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By Staff | Dec 18, 2017

As to NAFTA. – the ag sector will miss it if it’s gone. Economic growth, particularly in Mexico, that developed because of NAFTA, turned millions of peasants there into consumers with disposable incomes. The first thing new consumers spend disposable income on is food, calories . . .meat. This improvement in diet south of our border produced a very handy market for U.S. ag exports. Mexico became our No. 1 corn buyer, No. 1 pork buyer, No. 2 beef buyer and No. 3 soybean buyer. Will this market entirely go away if NAFTA ends? No, it won’t but there will be a major disruption, the growth trajectory of Mexican demand for ag products will stall, and supply chains in both countries will resort to changing origination and destinations of goods.

The Mexican economy would most assuredly fall into recession. The peso is likely to decline relative to the dollar, making U.S. ag products more expensive relative to those from South America. Unemployment in Mexico will rise resulting in an even cheaper labor cost disparity with the U.S. as well as generate another wave of potential illegal immigration into the US. Mexican-US foreign relations will turn nasty. The far leftist candidate in the Mexican election, Andres Obrador, will get a big boost for his electoral prospects.

Deteriorating relations will also negatively impact the tourism industry as Americans who vacation in Mexico fear for their safety. Mutual cooperation that existed in policing drug trafficking will deteriorate. The weakened Mexican economy will increase interest again in the drug trade. This will give President Trump ammunition to keep arguing for his wall.

The President of the Texas Farm Bureau summed up the impact of a full withdrawal from NAFTA this way, “NAFTA helped boost U.S. ag exports to Mexico and Canada from $8.9 bln in 1993 to $38 bln today supporting 509k jobs and driving a fourth of farmer’s income”. US negotiators have been making extreme demands that have gone unanswered by Mexico and Canada on purpose. They say they will not respond to certain proposals that they see as totally unacceptable with counter-proposals. Mexico also says that if the US withdraws as a negotiating tactic that it will turn its energy into negotiating new deals with Brazil, Argentina and the EU.

The South America Ag sector is hoping for a failure to re-set NAFTA seeing it as an opportunity to “Make South American Ag Great” as they soak up market share from Mexico and Canada who, as I noted, are currently our best customers for many U.S. ag exports. The parties have agreed to continue negotiations into March of next year when election pressures force an end to efforts to shape a new agreement.

President Trump is focused on getting his tax cut bill passed by Congress and if that happens by the end of the year, which is their timetable, then he will focus on NAFTA. He can pull the plug at any time he decides Canada and Mexico are not willing to make the concessions he demands. That is why USDA Ag Secretary Sonny Purdue brought it up to work on contingencies if NAFTA fails.

Politically Trump can’t call NAFTA “the worst trade deal in history” and then agree to continue the trade pact after just a few tweaks. His base supporters at rallies who enthusiastically responded to his slams of Mexico with comments like “#### them beaners!” are not going to be placated by a minor revision. NAFTA is first up in his larger trade agenda with China, Japan, KORUS and others to follow, so whatever he agrees to on NAFTA will set a precedent for future negotiations. If he settles for minor changes it will undermine his negotiating leverage with others. To me that makes me expect that when he is ready, he will bring the hammer down and smash NAFTA, doing as much damage and disruption as he can to send all of our other trading partners a message as to what they too can expect if they are not ready to make serious concessions.

U.S. business concerns who support NAFTA have lobbied the Administration aggressively but report it having little effect. The idea that he will not crap-can NAFTA because it would hurt farmers and farmers voted for him is not finding much sympathy within his administration. Commerce Secretary Wilbur Ross says that they will rebalance NAFTA by sector and region. That means that it will be the Ag sector and the heartland region that will take the short end of the rebalancing to theoretically help manufacturing and industrial states. Frankly, I do not think that they are going to care about the ag sector when it interferes too much with their larger agenda.

The two markets that are most vulnerable to a NAFTA collapse and the Trump trade rebalancing in general would be the corn and pork markets. Mexico has grown its own livestock industry and imports feed for it from the U.S. A recession would derail Mexican economic growth, negatively impacting their domestic meat demand. As noted, it is currently the top pork and second largest beef buyer. Therefore, the loss of NAFTA would have a direct impact from lost corn exports and a secondary impact on the corn market as well from the negative result of reduced pork and beef export demand going to Mexico.

The recent expansion of the U.S. pork industry, with several new packing plants built and in the works, is predicated entirely on pork export growth. The loss of TPP followed by the loss of NAFTA as a precedent to renegotiating KORUS would rock the hog industry which is just coming off a very good year in 2017.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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