Weather and the US-China trade war are taking a toll on the economy in the Midwest.
Perhaps no region in the United States has been more adversely impacted by the trade war with China than the Midwest. The retaliatory tariffs have choked off the China market for agricultural products while the ongoing skirmish over the new NAFTA (USMCA) and a near hostile European business outlook to the U.S. has hindered expansion into alternative markets. Add to the mix several years of adverse weather conditions and many farmers are standing on the ledge looking down into the abyss of financial disaster. But the bad news isn’t confined to the farmers. The industrial sector in the Midwest is also spinning its wheels with little to no growth. In particular, the auto industry is feeling the pinch from the trade war and general slowing of the economy, not only in the U.S. but globally as well.
For the farmers of the Midwest the last few years have been a perverse cocktail of bad weather mixed with equally adverse economic conditions. Despite the hostile environment the agricultural sector has shown itself to be remarkably resilient – the region’s GDP growth in the last few quarters kept pace with the U.S. growth after years of lagging behind. But how long the region is able to keep its head above the rising flood of red ink is anyone’s guess.
Certainly, the weather has contributed mightily to the plight of the Midwest farmers. The severe flooding has not only impacted this year but will have economic repercussions moving forward.
In Wells Fargo’s August release of the “Midwestern States: 2019 Midyear Outlook” they outlined the predicament, “The National Oceanic and Atmospheric Administration (NOAA) reported that the 12 months ending in April were the wettest since records for the United States began in 1895. With fields inundated, the spring planting season was significantly upended – farmers were forced to shift to less profitable crop mixes, or leave millions of acres entirely bare. High water levels on key waterways (see Matt Miller article on barge business page 12) throughout the Midwest also disrupted the transport of fertilizer and harvested product.”
Tariffs and Farmland
As injurious as the weather has been to the Midwest farmers’ income, the real elephant in the room has been the Trump Administration’s prolonged tariff war with China. Although the region has generally supported the administration, patience is waning as financial woes grow. It is understandable as rhetoric and reality collide. Back in October of 2018, President Trump announced via The Ingraham Angle: “China has agreed to buy massive amounts of ADDITIONAL Farm/Agricultural Products - would be one of the best things to happen to our farmers in many years!”
It was one of many such pronouncements but little has helped the region. In August, Bloomberg said that Gary Wertish, president of the Minnesota Farmers Union drew applause at a country fair when he criticized the administration’s trade policy at a forum with Agricultural Secretary Sonny Perdue in attendance. It is fair to say there wouldn’t have been an applause in 2017.
The August edition of the Agricultural Newsletter for the Federal Reserve Bank of Chicago outlined the difficulties the region is facing. The newsletter reported that the credit conditions for the District are deteriorating, “The portion of the District’s agricultural loan portfolio reported as having “major” or “severe” repayment problems (6.2 percent) had not been higher in the second quarter of a year since 1999.”
The farmers’ financial situation has also been exacerbated by “sliding real farmland values” as the expectations for agricultural income have been restrained by the U.S.-China trade war.
The region is largely dependent on returns from soybean and corn crops. Because of the adverse weather, the yields are expected to be lower – which generally leads to higher prices. Corn and soybean prices have climbed 9.6% and 3.6% June over May but the increases have been limited as tariffs have hemmed in agricultural exports with more tariffs on the horizon.
Davie Stephens, president of the American Soybean Association (ASA) recently said in response to the next round of tariffs, “ASA has strongly requested an end to the tariffs on U.S. beans for more than a year. This escalation will affect us not because of the increasing tariff on our sales, which have been at a virtual standstill for months, but through time. The longevity of this situation means worsening circumstances for soy growers who still have unsold product from this past season and new crops in the ground this season – with prospects narrowing even more now for sales with China, a market soy growers have valued, nurtured, and respected for many years.”
It isn’t just the Midwest being affected. The impact of the tariffs is being felt throughout the entire agricultural sector. The USAD in September revised downward its estimates for U.S. agriculture. The agency says total agricultural exports will decline 6.2% from 2018 to $134.5 billion – potentially the lowest tally since 2016. Overall, the revised forecast would put the U.S. agricultural trade surplus at $5.2 billion – the lowest since 2006.
Uncertainty in the Industrial Midwest
The industrial Midwest hasn’t been hit as hard by the U.S.-China trade war as the region’s agricultural sector. The Section 232 tariffs on steel and aluminum introduced in 2018 did provide a shot in the arm for the ailing U.S. mills in the Midwest. But the gains have more than been mitigated by the impacts on manufacturers utilizing steel and aluminum in their products and selling finished goods in foreign markets.
The Chicago Business Barometer [an indicator made up of five sub-indicators is designed to predict future changes in (GDP). A result of 50 is neutral. The farther an indicator is above or below 50, the greater or smaller the rate of change] advanced 6 points to 50.4 in August up from 44.4 in July. This was after two months in “contractionary territory”. According to the report, the “survey still suggests a softer overall tone in business activity despite the August pick-up in sentiment, as the three-month average fell again, dipping to 48.2.”
The issue with the region’s industrial activity and that of the nation’s overall industrial activity is the uncertainty in both national economic policies and markets. For the auto manufacturers, the “uncertainty” runs from all the way from the board room to the ship floor.
In every automakers’ boardroom, there is a global jigsaw puzzle to be worked out which begins with sourcing parts, manufacturing vehicles to eventually selling cars. The tariffs imposed in the trade wars between the U.S. and its trade partners (Europe and China) has made it exceedingly more difficult to source, build and sell vehicles.
On August 23rd China’s State Council Tariff Commission said that as of Dec. 15 it would re-impose 25% duties on a wide range of U.S. built vehicles and parts. Tariffs the PRC had suspended last April. The PRC announcement led to a Trump retaliatory tweet that reverberated through the board rooms of American automakers: “We don’t need China and, frankly, would be far better off without them. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”
With supply chains, more complex than a bowl of spaghetti, Detroit’s automakers were taken aback by the tweet. Automakers like BMW, Ford and Mercedes are particularly vulnerable to the tariff threat.
But there is much more at play for the region’s auto industry. Auto workers (with the UAW) are seeking a new collective-bargaining agreement and have voted to authorize strikes at each of the Big Three (GM, Ford and Fiat Chrysler Automobiles). In the meantime, there is a push to get the USMCA agreement pushed through Congress – a deal that both the region’s farmers and industrial labor generally support. Finally, the U.S. and Japan are trying to finish the details on a new trade agreement that could benefit both auto and farmers alike. But like so many other negotiations, although Trump has threatened Japan with auto tariffs, indications are that the entire negotiations on the auto industry might be made into separate talks.
For the Midwest, the only certainty of being stuck in the middle of a trade war is uncertainty.
