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What is going on between the United States and China Trade Tariff Negotiation?

By Yangxuan Liu, Adam N. Rabinowitz, Esendugue Greg Fonsah, and Levi Russell

This is a series of posts related to the ongoing trade negotiation between the United States and China and its impact on Georgia agriculture. This post briefly discusses what happened recently in trade policy between the United States and China.

On March 23, 2018, President Trump signed an order to impose non-country specific tariffs with 25 percent tariffs on steel and 10 percent tariffs on aluminum. By the end of March 2018, several countries, with the exception of China, have successfully been granted exemption from the tariff (Shurley, 2018). In response to the steel and aluminum tariffs imposed by the U.S., China suspended tariff reduction obligations on 128 products of United States origin on April 2, 2018, effective immediately. Eighty four products on the list were food and agricultural products (Inouye, 2018). Roughly $2 billion of United States food and agricultural exports to China will be impacted by theses tariffs (Inouye, 2018). There is an additional 25 percent tariff on pork and pork products, and an additional 15 percent tariff on fruit and nut products, wine, ginseng, denatured ethanol (Inouye, 2018). It is important to note that peanuts are not included in the nut products.

On April 3, 2018, the United States formally proposed $50 billion worth of 25 percent tariffs on 1,333 Chinese products. On April 4, 2018, China responded with a list of an additional 25 percent tariff on 106 United States origin products, which are worth $50 billion. Thirty-three products on this list are food and agricultural products, which are worth approximately $16.5 billion (USDA FAS, 2018). These products include soybean, corn and corn products, wheat, sorghum, cotton, beef and beef products, cranberries, orange juice, and tobacco and tobacco products (USDA FAS, 2018). The announcement made on April 4, 2018, by China did not  indicate a specific date of implementation (USDA FAS, 2018). It stated that the date of the Chinese tariff will be announced later, depending on when the United States tariff actions will take effect (USDA FAS, 2018). Meanwhile, the United States allows 60 days for public feedback on the proposed tariffs of 1,333 Chinese products. The fact that these trade tariffs are not carried out immediately indicates there may be room for negotiation.

Exports are an important component of United States agriculture. During fiscal year 2017, the United States exported a total of $140.5 billion worth of agricultural products resulting in a $21.3 billion trade surplus (USDA Press, 2017). Exports are responsible for 20 percent of United States farm income that supports more than one million American jobs; both on and off the farm (USDA Press, 2017). According to the United States Department of Agriculture (USDA) Economic Research Service (ERS) (Foreign Agricultural Trade of the United States (FATUS), 2017), China is the second largest agricultural trading partner with the United States. Last year, around $22 billion of United States agricultural products were exported to China, while the United States only imported $4.5 billion of  agricultural products from China. This resulted in a $17.5 billion United States agricultural trade surplus with China. Soybeans, coarse grains (excluding corn), hides and skins, pork, and cotton are the top five United States agricultural products exported to China (USDA FAS, 2017).

The recent trade tariffs implemented between the United States and China would have a defined impact on overall agricultural trade. According to economic trade theory, there would be no winners for either the United States or Chinese economies. In particular, where United States agriculture runs a significant surplus in trade, there are limited (if any) opportunities to increase the sale of exported goods within the domestic market. If the Chinese tariffs on the major agricultural products stay in place, then we anticipate fewer United States exports which will lead to higher ending stocks, especially for soybeans, pecans, and sorghum. Lower domestic prices for these products will be anticipated in the United States. The loss of a price advantage of United States agricultural products will make global suppliers like the European Union and South America more attractive to Chinese buyers. It also encourages these suppliers to add more acres to meet the demand of Chinese buyers, creating increased supply in the world market and a further reduction in the price that United States farmers can receive for their crop.

United States agriculture has been struggling in recent years due to low prices. According to the USDA ERS (2018), net farm income in 2018 is expected to fall to the lowest level in nominal terms since 2006. This leads to greater risk and vulnerability of the agriculture sector to further price reduction. The uncertainty in trade policy between China and the United States creates concerns among the agricultural community about lengthening the period of stagnant farm incomes.

Meanwhile, President Trump has instructed Secretary of Agriculture Sonny Perdue to implement a plan and assistance to protect United States farmers and ranchers. The United States Department of Agriculture is working on emergency aid programs under the Commodity Credit Corporation to help compensate farmers and ranchers for expected losses due to new Chinese tariffs. In order for the USDA to make payments to farmers, the actual losses need to be evaluated to calculate the amount of assistance. There is still much more information and analysis that is necessary before we can begin to understand what a compensatory program may look like.

References

Foreign Agricultural Trade of the United States (FATUS). (2017). Top 15 U.S. agricultural export destinations, by fiscal year, U.S. value. Retrieved from: https://www.ers.usda.gov/data-products/foreign-agricultural-trade-of-the-united-states-fatus/fiscal-year/

Inouye, A. (2018). China imposes additional tariffs on selected U.S.-origin products. Beijing, China Retrieved from https://gain.fas.usda.gov/Recent%20GAIN%20Publications/China%20Imposes%20Additional%20Tariffs%20on%20Selected%20U.S.-Origin%20Products_Beijing_China%20-%20Peoples%20Republic%20of_4-2-2018.pdf.

Shurley, D. (2018). Shurley on Cotton: More Tariff Talk.  Retrieved from http://www.cottongrower.com/market-analysis/shurley-on-cotton-more-tariff-talk/

USDA ERS. (2018). Highlights from the February 2018 farm income forecast. Washington, D.C. Retrieved from https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/highlights-from-the-farm-income-forecast/.

USDA FAS. (2017). Infographic: U.S. Agricultural Exports to China, 2016. In. Washington, D.C.

USDA FAS. (2018). China responds to U.S. section 301 trade action announcement. Beijing, China Retrieved from https://gain.fas.usda.gov/Recent%20GAIN%20Publications/China%20Responds%20to%20U.S.%20Section%20301%20Trade%20Action%20Announcement_Beijing_China%20-%20Peoples%20Republic%20of_4-4-2018.pdf.

USDA Press. (2017). U.S. farm exports hit third-highest level on record [Press release]. Retrieved from https://www.fas.usda.gov/newsroom/us-farm-exports-hit-third-highest-level-record

Publication: Surviving the Farm Economy Downturn

by Levi Russell

A new publication entitled “Surviving the Farm Economy Downturn” is now available online free of charge. The publication provides a general farm economy outlook as well as discussions of topics such as risk reduction, cost control, alternative crops, livestock sales during drought, crop insurance, ARC and PLC payment forecasts, stress and suicide, and other issues. Please follow the link below to check out essays on these and other topics:

https://afpc.tamu.edu/extension/resources/downturn-book/

Information on Livestock Emissions Reporting

A recent court case striking down the agricultural exemption for reporting under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) means that many producers will have to start reporting complicated emissions information in May of this year. Currently, a federal Senate bill is being considered that will make the exemption legal, but congress must act swiftly.

In the event that action by congress fails or is delayed, producers should be aware of the rules and how they will impact their operations. Extension agricultural lawyer Paul Goeringer has a pair of short podcast episodes available that explain the rule. Click below to listen!

Part 1

Part 2

Understanding Your Generic Base Conversion Options With the Seed Cotton Program

by Don Shurley and Adam N. Rabinowitz

We have developed a third publication in a series of fact sheets on the new seed cotton program. Included in this document is a little history of what happened with the 2014 farm bill that led to the development of the seed cotton program.  We provide an example of the decision process and identify things to think about when making the decision.

The PDF can be downloaded here.

MYA Prices and Calculating Payments with the Seed Cotton PLC

by Don Shurley and Adam N. Rabinowitz

This post presents a second fact sheet in a series of publications that briefly explain the basic workings of the new seed cotton program.

Effective with the 2018 crop, “seed cotton” is now a covered commodity under Title I of the 2014 farm bill and eligible for PLC (Price Loss Coverage) payments. For purposes of the legislation, “seed cotton” is unginned upland cotton—a combination of both cotton (lint) and cottonseed.

The linked document discusses:

  • Reference price and payments,
  • Marketing year average prices and how to calculate them,
  • What would have been the past 10 years had the seed cotton program been in place,
  • Payment yields, and
  • A payment calculator

Click on this link to access the factsheet.

 

Changes to the Dairy Margin Protection Program in the Bipartisan Budget Act of 2018

by Levi A. Russell

UPDATE

The big questions left on the table back in February when the Bipartisan Budget Act was passed have been answered. The information below in the original post is still correct, but I wanted to fill in the gaps here.

Re-enrollment for 2018 CAT-level and buy-up coverage began on April 9th 2018 and ends on June 1st 2018. All outstanding balances for 2017 and prior years must be paid in full before a dairy operation can be approved for 2018 coverage.

Coverage elections made for 2018 under the re-enrollment will be effective retroactive to January 1st 2018 for eligible dairy operations.

All dairy operations that want to participate in MPP in 2018 must sign up during the re-enrollment period.

During the 2018 re-enrollment period only, producers in dairy operations with an active policy under LGM-Dairy who have target marketings insured during months in 2018, will be allowed to register for 2018 coverage under MPP-Dairy while still meting the contractual requirements for the LGM-Dairy contract. Producers may participate in either LGM-Dairy or MPP-Dairy, but not both.

Example: A producer purchases LGM-Dairy in November 2017 with target marketings through April 2018. Coverage under LGM-Dairy will conclude at the end of April 2018, and coverage under MPP-Dairy may begin May 2018. Premiums for 2018 will be prorated based on when LGM-Dairy coverage ends and MPP-Dairy coverage begins for 2018.

Dairy economists at DairyMarkets.org have a longer fact sheet with several examples of coverage benefits calculated based on projections done in February 2018.

The MPP decision tool on their site has also been updated with the latest policy information, so you can calculated projected indemnities for 2018.

For more information about the changes and enrollment, contact your local county agent or FSA office.

ORIGINAL POST

The Bipartisan Budget Act of 2018 made some significant changes to the Margin Protection Program for dairy producers. These changes apply beginning with the 2018 calendar year and make the program more producer-friendly and substantially decrease premiums for Tier I coverage. The specific changes are as follows:

-Dairy-MPP now operates on a monthly basis. Feed costs, milk prices, the margin, and payments are all calculated or paid monthly. There are no additional changes to any of the formulas to compute these costs, prices, margins, and payments.

-The 2018 election year is extended by at least 90 days after the enactment of the Bipartisan Budget Act of 2018 (February 9, 2018)

-Limited resource, beginning, veteran, and socially disadvantaged farmers are exempt from the administrative fee associated with Dairy-MPP

-The base production history is maintained

-Tier I premiums now apply to the first 5,000,000 pounds of production instead of the previous 4,000,000. Tier II covers production in excess of 5,000,000 pounds

-Premiums for Tier II are unchanged. Premiums for Tier 1 are lowered as follows:

Coverage Level Old Premium New Premium
$4.00 None None
$4.50 $0.010 None
$5.00 $0.025 None
$5.50 $0.040 $0.009
$6.00 $0.055 $0.016
$6.50 $0.090 $0.040
$7.00 $0.217 $0.063
$7.50 $0.300 $0.087
$8.00 $0.475 $0.142

Sources:
Bipartisan Budget Act of 2018

7 USC Chapter 115, Subchapter III, Part A

The Bipartisan Budget Act of 2018: What Farmers and Landowners Need to Know about Cotton and Generic Base

by Don Shurley and Adam N. Rabinowitz

On the morning of February 9, 2018, the U.S. Congress passed budget legislation that included the designation of seed cotton as a covered commodity under the 2014 farm bill. The President has signed this legislation and it has become law. The document linked below highlights the critical components about the new cotton program and treatment of Generic Base.

The Bipartisan Budget Act of 2018

More information, including a decision aid, will be available soon at http://agecon.uga.edu/extension.

Reports: Beef Demand and Cattle Inventory

by Levi A. Russell

A couple of recently-released reports provide some interesting observations about the state of the beef industry and some good news for the long run as well.

Beef Demand

First, a few of my colleagues at Kansas State and Purdue Universities have written an extensive report on many drivers of beef demand. Below I reproduce the Executive Summary, but the rest of the report is also informative:

Several key findings are of elevated importance:

1. Over the past decade, the quantity of beef consumers purchase has become less sensitive tochanges in beef prices yet more sensitive to consumer incomes. This could be a result of record high retail beef prices in recent years that resulted in loyal beef consumers, who are less price sensitive, having the strongest presence in the market. As consumer incomes have grown, more consumers who might have been priced out of the beef market, have allocated some of that income growth to purchase beef again thus increasing beef demand response to growing income.

2. The relative impact of pork and chicken prices on beef demand is economically small relative to other factors. This does not imply individual beef, pork, and chicken products are not substitutes, rather the substitutability in aggregate is just not as strong as traditionally thought.

3. Print media and medical journal coverage of topics around beef changes notably over time in areas of focus and volume of coverage. Certain types of media coverage are found to affect meat demand, and an emerging area of negative impact focuses on climate change. Having an impactful presence in the media is immensely important as it shapes perceptions.

4. Some demographic trends are favorable for beef demand including anticipated growth of Hispanic and African-American populations within the U.S.

Cattle Inventory

On January 31, the 2018 cattle inventory report was published by the USDA. This report compares inventory levels on January 1, 2018 to those of January 1, 2017. This report is a great opportunity to see what is happening on the national scale for cow-calf producers and in the feedlots.

This year’s report tells a familiar story: slow herd expansion. Nationwide, the herd has been expanding since hitting a bottom in 2014. The previous several years saw a decline due in part to serious drought in the western U.S. Expansion in the herd overall was only 1%, significantly slower than the previous few years. This was expected, as we’ve seen slaughter rates for beef heifers and cows pick up significantly in the last couple of years. This year’s report showed a 4% reduction in the number of heifers currently held as beef cow replacements, indicating that during 2018 we will likely see very little to almost no growth in the herd. Finally, the calf crop increased 2% relative to last year and the number of cattle on feed increased 7%. This pre-report commentary provides additional context to the report.

As we continued to see slower herd growth and some bright spots for beef demand, I’m cautiously optimistic that we will be able to maintain profitable calf prices and stocker margins through 2018. If you have questions, please don’t hesitate to contact me at lrussell@uga.edu.

2017 Tax Reform Law and Agriculture

by Levi Russell

Last year an overhaul of the tax code was passed by Congress and signed into law by President Trump. We thought we would put together a resource page on the aspects of the law that will affect agricultural producers.

First, a rather lengthy article covering all aspects of the new law that will affect agricultural producers. This piece is written by Roger McEowen, an agricultural tax lawyer in Kansas. I have confirmed with the author that the information in this article is up to date.

Second is a post by another agricultural lawyer focusing primarily on the estate tax changes.

Finally, a 17 minute radio interview on major tax and agricultural law issues for the new year.

Beef Herd Expansion Possibilities

by Levi A. Russell

Board prices for feeders and fats have been quite strong in the past few months and Georgia producers have seen similarly strong prices in our cash markets, relative to seasonal expectations. The typical seasonal downward slide into October and November has not appeared and prices have been more or less flat since the summer. One of the threats to strong prices in coming years is a continuation of herd expansion.

David Widmar, an ag economics consultant with Agricultural Economic Insights, did a great job recently of digging into the state-level inventory numbers to see if we will see continued expansion through 2018. Ad Widmar notes, Texas cattle numbers made up a large percentage of the recent inventory decline and have also made up a large percentage of the recent increase in inventory. However, Texas has not fully recovered its previous inventory level, so there is still some growing room out there, indicating that we will likely see more herd expansion. You can read Widmar’s full analysis by clicking here.

This year, strong demand and low feed costs have helped buoy prices despite continued herd expansion. Time will tell if continued demand strength will absorb the price-reducing effect of larger beef supplies.