Wednesday, November 30, 2016

The coming crisis in US agricultural markets

For those in love with real "corn porn" - I give you - the Market Journal. Very reminiscent of "Aamchi Maati Aamchi Manse" on Doordarshan-1 back in the day.

As things stand reports today morning suggest oil is due to rise after OPEC nears an agreement that will effectively cap the production at lower levels.

As Donald Trump talks about bringing down the TPP and NAFTA, US agriculture faces the prospect of disruptions to trade with the biggest purchasers of US corn, hog and steer - Canada, Mexico and Japan.

Most people who voted for Trump probably don't know that the oil, corn, dairy, beef, pork and chicken markets are all linked. You break one link in that chain and pandemonium reigns.

In March - South American producers are likely to bring added volume to the markets.  March basically closes out the seasonal high that US corn (and hence pork and beef) enjoys.

Prices today for corn are roughly half of what they were last December.

Will Donald Trump give some new kind of subsidy to keep corn prices high?  (He should do something like that - after all these people voted for him).

Or will he simply let his trade-tariffs-trumpeting screw them six-ways-to-Sunday? (Well, he is kind of known in the real estate business for screwing over small investors without big legal support.)

The price of corn essentially is deeply tied to the price of Beef and Pork. Beef and Pork production  deeply affect the price of poultry - the livestock markets are interlinked.

As the price of oil rises - the low price of corn cuts into net farm income as operating costs. This deeply affects the ability of farmers to make any profit off the farming.

In a perfect market, the farmers would cut back on production in those scenarios and the price would go up. However in a global economy, if the US farmer lowers production, producers elsewhere (China, Australia, South America etc...) will step up to fill the gap created.

If most of the US market was only domestic - then a tariff would work well, it would insulate the domestic price of corn in the US from these international pressures.

But the bulk of the US market is international - almost 45% of all US agricultural production is sent to foreign markets.

Any move to raise tariffs on agricultural foreign trade (or any other foreign trade) would result in trade partners targeting agricultural imports from the US.

This would catastrophically hit states like Nebraska that voted for Donald Trump.

What is the saying? -  Fool me once, shame on you... Fool me twice .. shame on .. err.. won't get fooled again.

8 Comments:

At 5:54 AM, Blogger Nanana said...

Maverick, you had said CPEC was just the tip of the iceberg in a longer plan. Some Pakistani analysts are saying Pak should temper the enthusiasm. http://www.dawn.com/news/1299683

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At 5:58 AM, Blogger Nanana said...

Tracking the Chinese consumer tech achievements, they seem to have genuinely displaced Japan as a centre of innovation - so many billion dollar companies coming up its unnerving. I guess it reflects in the development of the mil-industrial complex as well. So is the long game to grow stronger and stronger until the they can plan Empire while the US (maybe) wanes?

 
At 8:23 AM, Blogger maverick said...

Dear Nanana,

I have not looked at what CPEC is really doing to Pakistan.

I am quite impressed by the progress they have made on the issue and I think one should take their claims of opening a new route to CA seriously as the decade progresses. But this is till a decades long process given how much time it really takes to shift trade routes.

Also you are correct that China is slowly replacing Japan as the innovation hub in Asia. I would however like to see a significant rise in quality of Chinese made products and improvements in high precision higher margin products of Chinese origin before I say that the process of replacement is complete.

Even today Chinese innovation lacks a certain depth. When creating mass production machinery, China lacks the precision of Japanese industrial innovators. Basically unlike China where labor is cheap, the price of labor in Japan (especially during WWII) rose significantly. So they invested heavily in industrial innovation. The Chinese will get there once they near their Lewis point.

 
At 11:26 PM, Blogger Nanana said...

Here are views from another maverick On CPEC:

http://m.firstpost.com/world/indian-intel-may-shrug-off-chinas-presence-in-kashmir-but-it-may-be-worse-than-we-think-3125720.html

http://m.firstpost.com/india/china-pakistan-economic-corridor-highway-of-terror-turns-operational-at-last-3107800.html

 
At 9:07 AM, Blogger maverick said...

Hi Nanana,

Yes people have very negative views about the opening of new trade corridors.

Unfortunately these things are based on economic needs and cost calculations that no Maverick can change.

When you have a nation like China with a very long strategic thought process, then they come to conclusions after serious and deliberate study. There is a very good reason for doing whatever they are doing and the investment is secured in multiple ways. It is difficult to unsettle that calculation. Gen. Katoch is correct about that.

Shifting an actual trade route however takes decades and it is correct to view this as a medium term risk (10-15 years) to India's interests - although India does not lose anything by way of China gaining a land route around the Malacca Straits.

 
At 5:49 PM, Blogger Nanana said...

https://www.ft.com/content/967099ce-a693-11e6-8898-79a99e2a4de6

FYI - so a post-beef world will have large consequences? Silicon Valley is already funding that disruption

 
At 10:06 AM, Blogger maverick said...

Dear Nanana,

> Silicon valley disrupts food.

It is not clear how viable the current meat production paradigms are so exploring alternatives is not a bad thing.

One interesting idea was to grind up insects and make faux meat. It is not as appetizing but who with meat consumption being dictated by availability and pricing more than just taste, there is something here that can't be denied.

 
At 8:20 AM, Blogger maverick said...

China surpasses Japan as US pork importer per Market Journal.

Wonder if low corn prices help offset transport costs and make US pork competitive with Chinese domestic pork.

 

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