America’s dairy farmers are feeling better this week after the Trump administration got Canada to budge on select milk products that had long soured relationships around the 25-year-old North American Free Trade Agreement.
Yet much of the rest of the agricultural sector, those farmers and producers growing crops and raising livestock whose income is largely dependent on exports, are still nervous when it comes to trade, especially with growing super-consumer China. It grabbed $19.6 billion of U.S. ag exports last year, a touch below Canada’s more diverse haul of $20.5 billion from U.S. farmers.
At least one measure captures that uncertain mood. The Purdue University/CME Group Ag Economy Barometer fell to a reading of 114 in September, 15 points below its August reading of 129 and the three-year-old index’s lowest reading since October 2016.
“Concerns about the ongoing impact of trade conflicts, and especially China’s tariffs on imports of U.S. ag products, continue to reverberate throughout the U.S. agricultural sector,” said James Mintert, director of Purdue University’s Center for Commercial Agriculture, in summing up the report’s volatility over the past few months.
More than 70% of producers surveyed said they expect lower income in 2018 because of trade disruptions. The survey queries 400 agricultural producers from across the country.
Read: What any American who eats should know about Trump’s trade fight for farmers
Nafta 2.0 was advanced this week (congressional approval still looms). With it, Canada will drop its complex “Class 7” dairy quota and pricing system to provide new access for up to 3.6% of U.S. dairy into Canada before tariffs hit, up from 3.2% in the old version, including the skim milk powder that has been a particular point of contention. The U.S. exported $637 million worth of milk, cheese and other dairy products to Canada in 2017, according to the U.S. Department of Agriculture, a relatively small slice of agriculture overall. Mexico, notably, still throws up pretty hefty tariffs on U.S. cheese in the old Nafta, and the new.
Read: U.S. believes it has the upper hand in China trade negotiations with Nafta deal done
Speaking at the World Dairy Expo in Madison, Wisc., on Tuesday, one U.S. producer told MSNBC in an interview that no change to the dairy provisions of Nafta would likely have killed off 600 Wisconsin dairy farms. A Canadian producer taking part in the same interview said the differing size of the markets has long been the driver behind Canada’s trade support; he said the Nafta changes could mean he’ll have to seek additional income off the farm. In 2017, the total number of milk cows in the U.S. amounted to about 9.39 million; Canada had 1.4 million head.
Of the 400 U.S. farmers surveyed in the Purdue/CME report, only 5% are dairy producers. For September, approximately 24% of the respondents thought farm-level U.S. milk prices would be higher 12 months from now and 19% thought they would be lower.
“The new agreement with Canada is likely to increase the percentage of respondents that expect milk prices to be higher,” said Michael Langemeier, professor in the Department of Agricultural Economics at Purdue.
“Based on previous surveys, a positive development pertaining to trade, such as the new agreement with Canada, is likely to have a positive impact on producer sentiment,” he added.
The prospect of a new North American trade pact, which farmers had largely defended but welcomed a modernization, along with a new U.S.-South Korea free-trade agreement signed last week “represent welcome momentum during what has been a challenging year,” Jim Heimerl, president of the National Pork Producers Council, said, according to the Wall Street Journal.
President Donald Trump, speaking outside the White House midday Tuesday, said the revised plan, now to be known as the USMCA trade pact by naming the three participants, has gotten “tremendous reviews.” He included “farmers” generally in the list of those American producers offering positive responses. But grain and livestock farmers remain focused on the bigger prize, open markets to China and other parts of Asia that are fast adding meat and soy protein to expanding diets.
China, which slapped a 25% tariff on American soybeans earlier this year in retaliation for the Trump administration’s levies on Chinese-made goods, is the biggest buyer of U.S. soybeans, to the tune of about $14 billion, and takes about a third of the entire U.S. crop, including plenty of soy meal to feed livestock. It also buys sorghum and a fair amount of pork and cotton; it only recently started taking U.S. beef after a hiatus. Notably, China is less dependent on imports of U.S. corn and wheat due to its longstanding “national security” pledge to be self-sufficient in as many grains as it can.
Read: Here’s what really scares soybean farmers about Trump’s trade battle with China
Trade is part, but not all, of the driver behind the Purdue/CME barometer. It tracks how producers feel about current conditions and future expectations and whether they’re comfortable making capital investments on land and machinery. Unlike other indices, it focuses directly on these economic drivers (e.g. farm profitability, farmland values and key commodity prices, which can be driven by trade expectations). Soybean prices SX8, +0.38% , for instance, with futures down 11% so far this year, trade at roughly 10-year lows.
The hesitancy of farmers can also speak to their overall confidence in the economy, which is currently nudged along by a tight labor market and robust stock market gains SPX, -0.04% that might not be felt as strongly in the ag sector.
In September, 78% of the Purdue/CME respondents said it was a bad time to make large investments and just 20% said it was a good time to invest, the lowest combined reading on large farm investments since the barometer launched in October 2015.
Want news about Asia delivered to your inbox? Subscribe to MarketWatch's free Asia Daily newsletter. Sign up here.
