President Donald Trump’s trade war is already prompting farmers and agricultural forecasters to plan for a dismal 2019 growing season before the fall harvest is complete.
Trade disputes — namely the escalating feud with China — have weighed on commodity prices and the president has threatened to ratchet up tariffs rather than ease tensions come Jan. 1. To boot, ordinary business costs like fertilizer and fuel appear to be on the rise, further squeezing bottom lines.
“2019 right now looks like another difficult year,” said David Widmar, an agricultural economist who tracks trends like farm income and crop budgets. “Early on, we were worried about how far down farm incomes would drop. Now we’ve switched to ‘How long will this financial erosion continue?’”
The Agriculture Department’s Economic Research Service has estimated that 2018 net farm income will be $9.8 billion, or 13 percent, lower than the year before. Adjusting for inflation, farm income is barely above the lowest level since 2002. If current trends continue, some agriculture economists predict that farm income will fall again in 2019.
Bill Gordon, a farmer in southwest Minnesota, said his 2,000-acre, family-run operation was on track to break even in 2018 before crop prices went south amid worries of the effect of the trade war. Now, Gordon said, he’s looking at losses as high as $100,000, which he says he’ll offset by taking out equity to cover costs from bank interest payments to fertilizer and seeds.
Gordon, a member of the American Soybean Association Board of Directors, estimated fertilizer costs in spring 2019 will be 15 percent more than this year for him. Fertilizer prices have jumped since spring, due in part to lower production levels in China.
“We have one of the lowest years of farmer profitability, and yet next year our inputs are going to be higher,” he said.
Trade aid vs. suppressed demand
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Although many farmers aren’t vocally blaming Trump for their woes, the trade war has both direct and indirect effects on agriculture. Steel and aluminum duties levied on imports from China as well as other trading partners like Canada have bumped up the cost of farm equipment, while tariffs on Chinese chemicals have raised prices on pesticides and herbicides.
USDA’s recent trade aid package provides some respite, but it will not address the broader challenges. Several sectors of the farm economy also complain that the $12 billion trade assistance program will give meager relief from retaliatory tariffs.
The department is set to announce plans for a second round of trade aid around early December, but the Agriculture secretary has repeatedly stressed the cash payments are intended to just be a temporary, one-year stopgap.
Gordon called the program a “Band-Aid on an arterial bleed.”
The biggest factor taking aim at farm incomes has to do with supply and demand economics. Commodity prices have plummeted since spring, when China was gearing up to slap 25 percent duties on U.S. agricultural goods like soybeans in retaliation for Trump’s tariffs on Chinese high-tech products.
Soybeans are the poster crop for the current trade pain, with prices down roughly $2 per bushel, or 20 percent. U.S. growers have effectively been shut out of the world’s largest soy market in China since those retaliatory tariffs went into effect in July.
“Prices have just fallen off a cliff since those tariffs went into effect,” said Grant Kimberley, a corn and soybean farmer in central Iowa and director of market development at the Iowa Soybean Association.
If crop prices remain low, farmers are already looking at a strenuous 2019. This year, some producers were able to presell part of their crop before the summer’s steep decline in prices. There won’t be the same opportunities next year if tariffs stay in effect.
“If you’re an economist or a tax guy like I am, if you look at next year, I cannot lock in a profit,” said Gordon, who also owns a tax and accounting firm.
USDA’s Foreign Agricultural Service also estimates that “a large pullback in Chinese demand for U.S. soybeans appears likely to continue well into 2018-2019.” Record soybean production and large ending stocks projected by USDA could further push down crop prices going into next year.
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Widmar, the agricultural economist, said resolving the trade spat with China would produce a “much more positive outlook for 2019.”
But there’s no indication that a resolution is on the horizon. Trump’s next meeting with Chinese President Xi Jinping is expected to be at the G-20 gathering Nov. 30-Dec. 1 in Buenos Aires, Argentina. That might pave a path toward more substantial negotiations. Or it could just as easily fall through, as previously planned U.S.-China meetings have, and result in harsher tit-for-tat measures ratcheting up the trade war.
Ken Morrison, an agriculture commodities market expert, said China is unlikely to back down over Trump’s trade demands on issues like intellectual property and technology transfers. Like other trade experts and market watchers, Morrison thinks retaliatory tariffs are here to stay.
“I spent four years in China, long enough to know not to underestimate their willingness to endure economic pain, especially when their sovereign goals are threatened,” he said.
Crop glut with nowhere to go
Exacerbating the trade pain is a crop storage logjam in parts of the country stretching from North Dakota to Louisiana.
After soybean sales to China dried up, the commodity began piling up in grain elevators or rerouted to different seaports like New Orleans to export to other markets including South America, Europe and Africa. The backlog has left little room for newly gathered crops and widened the gap between market commodity prices and the cash payments farmers receive for their crops at the elevator.
Rep. Ralph Abraham (R-La.), a House Agriculture Committee member, said the numerous headwinds — which include soppy wet weather in October that’s kept combine harvesters on the sidelines — are creating a “crisis situation” for producers in Louisiana and elsewhere.
Abraham has said he’ll introduce an emergency spending bill aimed at throwing farmers a lifeline when Congress returns after the Nov. 6 midterm elections.
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“We’re having to really shore up what we can… to keep our farmers bankable for next year,” Abraham said. “They’re not going to make any money. They’re going to actually lose loads of money this year.
“What we want to do is just make them survivable, so they can go to the bank and maybe get a loan for next year,” he added.
On the other side of the ledger, farm operating costs are starting to increase, further squeezing producers. Along with various equipment and fertilizer prices, the cost of fuel is rising, and certain herbicides, pesticides and chemical ingredients manufactured in China are subject to tariffs and therefore more expensive.
Kimberley said farmers could try to get by without fertilizing their fields for a year, risking soil richness to cut costs. “That’s not a multiyear strategy, that’s basically a one-year strategy,” he said.
Like many farmers, he’s maintaining his optimism for the future. But the uncertainty is becoming a reality for so many who rely on farm income.
“It’s been a tough year. Probably the toughest harvest season that I can recall,” Kimberley said.