Ag revenue prospects
Unless something changes fundamentally, ag revenue prospects do not look any better next year although it would be hard for the weather to be much worse. That doesn’t seem to matter according to USDA who can always make the acres rise even though prevent-plant was a record.
If weather is improved, that will increase production and lower prices. Brazil is expected to produce over 124 million metric tons (mmts) of soybeans next year and we will likely produce 100 mmts. Add those two together and subtract 85 mmts of Chinese imports and it leaves 139 mmts, which is a formidable surplus.
By denying U.S. farmers market access to the Chinese soy crushers, it created new demand for South American soybeans creating an alternate supply chain partially duplicating what is needed. South American farmers have had a couple years of higher production and higher prices in real. They are also engaging in expansion of chicken, pork and beef production, highlighted by a near $2 billion new investment by JBS in Brazil meat production and processing. The longer this goes on it will be more than just U.S. soybeans and corn, that will have to compete with Brazil for export markets.
Brazilian farmers literally exclaim that Donald J. Trump (DJT) was “the best president” that they have ever had. His recently announced metals tariffs were a surprise but missed the target by so far that they are confused as to whether he was even shooting at them. The message sent by the metal’s tariffs was garbled in translation.
Ukraine, Argentina and Brazil are all exporting more corn than we are. The alternative supply chains that have developed to fill markets that we have been shut out of are gaining strong footings and it will not be easy to displace them again even if a trade deal with China is gotten. If a trade war is resolved for ag with China, I believe that Trump will start a new one with Europe and they will retaliate with tariffs. The result may be gaining a market while losing another. The U.S. will once again lose its reputation as a reliable ag supplier as that reliability depends on the whim of an erratic president. This merry-go-round of trade wars will tire us out. As global trade contracts, everyone suffers. The general U.S. economy will suffer the least with the ag sector the most. We are getting hung out to dry for the perception of forcing fair trade without receiving the benefit. That is the negative narrative. There is more than one.
Beijing reportedly is willing to trade IP protection and commodity purchases for tariff relief. They want more than Trump just not adding new tariffs…they want some of the current ones to go away. While Chinese economic numbers have exceeded expectations there is some question as to how real that they are and how much it is costing them to stimulate that growth. Their government is likely supporting their stock market discouraging selling.
The trade wars have taken the edge off the U.S. economy, particularly the manufacturing sector and Trump needs all the economy that he can get to win re-election in 2020. The economy is his best argument and there is nothing that he will not do to keep the narrative of the U.S. being the strongest economy in the world.
Farmers, rural voters, are a key political constituency for him in states that are important to the electoral college. If the ag economy festers or goes south he can kiss off any chance of winning Minnesota which he lost by just 2 percent in 2016.
Iowa, Michigan, Wisconsin, and even Pennsylvania and Ohio would be in play.
2020 is an election year and there are issues with the RFS and trade that can make or break him with the farm sector and rural voters. The Dems are not going to win rural voters but the margin of their loss will determine their overall outcome. They have not been able to turn out an offsetting lopsided majority in urban districts to pull out victory in states like Iowa.
Trump benefited from a lopsided rural versus urban margin last election, so if the ag economy tanks it is difficult to see that happening again. If he wins rural districts by 65 percent, he wins and if he wins them by 55 percent, he loses.
I would think that he would do everything that he can and he has never been bashful about such things. New EPA rules over ethanol should be a bellwether of that. I think that the EPA will be more careful over RIN waivers in an election year.
Pelosi finally stopped moving the goal posts for the USMCA. The U.S.-Japanese trade deal was done because of this political need. Japan did not want auto tariffs and Trump conceded to get an ag deal as good as TPP. The fact that he did that was a result of rural political pressure. That pressure is even greater for a trade deal with China. He is not going to get a full comprehensive trade deal that settles all of the issues with China before the next election or maybe ever. There is as much chance of a cold war with Beijing as there is a full-throated trade agreement. Both sides however, could use a breather. China will give up some easier things for tariff relief and commodity purchases and Trump will get, “The best deal in history making farmers love him”. . . that’s the way that he will tell it.
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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