The monthly World Supply and Demand Estimates (WASDE) report released last week by USDA represents the first attempt to incorporate impacts from recently enacted tariffs by the U.S. and its trading partners on 2018 commodity markets. Authoritative Analytics uses these same numbers to update the financial outlook for U.S. agriculture. As a result, the initial impacts of reduced trade on U.S. Agriculture can be evaluated by comparing the June and July forecasts.
The largest impacts were on soybean and dairy product receipts (Figure 1). Receipts for these two commodities were forecast to be $4.7 billion lower than in the previous month as a result of reduced exports. Most of the reduction in soybean exports was attributed to “The tariff that China recently imposed on U.S. soybeans…” Similarly, the export situation for dairy products was affected as indicated in the report, “China’s tariffs on certain U.S. dairy products hampers exports to some extent…” The overall implication for net cash income would be a $3.5 billion drop, representing a 3-percent decline from 2017. In contrast, I reported net cash income forecasts for 2018 in June as being essentially stagnant. The impacts on net cash income would have been potentially larger (minus $5 billion) were it not for the positive adjustment to 2018 fruit and tree nut receipts stemming from the recently released NASS report.
How Bad Could IT get?
The good news is, year-to-date, 2018 was running slightly ahead of 2017 in terms of the value U.S. agriculture exports (through May, the latest month for which statistics are available). The bad news is that the remaining months, on average, account for about 60 percent of the total value of exports during the calendar year. Of course, not all of this trade value will be adversely impacted.
For soybeans, China accounted for about 60 percent of calendar year export volume on average between 2014 and 2017 (Figure 3). Through May, China had already purchased one-fourth of the previous 4-year average volume of soybeans (7.3 million metric tons relative to 31.5 million metric tons). By my math, that leaves about $10 billion of soybean trade with China at risk for the remainder of the calendar year, of which 31 percent ($3.1 billion) has been discounted in the recent WASDE report. This suggests that some of the lost sales to China will be made up for elsewhere. Through May, soybean export volume to China was off more than 20 percent from the previous year, but total soybean exports were only down 2 percent.
Trade remains vital to the financial health of U.S. agriculture. Ramifications of the trade dispute with China will have a negative impact on 2018 earnings for U.S. agriculture. The magnitude is dampened somewhat by the export potential to other countries and unmet demand in China. Brazil, the world’s top soybean exporter since the 2012–13 season doesn’t have the capacity to meet China’s demand alone, and there are few, if any, other producing countries that could step in this fall. What happens for the remainder of 2018 depends on whether and to what degree other trading partners retaliate and additional commodities are implicated.