Flags of the United States, Canada and Mexico fly at a business outside of Omaha. Ag economists say U.S. trade negotiations with Canada and Mexico are crucial for American agriculture, both as export markets and as sources for some inputs.IFT photo by Benjamin Herrold
arming is an uncertain business and “penciling out” the year’s crop and profit margins at the dining room table always involves some guesswork when it comes to final input costs and revenue.
With tariffs making headlines, this fall and subsequent crop years may have additional uncertainty when it comes to the bottom line, as tariffs could impact input costs, market access and crop prices.
Cornell University professor and economist Wendong Zhang, who previously worked at Iowa State University, says the uncertainty is a challenge for farmers.
“Not only is there a tariff hike, but there is tariff volatility,” Zhang says. “It is uncertain on which countries a tariff will be applied, and how much, which is bad for farmers trying to plan.”
Julian Binfield is director of international programs for the University of Missouri’s Food and Agricultural Research Policy Institute. He says farmers have the chance to get more market access and reduced trade barriers from the trade negotiations.
“There’s some risk, but there’s some upside potential as well,” he says.
Ongoing talks with China
The trade outlook received some good news the weekend of May 10 when the United States and China agreed to a reduction of tariffs on most goods from 125% and 140% — which Zhang says would have effectively halted trade — down to 10% and 30%.
“This is definitely a welcome development,” he says. “The magnitude of the rate cuts surpassed the market expectation.”
However, Zhang adds he does have a “contrarian feeling” about the trade talks, noting the reduced tariff levels are higher than what ag products faced before the initial tariff escalation.
“We’re actually talking about adding more cost in the trade and barriers,” he says. “Especially when we’re getting into planting season, the agricultural products will actually face more challenges (to trade).”
The key will be whether the initial agreement is an early step in continuing negotiations and future trade deals, Zhang says.
“It’s important to watch how the ensuing negotiations go,” he says.
Binfield says the tariff reduction was a nice sign, even if there are still a lot of issues to resolve.
“China is one of the most important markets for U.S. agricultural exports,” he says. “There appears to be some movement away from a full-scale trade war. It’s obviously good for the agriculture sector.”
Zhang says there are benefits to both countries in having a good trade relationship.
“The U.S.-China relations are globally critical and mutually beneficial, especially the trade relations that involve agricultural products,” he says. “China cannot go without the products coming from the U.S. But at the same time, while China has dramatically increased its diversification efforts for agricultural products away from the U.S., Brazil has captured an increased market share.”
Zhang says the “Phase 1” trade deal with China during the first Trump administration did bring some benefits for U.S. agriculture, contributing to two years of record agricultural exports.
Binfield says it is hard to fully judge the Phase 1 trade deal because COVID hit quickly after the agreement, but he says agriculture came the closest to hitting its trade goals of any sector of the deal. He says the deal, which also came after tariffs, increased U.S. beef exports to China and supported exports of other products.
He says he expects agriculture to be a key part of any future trade deal with China.
“The Chinese want to buy U.S. products. They want to buy well-priced U.S. commodities,” Binfield says. “If there’s going to be a trade deal, agriculture is probably going to be a big part of it.”
Making deals
In addition to the talks with China, trade discussions continue between the U.S. and several other countries, in particular the neighboring countries of Canada and Mexico.
Early May also saw the U.S. announce a trade deal with the United Kingdom.
“The two trade deals that are probably most relevant, most prominent, are the U.S.-China and some continuation or update of the USMCA (U.S.-Mexico-Canada Agreement),” Zhang says. “The trade agreement with the UK is fine, but it’s not as critical.”
Those trade priorities reflect major U.S. ag export markets, he says.
“China, Mexico and Canada capture the lion’s share of the products that we’re selling,” Zhang says.
Binfield says these major destinations will likely remain important, and also the U.S. is always looking to develop new markets for ag products.
Cost of tariffs
Zhang says tariffs add costs to products that are bought and sold from one country into another.
“The tariff essentially is a tax on the products,” he says.
He says ag products being sold to countries that put a tariff on them essentially makes them more expensive for people in those countries to buy.
Also, tariffs on imports coming into the U.S. can add costs for farmers and ranchers.
“The nutrients you would use in your agricultural operation, the fertilizer coming from Canada, that means higher input costs,” Zhang says. “… I think for some of the inputs that producers have to import from other countries, there’s already some cost to it.”
In general, uncertainty is hard for farmers trying to plan their cash flow, he says. He says farmers have limited flexibility to change what they are growing if, for example, soybeans face a tariff in another country but corn does not.
“Often your seed and your planting, it’s contingent on your rotation and your planting last year,” Zhang says.
Binfield says the administration, including the USDA, are watching farm input costs.
“I think the administration is aware this is a potential issue,” he says. “Tariffs on those products could increase prices on them.”
Some U.S. ag groups, including the Fertilizer Institute, have advocated for tariff exemptions for products such as ag fertilizers coming from Canada.
In the meantime, farmers are going about their day-to-day work, finishing up planting, getting crops sprayed, watching crop markets. But also on their mind are the developments far beyond their fencerows, and what that might mean for export markets this fall when the U.S. crop comes rolling in.
“If trade issues persist, then there are going to be issues for agricultural exports,” Binfield says.
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