Trump Trade War, Soybeans, Danielle DiMartino Booth, Bill Poole
Former St. Louis Fed President Bill Poole who also was an economic adviser to Ronald Reagan has written about Trump-Trade policy and published this profoundly instructive commentary on July 2. He reveals the money conflict of interests that lurk behind some of the tariffs and he proposes a simple solution. Here is the link: The New Tariff of Abominations?
The Trump-Navarro trade war is only just starting to bite, and the growing list of casualties spans Americans from businessmen, investors, bankers, and lenders of all types to beleaguered US farmers and workers in impacted industries. With Danielle DiMartino Booth’s permission, we are featuring her excellent analysis. She recently devoted a full research note to soybeans. If you are in Iowa or Illinois or other ag states, you are now seeing the start of the damage.
If you are in Maine or Massachusetts, you see it in lobsters. If you are an auto dealer or provide dealer software support, you see it nationwide. If you are building a pipeline and need certain steel, you see it. If you are a healthcare service provider, you see it. If you are administering a college or university, you see the drop in revenue as your student headcount declines. Add cheese and diary products.
The list of impacts grows daily. Trump-Navarro took punches at China and Canada and Europe and landed those punches on the US farmer and consumer. The fallout will get worse. We see GDP growth peaking right now. The next few quarters are likely to see sequentially slower growth. Fiscal pressures are likely to intensify in many states.
How quickly collateral damage mounts and what the resulting suffering will mean for the November midterm elections remain to be seen. Over 40 House Republicans are retiring. But those who observe markets also worry when they realize that Congresswoman Maxine Waters is the ranking Democrat on the House Financial Services Committee and wants to chair that committee if the House Democratic Caucus achieves a majority after the midterms.
Let’s get to Danielle and her brief on soybeans. Danielle has developed a national persona as a regular commentator on CNBC, Bloomberg, and Fox Business and is the publisher of Money Strong, an acclaimed weekly investing newsletter. Danielle is also CEO and Director of Intelligence at Quill Intelligence LLC, where she writes the Daily Feather, a daily briefing on the economy, market trends, inflection points, and transactions. This letter offers 5-minute daily briefings like those she used to prepare for Richard Fisher during the Great Recession, when Fisher served as President of the Dallas Fed and she as his advisor. The Daily Feather is incisive, substantive, and reasonably priced. It is a designed for investors, financial advisors, investment managers, CEOs, CFOs, corporate strategists, policy makers, academics, and indeed anyone who follows the global economy. You can learn more about it here: https://quillintelligence.com/welcome-cumberland-advisors/.
Here is Danielle DiMartino Booth on farmers and soybeans and trade war damage with who wins (Brazil and Argentina) and who loses (you, my dear reader, and me) in the recent Quill Intelligence Daily Feather, “Fireworks Over the Farm Belt”.
• By the summer of 2012, top quality Iowa farmland that traded hands for about $4000 an acre in 2006 soared past $15,000 while farm income more than doubled from 2006 to 2013.
• In 2017, China took in 57% of US soybean exports. Early this year, the USDA estimated that within a decade, China would absorb 70% of US soybean exports.
• Accumulated exports of US soybeans to China for the marketing year have fallen 27 million metric tons, 20.5% less than this time last year.
• U.S. soybean prices have now fallen from about $10.50 per bushel in late May to $8.60 as of last Friday’s close.
• Call the U.S. farmer, and Illinois and Iowa in particular, collateral damage in what is now becoming a broader trade battle.
• Next, tariffs will begin to stifle U.S. economic growth as the price of affected goods begins to bite into household paychecks.
As if Illinois didn’t have enough fiscal fireworks to contend with this Independence Day, with market weakness further crippling the state’s pensions, budgeting in Lincoln’s home state will be crimped further by the 25% tariff on U.S. soybean exports to China, which becomes effective July 6th.
Illinois is the top-producing soybean state and exports about 60% of its crop. Half of that goes to China, which equates to $7.5 billion of the state’s economic output. Craig Ratajczyk, CEO of the Illinois Soybean Association, recently warned that smaller and rural communities would be hit the hardest and that the lower-tax-revenue “multiplier effect” would cut beyond lost industry into school and hospital funding.
Though its state’s finances aren’t nearly as fragile as those of Illinois, farmers in the second-biggest soybean-producing state, Iowa, would suffer a similarly damaging setback. Life across the farm belt is already volatile enough with the whims of Mother Nature. Though they are a boon to several South American mega-soybean exporters, tariffs are the last thing American farmers need.
While it’s always been feast or famine for the American farmer (pun intended), farming has been a particularly wild ride these past few decades. By the mid-1980s, the commodity bull market of the 1970s had faded to recession. Crop prices crashed, and farmers folded under the weight of too and $10 per bushel. Imagine the challenge of your main crop’s either doubling in price or halving with zero predictability.
The tables turned in 2006, a year that marked the advent of a glorious era in farming. Soybean prices recovered and by 2007 had broken free of a 30-year price range. A bonus: the price of farmland went haywire. By the summer of 2012, top quality Iowa farmland that traded hands for about $4000 an acre in 2006 soared past $15,000 amid wildly overheated auctions. As per the USDA, farm income more than doubled from 2006 to 2013.
It’s no chronological coincidence that China’s appetite for every natural resource on the planet, including food and grain exports, skyrocketed over the same period. This was especially the case for soybeans, a robust source of nutrition with which to feed a vast population that powered a historic industrial revolution. In 2017, China took in 57% of US soybean exports. Early this year, the USDA estimated that within a decade, China would absorb 70% of US soybean exports.
Did someone mention the vagaries of Mother Nature? As welcome as the Chinese demand no doubt is, it’s been anything but a smooth ride for American soybean farmers. First came the summer drought of 2012, which sent soybean prices to historic highs. The snapback was equally vicious. By 2016, prices had sunk to 50% of their peak levels. And that same prime acre of farmland in central Iowa now goes for about $9000. Farm income has been cut in half.
As for this week’s tariff imposition, it’s apparent China has seen no need to wait out the deadline. Last month, CNBC reported that, “China canceled 136,000 metric tons of U.S. soybean purchases in the week ended May 24…. That brings accumulated exports of US soybeans to China for the marketing year to 27 million metric tons, 20.5% less than this time last year.”
While beleaguered Brazil and Argentina count their blessings as China’s new “it girl” soybean exporters, U.S. soybean prices have fallen from about $10.50 per bushel in late May to $8.60 as of Friday’s close.
Call the U.S. farmer, and Illinois and Iowa in particular, collateral damage in what is now becoming a broader trade battle. If the result is a more level playing field on trade, we can optimistically conclude that American farming communities are taking one for the team. But good sportsmanship won’t pay the bills come harvest time this fall.
In the coming weeks, as second-quarter earnings roll out, we’ll likely hear countless lamentations about the implementation of tariffs on hundreds of products by not just China, but Canada, Mexico, the EU, and others. We hope this too shall pass, and soon.
In the meantime, the tariffs will begin to stifle U.S. economic growth as the price of affected goods begins to bite into household paychecks. You are correct to deduce that the stock market will not like any combination of these factors – lower earnings, slower economic growth, and rising inflation.
But just imagine how much worse it could be. You could be the state comptroller of Illinois where it “Ain’t That America” for residents of this textbook example of fiscal dysfunctionality. Given its broken pensions and reliance on Chinese soybean exports, the state will soon sustain not one, but two fiscal body blows.