Tariffs and Their Impact on US Agricultural Trade · Hancock Farmland Research Note August 2018 3 Mexico has not placed tariffs on US tree nuts and is a very small export market for

Hancock Farmland Research Note August 2018

Tariffs and Their Impact on US Agricultural Trade

In recent months, trade with China, Canada, Mexico and the EU has been a dominant and recurring story in the mainstream media. The Trump Administration has identified trade imbalances as a key component of their agenda, with notable frustrations around NAFTA, China and the EU. At various points, certain products with these trade partners have become flashpoints for public comments and threats from all sides. The Trump Administration has announced and implemented certain trade measures designed to weaken Chinese and Mexican competitiveness in a variety of import markets, particularly the steel and aluminum industries. In turn, China and Mexico have imposed tariffs or other restrictions on US products, including agricultural products. Mexico and China represent the US’ second and fourth largest trade agricultural trade partners, responsible for around 28% of the value of US agricultural exports1, on average, over the past five years. Any restrictions on US access to the Chinese and Mexican markets will have impacts on US farmland markets. This document identifies the agricultural commodities most at risk, and outlines Hancock Agricultural Investment Group’s (HAIG’s) view on the possible outcomes.

Hancock Farmland Research Note August 2018

On April 2, 2018, China’s State Council Tariff Committee (SCTC) announced that additional tariffs on 128 US-origin products would be implemented, effective immediately, in retaliation for the US increasing tariffs on Chinese steel and aluminum exports into the US. These tariffs are expected to affect roughly $2 billion in US food and agricultural exports (USDA), including fruit (fresh and dried), tree nuts (shelled and in-shell), wine, ginseng, denatured ethanol, and pork and pork products. While China has discussed increasing tariffs on US soybeans, corn, beef and wheat, no tariffs on these products have been implemented as of yet. Below is a chart showing the changed Chinese tariff structures on US agricultural imports in HAIG’s portfolio.

Current Situation

(Continued on page 2) 1USDA GATS May 2018

Product Pre-April 2, 2018 Tariff Post-April 2, 2018 Tariff

Almonds 10% 25%

Walnuts 10% 25%

Pistachios 10% 25%

Apples 10% 25%

Table Grapes 13% 28%

Cranberries 30% 45%

Cherries 30% 45%

Denatured Ethanol 5% 20%

Pork and Pork Products 20% 45%

Source: USDA China Gain Report; 4/2/2018

Hancock Farmland Research Note August 2018 2

On July 5, 2018, Mexico followed China’s lead and announced its own retaliatory tariffs against US agricultural exports, effective immediately. The primary agricultural products that were affected by Mexico’s announcement were apples, cranberries and pork. Mexico increased tariffs on US exports of these products from a NAFTA-mandated 0% to 20%, effective immediately. Mexico has not placed tariffs on corn, soybeans, wheat or tree nuts at this point.

Impact of Current Tariffs on US Agricultural Sector2

The products that will be most affected by Chinese and Mexican retaliatory tariffs on US agricultural exports are apples, tree nuts and pork and pork products. Although both countries increased tariffs on cranberries, the vast majority of US cranberry consumption occurs in the US market (close to 90%) and the EU and Canada are the US’ primary cranberry export markets (accounting for almost 80% of total value in 2017).

Tariffs and Their Impact on US Agricultural Trade (Continued from page 1)

Apples

Apples are a niche, luxury product in the global trade market that compete with other fruits, such as berries, stone fruit, tropical fruit and citrus, for market share. As the price of apples increases, consumers have shown that they are willing to substitute apples with other fruits.

The state of Washington (where HAIG concentrates its apple production) exports approximately 30% of its apples. Its primary export markets include Mexico, Canada, Taiwan, and India, with Mexico accounting for 28% of Washington apple exports by value and 31% by volume in 2017.

China is a bit player in regards to US apple exports, accounting for only 2% of US apple export volume and value in 2017. However, US apple export volumes were expected to grow to China prior to the tariff increase, as China had lifted a ban on US Red Delicious apples starting in 2016.

While Mexico is a net deficit grower of apples and has to import most of its apple needs, China is the world’s largest grower of apples, accounting for more than 60% of global production, on average, between 2000-2017.

Increased tariffs on US apple exports in China should not have a significant impact on the US apple industry due to the small volumes that China imports. However, the increased Mexican tariff on US apple exports could have a significant impact on the industry for several reasons.

Mexico is not a major grower of apples, and a

20% increase in the landed price of apples in Mexico due to the tariff could motivate

Mexican consumers to shift fruit consumption to other fruits, thereby, reducing demand for apples.

A 20% increase in the price of US apples

more than covers the transportation cost benefits that the US enjoys over Chile and the EU into Mexico. This could lead to increased competition for US apple exports from these key apple-exporting countries. The 20% tariff will also likely embolden Chile and the EU to sell apples into Mexico at a higher price point, which could hurt consumer perception on apple prices and lessen demand.

Overall, we believe that the apple tariff in Mexico will affect apple prices negatively in the short term, as the US has to search for new markets to offset Mexican demand. However, in the long term, we believe that the overall demand fundamentals for apples will lead to consumption increases globally and that the retaliatory tariffs will be short term in nature.

(Continued on page 3)

2USDA GATS May 2018

Hancock Farmland Research Note August 2018 3

Mexico has not placed tariffs on US tree nuts and is a very small export market for US almonds, pistachios and walnuts.

However, China is a major market for all three products. In 2017, China accounted for 2% of US almond exports, 3% of US pistachio exports and 2% of US walnut exports. An interesting point to note on US exports to China is that the vast majority of tree nut exports actually land in Hong Kong and are then re-exported to China.

As Hong Kong is not impacted by the tariff increase, we believe that this trend will continue allowing the US to still export to China through Hong Kong.

The 15% tariff increase on tree nuts is for the US only. Australia, the world’s second largest exporter of almonds is likely to be positively impacted by the tariff increase, as Australian tree nuts will be able to land directly in China at a lower price than US almonds. HAIG is well-positioned to take advantage of this trade flow shift, as it owns almond farmland in Australia.

We believe that the increase in tariffs will not have a significant long-term impact on US almond prices in the future for several reasons:

Direct volumes to China are small and the vast majority of US tree nuts that eventually land in China arrive in Hong Kong first, thus avoiding the tariff.

The US is responsible for approximately 80%

of global almond exports. China would still have to import US almonds, as Australia cannot fill all of China’s almond needs.

Assuming Australia takes a dominant share of

exports to China, it will not be able to fill demand in other countries. As a result, the US will take Australia’s share in other large markets such as India and the EU.

While it might take some time for trade flows

to shift and tariff increases in China could lead to export declines in the US in the short term, the global fundamentals of almond demand remain strong and we foresee global demand growing between 4-6% per year in the future while production growth declines at a lesser rate.

Update on Potential Tariff Impacts on U.S. Agriculture (Continued from page 2)

Tree Nuts

(Continued on page 4)

Almond orchard

Hancock Farmland Research Note August 2018 4

Update on Potential Tariff Impacts on U.S. Agriculture (Continued from page 3)

Since 2011, China and Mexico combined have ac-counted for 43.5% of US pork exports by volume and 31.3% of US pork exports by value. China is the world’s largest producer of pork, accounting for over 60% of global pork production volume since 2011, while pork production volumes in Mexico have grown substantially driven by returns from increasing ex-ports.

While both countries are major producers of pork,

they do not produce sufficient volumes to meet do-mestic demand and have to import large volumes. The pork production industries in both countries have ex-perienced increasing margins in pork production in the past few years due to declining feed prices. (The primary feed ingredients in swine production are soy-bean meal for protein and corn for carbohydrates and both markets have experienced significant downturns in prices.)

The increased tariffs on pork and pork products in

China and Mexico could lead to these countries fur-ther expanding their pork production industries as prices in both markets, especially Mexico, are likely to rise due to the higher landed price of US pork ex-ports, which is likely to make domestic production more competitive with exports.

Brazil and the EU are the other major global pork ex-

porters and it is expected that their share of trade to China and Mexico will increase due to the increased tariffs placed on the US.

While HAIG does not participate in the pork market,

it could be affected by the increased tariffs on pork because two of the row crops that HAIG does produce (corn and soybeans) will be directly impacted by re-duced US pork exports to China and Mexico.

US pork supplies are likely to increase as ex-ports to Mexico decline, leading to lower prices for pork and a reduction in the US swine herd.

As soybeans and corn are the major feed in-

gredients in the hog ration, this could lead to less feed demand and impact corn and soy-bean stocks negatively, thus reducing corn and soybean prices in the near term.

Pork and Pork Products

The Bottom Line

The increased tariffs on apples, tree nuts and pork and pork products in China and Mexico are likely to affect US exports of these products negatively in the near term. Global fundamentals for long-term US exports of these products should remain strong, as increasing GDP per capita and population growth lead to increased food consumption, particularly in developing economies such as China and Mexico. This will occur at the same time that production faces constraints from reduced arable land and water resources, especially in the large export markets of China, India and Mexico, supporting increased future import demand for agricultural commodities.

Corn and soybeans

Hancock Farmland Research Note August 2018 5

Disclosures

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Court Washburn Managing Director and Chief Investment Officer [email protected] Keith Balter Director of Economic Research [email protected] Mary Ellen Aronow Associate Director, Forest Economics [email protected]

Bill Devens Associate Director, Agricultural Economics [email protected] Elizabeth Shestakova Economic Research Analyst [email protected] Weiyi Zhang Natural Resource Economist [email protected]

HNRG Research Team

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