Several years ago, another editor and I worked in a lonely pressroom at an agricultural meeting. Everyone else was attending a standing-room-only press conference featuring a former USDA secretary.
“Hmmm,” I said, “are we missing something?” I was so focused on the meeting’s agronomic topics that I was oblivious to anything else.
“Nah,” said the editor, who was as equally focused on commodity markets. “Once you’ve seen one ag secretary, you’ve seen ’em all.”
These days, though, ag policy — including President Donald Trump’s turbulent tariff talk that may spur a trade war — has potential to jar farmers’ bottom lines more than it normally does.
“He’s much more willing to use the power of the presidency with tariffs than he was during his first term,” says Stephen Nicholson, a Rabobank global strategist for grains and oilseeds.
During Trump’s first term, his administration leveled tariffs mainly on China. This time, Canada and Mexico also are major targets. “People are really uneasy, as [tariff talk] creates a lot of uncertainty in the marketplace and across geopolitical boundaries,” Nicholson says.
Short-term benefits exist. Tariffs can leverage beneficial changes in immigration or protect U.S. jobs from foreign competition.
Long term, however, drawbacks overwhelm such perks.
“If you look at U.S. soybean exports to China, they were on a fairly substantial movement upward all the way up until July 2018,” Nicholson says.
Of course, that’s when the first Trump administration applied tariffs to China.
“After July 2018, [soybean exports] were much more volatile,” Nicholson says. “The United States became a residual supplier of soybeans. If Brazil has a [soybean production] problem, then we get to play [in global trade]. If Brazil's producing 170 million metric tons of soybeans, we're probably not going to be in the market. It created the expectation that the U.S. is a residual exporter.”
Sticky input prices
The specter of stagnant trade — and ultimately lower prices — compound an already sluggish grain and oilseed complex.
“We’ve seen these five- to seven-year cycles before, where we go from the depths of depression to euphoria,” Nicholson says.
Cycles can change due to supply or demand shocks. Yet, neither are currently on the horizon, he adds.
Input prices also remain at elevated levels. “If you look at some of the [fertilizer] pricing, it's not too dissimilar from a year ago,” says Sam Taylor, a Rabobank analyst for farm inputs. “Phosphates in some products such as [diammonium phosphate] are down [in price] a bit, while potash costs are slightly up. The nitrogen complex is little bit more complicated because there is some capacity coming online with ammonia that’s been delayed over two years.”
Still, upside price risk exists due to the threat of tariffs. That’s also the case with agricultural chemistry. Since China manufactures many raw chemical materials, tariff action would affect chemical prices.
“Farmers are the ones who will pay the cost of those tariffs,” Taylor says.
What do you do?
Well, in bad times as well as good, strive to be a low-cost producer.
“Farmers who are low-cost producers with a strong balance sheet will survive because they’re very good at what they do,” Nicholson says. He observes that many low-cost producers closely monitor soil nutrients.
Nicholson notes that one Rabobank borrower shifted from core soil sampling 2.5 acres every three years to 1 acre every three years.
“He showed a map of his farm’s pH, comparing sampling every 2.5 acres vs. sampling every acre,” Nicholson says. “The difference was just remarkable.” Obtaining a more comprehensive view of his field’s pH enabled him to cut commercial fertilizer applications through greater precision.
On the marketing side, Nicholson advises taking a page from soybean crushers. After they buy soybeans, they’ve locked in their margins by having already sold meal and oil.
Many farmers don’t do this, he says. Although they lock in input prices, they often leave grain unpriced.
“It’s the classic Texas hedge, where you have one leg hanging out there that's going to get cut off if something goes wrong,” Nicholson says. “It all comes back to knowing what your costs are and locking in a profitable price when you have the opportunity.”
Certainty amid uncertainty
All this looks easy on paper. Doing it amid existing uncertainty is more difficult. Adverse weather (preferably outside of Iowa!) could change the picture, as could a favorable outcome from tariff talk.
Or not.
In the meantime, we’ll do our best to help you wade through this uncertainty. That part is certain.