By: Katie Nichols and Justin Miller
AUBURN, Ala. – Recent trade discussions between the United States and China have Alabama producers like Stewart McGill cautious about the future markets of crops. China recently announced a 25 percent tariff on many American export products, including soybeans, cotton and other agricultural products.
“As of now, we don’t know what might happen,” said McGill, who is a cotton, soybean and corn producer in north Alabama. “This could be detrimental to producers or good for us.”
“Either way, our marketing strategies are different this year. We have to watch the market and make the decision to either be aggressive or conservative.”
The Effect on Production
Jessica Kelton, an Alabama Extension farm and agribusiness management regional agent, said soybean prices are already feeling effects of the tariff discussion.
“There was a soybean price drop after the announcement, which could hurt soybean producer profits if it doesn’t improve,” Kelton said. “However, these prices could fluctuate a lot given that the market reacted to the announcement rather than an actual reduction in exports.”
According to Kelton, Chinese imports of American soybeans slowed before the announcement, but exports to other countries helped keep prices higher.
“Even with tariff threats for products, other countries still depend on some U.S. row crop imports,” Kelton said. “China has a particularly high demand for U.S. cotton and soybeans, so huge tariffs would create a problem for their country.”
Max Runge, an Alabama Extension economist, said the outlook for 2018 agricultural production shows tight profit margins. He said this tariff could hurt producers.
“Any action that lowers commodity price will hurt all U.S. farmers. How much it hurts them remains to be seen,” Runge said. “There may be far-reaching effects. For example, acres that were going to be planted to soybeans could shift to corn, cotton or peanuts. This would add to the current large supplies of these commodities.”
When it comes to cotton, Kelton said that it is difficult to speculate price changes because so much depends on the amount of quality cotton China needs.
“The U.S. does have a lot of stock on hand, but there are some quality concerns from the 2017 crop (Texas cotton),” Kelton said. “Since the price is already above where we would expect it based on the numbers unless there is a huge Chinese buying spree or a devastating crop loss, I would expect a gradual change in price.”
Kelton said producers could be tempted to start growing other crops. She said this is tricky based on the current market, which could change before harvest.
“It isn’t too late to switch from soybeans to another crop, such as corn. However, if you look at prices, corn also dropped in price because it is on the list for Chinese tariffs as well,” Kelton said. “China doesn’t import as much corn as they do soybeans and cotton, but I’m sure a lot of growers have considered making the switch. At this point, it is hard to say if it will be a good call.”
Runge said that producers shouldn’t make rash decisions about switching crops. There is still a lot to know about how the tariffs will affect the market, if at all.
“I don’t think producers need to rush to a decision. Soybean prices are where they were in February,” Runge said. “Depending on a producer’s cost of production, they could still be profitable with soybeans with soybeans over $9 per bushel.”
Producers can often lock in a price for their crops before the end of the season. They also have the choice to wait until later in the season to see if prices are higher. Producers may even choose to store their crops after harvest and wait for better prices if the circumstances are right.
With the potential of the Chinese tariff, some growers might want to lock down a price now. However, Runge said it might pay off to see how negotiations go between the U.S and China.
“I would be patient to see how these trade issues work out,” Runge said. “However, if your cost of production is such that a profit is possible at current prices, there is nothing wrong with locking in a price. It’s hard to go broke making a profit.”
In this time of uncertainty, Kelton said producers should manage their costs and budgets for profit instead of yield.
“When you reduce inputs, you are more likely to end up with reduced yield. Managing for profit rather than yield is a must,” Kelton said. “Sometimes pushing the yield can lead to increased costs and lower net returns, even with higher yields. Growers must know their typical yield and budget and not increase input costs just to get a few more bushels an acre.”
For more information, visit Alabama Extension online or contact your county Extension office.
Featured image by sima/shutterstock.com
Cotton image by Danny E Hooks/shutterstock.com