Print Page | Sign In | Register
News & Media: In the News

The U.S.-China Trade War: Farmers Didn’t Pick the Fight, But Will Be Paying For It

Tuesday, June 18, 2019   (0 Comments)
Share |
By Tanner Ehmke

The U.S.-China trade war seems to be going nowhere fast. With both the U.S. and China digging in and becoming further entrenched, the likelihood of the trade war lasting through 2020 has become a significant risk. This is of particular concern for U.S. agricultural commodity markets that depend on foreign markets like China to export our surplus.

Let’s remember a basic rule of economics: No one wins a trade war.

On the U.S.’s side, China’s retaliatory tariffs on U.S. agricultural goods have resulted in a steep drop in U.S. ag exports to China. In fact, agriculture has suffered more in the trade war than any other industry in the U.S. According to USDA-ERS, shipments of U.S. agricultural goods to China fell to $16.8 billion in 2018, down from $21.8 billion in 2017. For 2019, agricultural exports to China are expected to plummet to $6.5 billion

Loss of export business and market share isn’t the only cost on agriculture. U.S. tariffs on Chinese products raise costs on farmers and ranchers for major expenditures. Prices of anything containing steel or aluminum rise, from tools to fence to machinery, either as a result of tariffs being passed on to the consumer, by lower production, or both. John Deere recently announced expects to pay $75 million because of U.S. tariffs. The component parts that are made in China for inclusion in U.S. machinery also increase production costs for U.S. manufacturers, which will inevitably be passed on to the farmer.

On China’s side, the Chinese economy is slowing and is widely expected to suffer more than the U.S.’s. The impact of a weakening Chinese economy will be two-fold on U.S. agriculture. 1) Chinese consumers will have less income to afford ag imports from the U.S. 2) China’s currency, the yuan, will likely weaken relative to the U.S. dollar, thereby making U.S. exports into China more expensive. This is in addition to China’s retaliatory tariffs on the U.S.

Longer term, weakness in the Chinese economy could be a contagion sent around the world, resulting in slower growth for the world economy and heightened risk of a global recession. Either scenario would likely result in a stronger U.S. dollar.

A strengthening U.S. dollar, unfortunately, is a drag on U.S. commodity prices, including milk. (See chart, “U.S. Dollar vs Class III Milk.”) This currency headwind blowing in the face of U.S. agricultural exports could potentially turn into a gale-force hurricane if the Chinese economy enters into a full-blown recession. While day-to-day milk prices are influenced by a multitude of other factors, the currency risk remains a constant threat on prices long-term.

There’s a caveat. If the U.S. economy slows appreciably or moves into a recession, The Federal Reserve would likely cut interest rates – the combination of which would likely result in a weaker U.S. dollar. The U.S. economy currently appears to be charging full-steam ahead despite the U.S. engaging in trade rows on multiple fronts. But, U.S. economic growth is widely expected to slow in the remainder of 2019.

Does that mean farmers and ranchers can cheer a weaker dollar in the months ahead? That depends on the strength of the global economy. Around the world, major agricultural exporters are struggling with weaker currencies for their own reasons: Brazil is dealing with political turmoil, Britain and the EU face the Oct. 31 deadline for Brexit with an uncertain outcome, and Russia’s economy remains closely tied to oil prices that could soften in the event oil demand falls because of global economic weakness.

And, all of them are exporters to China. A slowdown in China’s economy inevitably will impact their respective economies and currencies.

Between higher costs on farmers and ranchers from U.S.-imposed tariffs, China’s retaliatory tariffs, and the rising threat of global economic weakness if the U.S.-China trade war persists, the outlook for agricultural commodity prices doesn’t leave farmers much room for celebration. U.S. agriculture may not be the reason for the trade war, but it will be paying a heavy price for it.

Proud member of...