Commercial and Industrial Inventory - Grains

Grains

Industry Insights

TARIFF ALERT

Date January 2019

Projected Values - Grain

Current Trends

  • Corn prices had rebounded somewhat as of December but were down 8.3% from their pre-tariff 12-month peak in May 2018
  • Approximately 20 percent of U.S. agriculture revenue comes from exports, and the U.S. Agriculture Department has forecasted approximately $11 billion in losses due to current tariffs
  • Ongoing trade talks and the pending passage of the U.S.-Mexico-Canada Agreement (USMCA) will continue to impact grain pricing through 2019

approximate net recovery on cost

Synopsis

Tariffs hit the industry: In early July 2018 China imposed a 25 percent tariff on a list of U.S. products including grains, corn, and sorghum in response to American duties on an extensive list of Chinese products. Subsequently, China’s grain imports decreased significantly as rising international prices curbed buying. China imports one-third of its corn and wheat from the United States, according to customs data. At the time the duties were imposed, monthly imports from China for July were down year-over-year for grains including corn (-64 percent), sorghum (-63 percent), wheat (-43 percent), and barley (-16 percent).
 

In December as world leaders met in Argentina for the 2018 G20 Summit, Chinese and U.S. delegations met to discuss bilateral tariffs on a variety of products. During the talks, China and the United States agreed to cease imposing additional tariffs that would further escalate the ongoing trade war that has upended global markets and stopped sales of American agricultural products to its top buyer. Per Reuters, “the United States said that Beijing had promised to buy an unspecified but very substantial amount of agricultural, energy, industrial, and other products, with purchases of farm goods to start immediately.” It remains to be seen what may come of the recent talks, or whether current tariff rates may be walked back in the near future. To the extent that China follows through on its claim to purchase, prices could increase.
 

During the summit, the USMCA was also signed. Agricultural groups offered initial praise for the agreement, which has yet to be ratified by Congress. Grain commodity groups see the deal as one that will bring stability back to the North American markets. In particular, the agreement addresses Canada’s discriminatory wheat grading process in order to benefit U.S. wheat growers along the border.
 

Approximately 20 percent of U.S. agriculture revenue comes from exports. The U.S. Agriculture Department (USDA) has forecasted approximately $11 billion of losses due to current tariffs. To date the United States has seen decreasing commodity prices in agricultural products including corn, soybeans, dairy, and others. In response to tariffs on soybeans, fruit, and other items, the U.S. government is planning a $12 billion bailout for farmers, but there could still be a long-term impact of lost markets and customers for U.S farmers as negotiations continue into 2019.
 

Operating costs impact value: As grain farming is highly mechanized, fertilizer, soil conditioning, and manure can range from 25 to over 50 percent of operating costs, depending on the grain type. As an example, based on USDA data, operating costs (excluding overhead) have totaled over 54 percent of the gross production value of U.S corn for the past five years. Given the high cost of production for certain grains, it is important to understand fluctuations in commodity pricing on a real-time basis. To the extent that commodity prices change significantly, gross recovery values can also be positively or negatively impacted in a short period of time. In addition to operating and allocated overhead costs, it is important for lenders with grain inventory as collateral to monitor factors that can impact pricing, including weather- or pest-related challenges (or benefits) to supply, product recalls, changes in U.S. or foreign trade terms, tariffs and other export    duties, federal regulatory changes, and consumer demand
 

Climate change a critical factor: Extreme droughts and catastrophic storms can have a devastating impact on crop levels from year to year. The USDA estimates that 90 percent of crop losses are related to the impact of extreme weather. Major crops affected by climate change include corn, wheat, and flowering crops, which are vulnerable to warmer temperatures and drought in particular. In certain parts of the country, the impact of climate change could cause farmers to reassess crop planting locations and timing. The predictability and length of growing seasons as well as temperature fluctuations that deviate significantly from averages will continue to be challenges as the effects of climate change escalate
 

Corn market outlook: The long-term future for the corn farming industry is expected to be optimistic as demand is anticipated to continue to grow as renewable energy targets increase annually. To meet demand, U.S. farmers are using genetically modified seeds, pushing yields to levels three times higher than they were 50 years ago. However, as yields rise and corn farming subsidies decline under pressure from the World Trade Organization, the average prices corn farmers receive are expected to remain low over the next five years. IBISWorld forecasts that both prices and production are expected to increase marginally, leading industry revenue to increase an annualized 0.9 percent to $45.3 billion through 2023.