Agribusiness is a multi-billion dollar industry in the U.S. with China, Mexico and Canada as some of its biggest buyers. While it is a core industry for the economy, the February 2018 USDA’s Economic Research Service and Foreign Agricultural Service outlook projected 2018 agricultural exports at $139.5 billion, down $500 million from the November forecast. That is due to a six-percent decline in oilseed and product export that is only partially offset by increases in livestock, cotton and grain exports. That’s because recent changes and upcoming legislation have created some questions in the industry.
There are many reasons why agribusinesses can have a bad year, including the weather, price competition and disease, but this year there are three major issues affecting the industry: trade agreements, trade sanctions and the 2018 Farm Bill.
The United States, Canada and Mexico are hoping to reach an agreement on the North American Free Trade Agreement (NAFTA) very soon. All three countries are keeping a close eye on the negotiations as they have already had an effect on prices and markets.
For example, U.S. farmers are the dominant grain supplier to Mexico, but Mexico has started importing from other countries. The country imported 583,000 metric tons of corn from Brazil in 2017, according to an article quoting US data. While Mexico remains the U.S.’s largest market, it is looking to alternative and often cheaper markets in case the NAFTA negotiations are unsuccessful.
There is precedence for the keen observation of the NAFTA negotiations. President Trump pulled the U.S. out the Trans-Pacific Partnership (TPP) in January 2017, calling it a bad deal. This was before opening negotiations on NAFTA, and many farmers and ranchers were concerned about a loss of market access. Many associations, including the Farm Bureau Federation, the National Cattlemen’s Beef Association and the America Pistachio Growers also had net positive support for the TPP because it reduced tariffs and opened up new markets. While multilateral deals didn’t dissolve, exiting the TPP did make it harder for U.S. agribusinesses to access new, tariff-free markets.
There is good news. Treasury Secretary Steven Mnuchin said in February 2018 that the country is interested in rejoining the TPP.
The U.S. government enacted trade sanctions on Chinese steel and aluminum this year, and China issued retaliatory sanctions on more than 100 U.S. items including sorghum, wheat, soybean and pork products. While it is still too early to see the results of the sanctions, U.S. officials are worried about the long-term effects. Some, like Iowa governor Kim Reynolds, have traveled to Washington to express their concern.
Not only do the sanctions depress farmers and ranchers’ incomes while raising their costs, they are losing market share to other countries who can offer the same products at a cheaper price due to a lack of taxes. There is talk of offering some form of financial relief to affected farmers and ranchers. This is an ongoing issue, so we’ll see what happens in the next quarter.
The 2018 Farm Bill
This may not be in the news as much as trade sanctions and negotiations, but it’s important because it’s expected to be passed by Congress this year. The 2018 Farm Bill, like all previous bills, plays a significant role not just with farmers and ranchers but with trade, research and development and the elimination of food insecurity. One of the concerns, according to Center for Strategic & International Studies, a bipartisan, nonprofit policy research organization, is that the bill has suffered from a decreased lack of funding every time it’s been renewed. This hurts the industry’s research and development ability and affects the U.S.’s standing as a leader in the global industry.
All of this leaves agribusinesses in an unsure position since there are a lot of unanswered questions, but the industry is advocating in Washington. Until NAFTA negotiations are agreed upon and sanctions are either modified or raised, that means waiting for things to settle while dealing with the things you can control. Your advisor can provide information that can help you make the best decision during unsure times.
Meet the Author
Dave Buck, CPA
Aldrich CPAs + Advisors LLP
Dave Buck has been with Aldrich since 1983. He specializes in providing tax, estate, and consulting services for agribusinesses, cooperatives, real estate companies, and closely held businesses and their owners. He is also a part-owner of his family’s grass seed farm and seed cleaning business in the Willamette Valley. Silverton Health, Governing Board of Directors…
- Agriculture and farming
- Real estate
- Closely-held business
- Tax planning, estate planning and consulting
- Certified Public Accountant