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Time Of Uncertainty For U.S. Agriculture | Stock News & Stock Market Analysis

The Trump administration is exploring a range of policy changes — involving taxes, trade, the environment and immigration — that could have a profound impact on U.S. agriculture.

Unfortunately, the possible changes come at a time when the industry already is treading water. With most commodity prices at historic lows, many farmers are continuing to experience net operating losses and mounting debt.

The potential changes vary in both their probability and their potential impact. But with the U.S. Department of Agriculture forecasting another significant dip in net farm income this year (a drop of nearly 9% from 2016), any changes must be weighed carefully.

Consider trade. Because U.S. agricultural productivity over the years has grown faster than domestic consumption, exports have become an increasingly important source of farm income. In fiscal 2016 alone, U.S. agricultural exports generated $130 billion in sales, according to the USDA, with Canada, China and Mexico topping the list of customers. During the eight-year period 2009 to 2015, farm exports produced $1 trillion in income — “the strongest period for U.S. ag exports in history,” USDA says.

So it’s clear that trade is extremely important to the economic health, and in some cases survival, of many U.S. farmers.

That’s why proposals to amend existing trade agreements should be evaluated carefully to make sure U.S. farmers aren’t unfairly impacted.

The administration’s decision to withdraw from the Trans-Pacific Partnership (TPP) agreement was the first such blow. The agreement, awaiting ratification, would have slashed tariffs on exports to and imports from Canada, Mexico and eight other countries, which together account for 40% of the global economy. According to the Peterson Institute for International Economics, the TPP would have added approximately $4.4 billion annually to U.S. farm income.

The TPP decision was followed by the administration’s announcement that it intends to renegotiate the North Atlantic Free Trade Agreement (Nafta).

The administration wants to focus on “modernization,” it says, which likely will include a greater focus on intellectual property protection, labor standards and digital trade, which was embodied in the TPP.

Mexico already is a top destination for U.S. corn, dairy products, pork and rice, while the U.S. relies heavily on Mexico for fruit and vegetable imports.

Mexico will not take major changes to Nafta lightly, as its interest in setting up corn purchase agreements with Brazil and Argentina indicates.

The loss of the United States’ largest foreign market for corn could be disastrous for many in the Midwest Corn Belt.

Given the high stakes, we think major changes to Nafta related to agriculture are unlikely. However, if negotiations stumble, U.S. agriculture would be an obvious target for Mexican countermeasures.

Trade with China, the world’s fastest-growing market, is another source of uncertainty. A recent agreement allowing U.S. beef exports to China is an encouraging sign. Less clear is the likely impact of another provision allowing China to export cooked poultry to the United States.

This is happening at a time when most other countries are opening their markets. The EU and Japan, for example — currently the fourth and fifth largest markets for U.S. farm exports — just concluded a free-trade agreement that will scrap tariffs on some 90% of all products, including agricultural goods, Japan’s Mainichi newspaper reported.

So the U.S. may find itself playing catch up in this area. President Trump’s plan to pursue bilateral agreements with individual countries could prove beneficial to farmers in the long term, but many could face financial stress while waiting for the agreements to be negotiated.

A second area of concern to U.S. agriculture is immigration policy. U.S. farmers are uniquely vulnerable. In 2014, according to the Pew Research Center, 26% of all U.S. farmworkers were in the country without authorization. The Federation for American Immigration Reform has estimated that stricter enforcement of U.S. immigration laws could drive up labor costs by 10% to 12%.

A large labor shortage will not only drive up costs, but could leave high-value fruits and vegetables rotting in the fields. It would also increase demand for technology-based farm equipment, such as vegetable harvesters, which could benefit manufacturers. But it also could increase the debt load many farm operators carry, since such equipment doesn’t come cheap.

Although much about the Trump administration’s agricultural agenda is still unclear, one thing is clear: Any major change in policy has the potential to disrupt the agriculture industry significantly.

  • Walker is a Chicago-based partner of The Boston Consulting Group and global leader of its agribusiness sector.
  • Van Wyck is a Chicago-based principal with extensive experience working with agricultural companies and advising industrial clients on policy issues. Colleagues Torsten Kurth and Matt Westerlund contributed to this article.

 

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