Trumps affect on farming

The Land, BENJAMIN PICTON, Rabobank1 Feb 2017

WITH all eyes on the first days of the administration of now president Donald Trump since his inauguration on January 20, it’s a pertinent time to ask the question “what does Trump’s elevation to the presidency actually mean for agricultural markets?”.

It’s well reported that Trump campaigned on a protectionist platform, promising to bring back American jobs and put in place punitive tariffs on goods imported from low-wage jurisdictions like China and Mexico.

This mantra – along with pledges to curb immigration and put in place tougher border protection policies aimed at reducing the number of illegal immigrants arriving in the US from Mexico – played well among Trump’s support base, and ensured that he beat out Hillary Clinton to receive the keys to the White House.

But what do these policies actually mean for world agricultural markets?

In truth, the impact of these policies may take some time to play out, but several economists and market commentators have noted the risk that Trump’s anti free trade stance poses in sparking a trade war with China, a major destination for US exports of soybeans, cotton and a number of other agricultural commodities.

The risk that President Trump will run is that a retaliation in the form of higher Chinese tariffs on US agricultural exports could dramatically change the competitiveness situation for US producers as they seek to sell their product into the world market.

This is particularly concerning for soybean production, which has been a major component of US gross domestic product (GDP) in recent times, propelling the better-than-expected third quarter GDP figure released in late October and causing the fourth quarter number to miss estimates by 0.3 per cent last week after soybean exports decelerated during the period.

In recent times, US beans have been under pressure from South American producers, who have managed to provide a number of cargoes at the expense of US suppliers.

Higher tariff barriers for US beans could have the effect of increasing the price of oilseeds globally, including locally-produced substitutes like canola.

Another potential consequence of higher tariffs on US agricultural exports would be a widening of the basis between Australian physical prices and futures contracts listed on US exchanges (CME wheat

futures for example) and a potential weakening in the correlation between domestic physical prices and those US-traded futures contracts.

Grain advisers should be keeping a close eye on those correlation statistics over the next four years to see whether the Trump effect will spark a deviation from the long-run historical figures.

Tighter immigration policies under the new administration will also hit the cost base of US producers as seasonal labour becomes less plentiful and, potentially, more expensive.

The President’s Mexican border wall, threats to deport undocumented immigrants and floated ideas of taxing remittances from workers in the USA back to their families in Mexico will make it harder and less attractive for Mexican labour to supply American farms.

Again, this could result in higher prices in world markets as US supply is effectively “priced-out” and a widening in basis between Australian physical and US futures.