By Victor Schramm, CFS®
Midwestern Farmers Facing Unintended Tariff Consequences
I haven’t been a fan of the so-called Trade Wars of the current administration. I’ve also been an analyst willing to conceded that at various key moments in the US-China trade confrontation, the United States has appeared to be “winning.”
One reason I’ve opposed the Trade Wars has been from a historical perspective. In that perspective, Tariff Wars, Trade Wars, etc., have universally faced unintended consequences- everything from political strife to outright wars. Right now, a case study of such collateral damage is emerging in the Midwest, where flooding came at the worst possible time for many farmers.
It’s difficult to say how these floods will impact global markets, as even if the worst case emerges for farmers, it is possible that Lawmakers will offer policy relief in any number of ways. Nonetheless, what is currently a deeply challenging moment for regional farmers along the Missouri basin will likely challenge investors in due time.
The Floods
A combination of factors led to historic levels of flood damage in Iowa, Nebraska, and Missouri. Nebraska Governor Pete Ricketts called it “The most extensive damage our state has ever experienced.” 1 Iowa Governor Kim Reynolds estimated the damage so far- $1.6 Billion- to be a record for the state. 2
Weather in the Midwest is a major factor in U.S. commodity pricing. Everything from Corn and Soybean to Gasoline prices are affected by regional weather trends. Unfortunately, it appears that trade policy this year added a tragic dimension to the risks implicit in grain farming.
The Trade Wars Come to Iowa
This year, because of the Trade Wars with China, farmers happened to be holding more of their harvest in on-site storage during the Spring floods. One such product was soybeans. China has been one of the largest importers of U.S. soybeans for some time.
Not only have soybean prices fallen 34% from their 2016 highs this Spring 3; China is importing less soybeans. In fact, China is importing the lowest amount of soybeans since 2011. 4
When the floods hit, many farmers did not have time to move their stored grains. Their harvests were lost. A startling amount of this product was not insured. The way insurance works, once the crop has been removed from the soil, it is no longer insured by the most common farmland insurance- insurance that covers poor or lost harvests due to drought or bad conditions. 5
The moral of the story is that farmers took excess risk to make up for negative conditions produced by the Trade Wars. Along the Missouri basin, this risk taking was heavily punished, leaving many farms on uncertain ground going forward in the face of this year’s losses.
There are other economic impacts that happen every time there’s a flood in the region- will farmers have liquidity to plant this year? Will the soil be in good enough condition to plant? Can farms afford a season without planting? Some of these factors have nothing to do with the tariff spat with Beijing, but others do. For instance, some farmers may otherwise have incentive to switch from corn to soybeans this year to stay viable. Uncertainty about the demand and prices for soybean make such a decision much riskier this year.
Top 5 Importers of U.S. Soybeans in 2018
Conclusion
We won’t ultimately know whether the Trade Wars are worth fighting with Beijing for quite some time. Sometimes it takes an entire economic cycle where old business models dependent on the old status quo die off and all of that labor and capital is put to use in new ways. That’s the theory at least. It’s certainly cold comfort for Midwestern farmers at this moment.
What is certain is that unintended consequences- good and bad- will stretch investors appetites for global trade conflict. The question is, will investors lose hope for trade rebalance before the political goals of the administration are achieved?
Disclaimer:
This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. Commodities are complex investments that should take many factors in to consideration beyond a single event or trend.