O'Keefe in the News

Food Biz Outlook: Embattled ag industry hopes trade stabilizes in 2020

Food Biz Outlook: Embattled ag industry hopes trade stabilizes in 2020

December 23, 2019

As published by Jessica Young, MiBiz

News that the United States-Mexico-Canada Agreement appears to be headed toward ratification comes as a positive for farmers across the country and especially in Michigan.

Canada and Mexico remain influential purchasers of Michigan goods and are a top export market for the state’s dairy, pork, dry beans, fruits and vegetables.

The new USMCA agreement — which remains much the same as NAFTA — will again allow for the cross-border flow of goods without the threat of tariffs.

“When the economics dictate it, our farmers have proven time and time again that they can compete with anyone in the world if the playing field is level,” said Ernie Birchmeier, manager of commodity, farm and industry relations at the Michigan Farm Bureau.

“Trade is critical to agriculture,” Birchmeier said, noting that the struggling farm economy will not improve without a significant thawing of international relationships. “Ninety-five percent of the world’s population lives outside of the United States, and we need to have the ability to market to those consumers.”

In addition to past uncertainty with continental trading partners, the farm economy has been hit hard by U.S. government’s temperamental trade war with China that began in July 2018. The tit-for-tat in the following months eventually raised tariffs on U.S. soybean exports to China as high as 33 percent and pork tariffs as high as 72 percent.

“China has a billion more people than we do in the United States,” Birchmeier said. “They’re dealing with a disease outbreak right now in their swine population that has wiped out about half of their swine population. That is a huge opportunity for American pork producers to move product.”

Without a substantive U.S.-China trade deal, the U.S. agricultural economy will continue to struggle with trade uncertainty in 2020, according to Colorado-based agricultural lender CoBank. Additionally, questions continue to linger as to whether the USDA will soften the blow of the trade war through government payments to farmers.

Even if an agreement with China is settled immediately in 2020, the effect of the tariff strife will continue to last for a number of years because the state’s former trading partners have already reorganized themselves, according to Steve Weber, director at consulting firm O’Keefe LLC.

“Anytime that we would get a trade war concluded with China, there would most likely be an immediate uptick in agricultural exports to China, but it’s going to take some time for normalized trade to resume,” Weber told MiBiz. “Perhaps they got new suppliers, they signed contracts and perhaps those contracts might be multi-year in length. It just might take a while for them to work those through.”

As opportunities for global trade for U.S. farmers shrunk, other producers filled in the gaps. Now, Michigan’s agricultural industry is facing much more competition from producers in eastern Europe, India, South America, and even China itself, which has started to grow more domestically. In particular, increased world grain supplies will keep downward pressure on prices, according to Weber.

“Back in the ’70s and ’90s, the United States and Canada were the bread baskets for a big portion of the world,” he said. “There are a lot more suppliers out there for producers to go to today.”

The financial challenges caused by the trade war will change Michigan farmers’ purchasing patterns in the coming year, forcing operations to become even leaner. Besides land costs, maintenance and cost recovery for machinery is the most significant expense for farms and many operations are no longer purchasing new equipment, opting instead for leasing arrangements, according to Weber.

“We’re seeing a lot of financing being provided not necessarily by a traditional bank, but by John Deere finance or Navistar International Harvester,” he said. “Their financial portfolios are growing.”

Farmers and ranchers also increasingly are choosing to outsource activities such as fertilization and herbicide application rather than owning the equipment themselves.

“They’re just making other choices,” Weber said. “They’re going to make whatever choices they can to reduce their costs and increase their bottom line.”

As well, an increasing number of GreenStone Farm Credit Services’ clients have filed for extensions on payments that are due next year, according to Paul Anderson, the firm’s executive vice president and chief credit officer.

The East Lansing-based GreenStone holds about 70 percent of the market share of farmers who borrow money in the state.

“They still have crops out in the field, so they’re not going to make that January 1st payment,” Anderson said.

Where appropriate, the lender is extending January due dates into next spring.

“All in all, it’s not as bad as we thought,” Anderson said. “Sixty or 90 days from now, it’ll be interesting to see how this prognostication pans out. It’s sometimes hard to tell because people don’t always ask for help until they really, absolutely need it.”