary regulations, biotech adoption processes, intellectual property (IP) theft and much more.

Gaibler argues that some of these structural reforms might even be more important than China’s purchase promises. For example, biotech approval in China could see significantly quicker timelines, and addressing phytosanitary concerns could improve market access for a variety of U.S. agricultural goods.

“Virtually every food and ag category has had some form of non-tariff barriers addressed in this agreement,” he says.

Phase-two negotiations may not begin for many more months, with President Donald Trump signaling they may not happen until after presidential election in November. Nigh says if current tariffs that remain stubbornly in place could be removed during that process, it would be a win-win for both countries. And Gaibler says greater regulatory cooperation should also be a goal for the next round of negotiations.

“Ideally, phase two would transform into a more formal trade deal that looks more like a contract than an agreement,” he says.

Serving on the board of the American Soybean Association and the United Soybean Export Council, Born has made several trips to China to have multiple in-person conversations with buyers there. He described his latest trip in January as “very positive” and says Chinese customers were hopeful that the current trade deal will give them more latitude to buy U.S. agricultural products.

“We’ve had a longstanding relationship with China,” he notes. “We have boots on the ground there and meet regularly to help educate and facilitate trade – and they have a favorable opinion of our products.”

And four out of every five farmers expect a favorable outcome in ongoing negotiations with China, according to the latest farmer poll from Purdue University / CME Group’s Ag Economy Barometer, released last month.

“They gave Trump a lot of leeway and took a lot of pain in the markets,” Bohl points out. “Now, they’re starting to see it come through.”

USMCA highlights

January also saw significant milestones for the U.S.-Mexico-Canada (USMCA) trade agreement, which passed both chambers of Congress with broad bipartisan backing before being signed by Trump. The deal must still be ratified by Canada’s Parliament but is closer than ever to becoming enacted.

Bohl says the U.S. is sending a powerful political message based on bipartisan support of USMCA, which passed 385 to 41 in the House of Representatives and 89 to 10 in the Senate – despite Congress being embroiled in a contentious impeachment process.

“This sends a good signal to other countries that we’re still getting down to business,” he says.

The deal itself is widely hailed as the most modern agreement that has ever been put into place, thanks to a plethora of ecommerce, conservation, labor, biotechnology and gene editing provisions. Just as importantly, the deal cements trade relations with two of the top three agricultural trade partners with the U.S. – Canada ranks No. 2 among all countries, and Mexico ranks No. 3. In terms of grain purchases, Mexico is an especially critical customer, buying more U.S. corn (545 million bushels) and wheat (138 million bushels) than any other nation last year, while coming in second only to China in soybean purchases (179 million bushels).

Additionally, the North American trading block is a formidable region for energy exports. The U.S. is the No. 1 oil producing nation in the world. Canada ranks No. 4, with Mexico falling just outside of the top ten.

“USMCA provides longer-term certainty while operating under modern rules,” Gaibler says. “The deal’s architecture should be in other trade agreements. As one example, it created a separate biotech chapter, which few trade agreements even mention in passing. It really is state-of-the-art.”

Nigh adds that USMCA is expected to increase U.S. agricultural exports by $2 billion and result in a $65 billion increase in total gross domestic product. The agreement allows new market access for American dairy and poultry products, and it preserves the zero-tariff platform for all other ag products.

How much of each product goes to each country?

Where next?

The search for new trade opportunities remains an ongoing process. The Trump Administration has signaled several nations it would like to pursue next, including bilateral deals with India and the United Kingdom.

With more than 1.3 billion people and an emerging middle class, India is an obvious target. An India trade deal, which some speculate could be signed in a few short weeks, looks to trim the trade deficit (which is currently $16.9 billion), allow exemptions for high duties on certain steel and aluminum products, and allow greater agricultural access for both countries.

As for the United Kingdom, U.S. Secretary of State Mike Pompeo recently told reporters that they were working “as quickly as we can” on sealing a deal there. In 2018, U.S. ag exports to the United Kingdom reached $2 billion, but grain sales play second fiddle to other product categories such as wine and beer, tree nuts and prepared foods.

These aren’t necessarily “low hanging fruits,” however, because there is still a tangle of fundamental disagreements to work through. And other targets may be more lucrative in the long run. Nigh points to Southeast Asia, which continues to make impressive year-over-year increases in U.S. ag purchases.

“With many countries in that region experiencing significant and prolonged economic growth, this trend is here to stay,” she says.

Trade deals with other areas such as the European Union and Kenya may also soon be in the mix.

“There are a lot of balls in the air right now,” Gaibler says.

That point isn’t lost on Born, who says global population and economic fundamentals should put grain sales on an upward trajectory.

“I’m very optimistic about our opportunities moving forward because of the basics,” he says. Demand will continue to increase as people move up the protein ladder.”

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