What are the latest developments on the trade deal with China? Trump has been clear that he’s willing to increase tariffs or keep some in place in order to get what he wants. He’s setting the tone through is public comments and and Twitter and has roiled global markets. US farmers are tired of being held hostage and want the tariffs to disappear. Can Trump pull off a win?
Trump is Willing to Increase Tariffs
President Trump was tweeting again on Sunday. According to Amie Simpson of Brownfield Ag News, Trump’s tweet shared his willingness to increase Chinese tariffs. Trade talks have occurred throughout this week, but Trump feels that they’re progressing too slowly. Tomorrow the 10% tariffs on $200 billion of Chinese goods will go up to 25% unless a last-minute deal is reached.
Prospects for a deal are not looking good. Today, CBS News reported that stocks are down after President Trump commented yesterday that China “broke the deal.”
But time hasn’t completely run out. Trump said,
“[T]he vice premier tomorrow is flying in — good man — but they broke the deal,” Mr. Trump said, referring to Liu He, China’s chief negotiator, at the Florida rally, according to Axios. “They can’t do that, so they’ll be paying.”
In response, Beijing has said that they are willing to impose “necessary countermeasures” if the tariff increases go into effect.
Trump is Setting the Tone, Market is Responding
It’s amazing how much damage a single tweet can do. Global markets dropped $1.36 trillion between Sunday and Wednesday according to one Bloomberg calculation.
Michael Hirtzer and Mario Parker of Bloomberg reported late Monday that after President Trump’s tweets about his willingness to ratchet up the Chinese tariffs, grain markets dropped to a 42 year low. The Bloomberg Grains Subindex Total Return hasn’t been this low since 1977. July soybean futures capped a seventh straight loss.
Soybeans have been hit especially hard by the Chinese trade war. The rise of African Swine Fever there hasn’t helped US producers either. Traditionally China has been America’s largest soybean importer. Now, US soybean socks are high, and will likely continue to grow. Due to the very wet and cool spring, many US producers will be forced to plant soybeans which can be planted later than corn.
Even before Trump’s latest missive, investors were ready to throw in the towel on crop prices. The pig-disease outbreak has forced China to cull more than 1 million hogs, denting the outlook for grain use in livestock feed. A measure of combined hedge fund net-short positions across corn, soybeans and wheat is at its most bearish since the data begins in 2006, a U.S. Commodity Futures Trading Commission report on Friday showed.
Many agree that markets will continue to be volatile until the trade situation with China becomes more clear.
US Farmers Fed Up
US producers have had about all they can take. So many negative things are happening at once. Fifth-generation Illinois corn, soybean and wheat farmer Dale Livingston says he understands why Trump started the trade war, but is ready for it to be over.
“Let’s quit playing these games and get it over with.”
Nebraska farmer Aaron Zimmerman wants to stick it out.
“I know it sucks and this hurts and I’m getting tired of it,” but it’s too late to turn back now, the third-generation farmer said.
The national campaign called “Tariffs Hurt the Heartland,” a group of over 150 different trade organizations says that the increased tariffs will really hurt farmers, businesses and consumers. They estimate that the increased tariffs could cost almost 1 million jobs.
Tariffs Need to Go
Some Ag groups are concerned that any kind of trade deal now might leave farmers worse off than where they started. There have been signs that the administration would accept Chinese purchase target pledges for commodities like soybeans and pork without lifting retaliatory tariffs. Mike Dorning’s article, “Farmers Fear Trade Deal Will Fail to Erase Tariffs” was published May 1 on Ag Update.
China has committed to a series of pork and soybean purchases, and the Trump administration counts that as victory points. The administration says a trade agreement would include commitments for more purchases.
But there are problems with this scenario. The purchases aren’t enough to even but a significant dent in US soybean stockpiles. If tariffs aren’t removed it’s going to be impossible for US farmers to export more than the purchase agreement quotas. Since the quotas would be controlled by Chinese government entities, they would be able to use them as leverage whenever tensions rise with the US. Basically holding US farmers hostage.
Jim Sutter, chief executive officer of the U.S. Soybean Export Council, remains optimistic.
“If we make a deal, then we need to get the tariff off so the trade can begin again,” Sutter said by telephone shortly after a visit to China. “I think it’s hard to imagine a situation where we come to an ‘agreement’ and then you leave the tariffs in place. I would be surprised if the Chinese found that an acceptable solution.”
Can Trump Pull it Off?
Dorning also wrote an article, “Farmers are Unnerved by Trump’s Enthusiasm for Tariffs,” for Western Farmer-Stockmen. Trump wants to keep some of the tariffs in place as leverage for enforcement, and that’s making farmers nervous. Trump has a tendency to pick winners and losers, and predicts the tariffs to last a long time. Still, he’s promising “massive” orders for US farm exports.
“It’s only going to get better because we’re doing trade deals that are going to get you so much business, you’re not even going to believe it,” Trump said at the American Farm Bureau Federation annual meeting in January.
US farmers are hopeful Trump can pull it off. Many say the economic pressure they’re feeling right now is similar to the farm crisis in the 1980’s. Farm profits are half of what they were in 2013. Recent years with record yields have caused corn and soybean prices to plummet as much as 40% since then.
Winners and Losers
Are there really any winners here?
Reuters published an article Monday listing companies that are benefitting from the trade war. It’s a short list. Our list below includes Ag-related businesses; the Reuters list also included tech companies and vehicles. The complete article is available here.
Losers
- Caterpillar Inc- Without any relief, the tariffs will cost the company $250-350 million in 2019.
- Deere & Co- US tariffs on Chinese goods will cost them $100 million in 2019.
- Archer Daniels Midland Co- Operating profits for sorghum and soybean trade dipped 30% in the fourth quarter.
- Bunge Ltd- Reported a $125 million mark-to-market loss in August, betting that a trade war would be averted. A temporary truce with China caused soybean prices to drop and the value of their Brazilian soybean inventory dropped $125 million.
- Cargill Inc- Trade disputes have impacted earnings in origination and processing.
Winners
There aren’t many winners. US steel was largely predicted to benefit from the trade dispute, but even that’s becoming a little murky.
- Nucor Corp- The steel company posted record earnings and shipped a record amount of steel in 2018. However, first quarter profits have been lower than anticipated. Increased domestic production has led to lower prices.
- JBS SA- The Brazil meatpacker- the largest in the world- have increased meat exports to China. Their share of exports grew 24% last year.
It’s difficult to predict how the remainder of today’s trade talks will go, but a couple things are pretty clear. Trump is determined to claim victory. So far, there haven’t been many winners here- certainly not US agriculture. Trump is willing to increase the tariffs or keep them in place if he doesn’t get what he wants. It’s likely China will hold their ground and do the same. Trump is also setting the tone. Any of Trump’s tweets about the trade talks over the next 24 hours will roil the markets.
