The Trump bump was evident at the beginning of 2018, but the good news gave way as the year progressed, ending with an especially rough December for most crop and livestock markets and policy issues.
How did we get to this point? For starters, consider:
- the president and his team’s entrenched trade war with China has surpassed the six-month mark;
- strong words were exchanged between President Trump and Fed Chairman Jerome “Jay” Powell over the Fed’s interest-rate hikes;
- the continued metal tariffs on Canada and Mexico, both U.S. allies, at least as of early January;
- Japan, China and others are inking trade agreements while the U.S. farm sector fears more rough times ahead from export competitors;
- a partial government shutdown to end 2018 and ring in the new year.
So, what’s in store for 2019 in light of stiff hurdles for Trump’s trade policies, the lingering harvest issues and crop and livestock prices?
- Despite a new farm bill, the safety-net improvements embodied in the 807-page measure estimated to cost $867 billion are not enough to cope with the latest recession in farm country. If prices don’t rally in the early months of 2019, and trade policy hurdles with China and others are not rectified, look for a Democratic-controlled House to lead the charge for additional aid for farmers and a more comprehensive relief package than the Market Facilitation Program provided.
- Free trade talks with Japan will commence this month, and talks will continue with the European Union, but the timeline for either of those trade pacts is murky at best. It is becoming increasingly evident that President Trump made a strategic mistake when on his third day in office he pulled the U.S. out of the Trans-Pacific Partnership (TPP) agreement. Now, the 11 remaining countries will see lower trade barriers and quotas trading with each other, at the detriment of U.S. exports.
- The U.S.-Mexico-Canada Agreement (USMCA/NAFTA 2.0), a success story for U.S. trade in 2018, must still be approved by Congress. The Democrat-controlled House is signaling USMCA consideration will be later rather than sooner, and only if there’s enforcement mechanisms.
- Corn producers are still upset at the end-around that departed EPA Administrator Scott Pruitt gave to some ethanol producers via Renewable Fuel Standard (RFS) mandate waivers. Look for this topic to be part of a review of RFS in 2019.
- On the financial front, the Fed is signaling more interest rate hikes are ahead, after four increases in 2018, while selling bonds at the announced pace of $50 billion per month. Some analysts believe the Fed is underestimating the impact of its balance-sheet reduction and predict monetary policy will start to contract economic growth sometime this year.
- The ag financial balance sheet is throwing caution flags, with working capital down some 70% from its peak in 2012. Farmers and ranchers have lost significant amounts of equity the past few years, and bankers will soon, if they haven’t already, have tough conversation with some farmers.
Bottom line: Commodity markets could finally see the long expected and hoped for rally if the U.S. and China can reach an agreement, or at least make substantial progress, by the March 1 U.S. deadline and if the Trump trade team lifts its metals tariffs on Canada and Mexico. We’ll see what the next 12 months bring.