“The U.S. has taken a very aggressive approach to foreign policy and trade policy,” Robison said, referring to recent trade negotiations with world trade partners. He noted Russian sanctions and investigations continue to haunt agricultural markets as a result of trade impacts.
Of the last five U.S. economic recessions, three were led by rising oil prices, and the last two recessions were not. Robison said, “When you look at U.S. trade policy, most of the trade agreements established over the last 50 years have been driven by strategic security concerns.” He noted U.S. agriculture has largely benefited from these security-driven trade agreements as net exporters.
In the oil arena, the U.S. has become more energy independent in the past decade, which has translated to more economic stability and security, and less volatility in oil prices. Robison drew attention to the U.S. oil production gains, driven by shale oil production. “We’ve reduced our reliance on OPEC nations, which is driving a significant change in our foreign policy,” Robison said. “In some ways, it helps us step back from the world stage, and reduces our military’s involvement in the security of other nations. With the inclusion of Canada and Mexico’s oil production, the U.S. is essentially energy independent.”
Efficiency in “production per rig” has increased in U.S. shale oil production, translating to almost 16 times greater productivity, per rig, from a decade ago. The U.S. has significant shale oil reserves, Robison said, and production costs are now competitive with many key oil-producing areas of the world. Margins are improving as technology continues to improve efficiency.
“If you look at crude oil compared to Class III milk price, you see a lot of commonality in price trends. It’s similar with other commodities, including wheat, though not as strongly correlated, but the trend lines are still there. Why? Specific to dairy, the Middle East, for instance, tends to be net importers of dairy products and exporters of crude oil.” Robison also noted the oil trade affects market sentiment and is heavily driven by consumption from a growing middle class in emerging economies and by increasing demand in the U.S.
Chinese trade agreements are of concern, Robison said, but recent new tariffs (set to launch March 1) received an extension, as the current U.S. administration notes progress in trade talks. However, the trade deficit is not the only issue. “Bigger issues ¬– key drivers beyond trade – have to do with security and technology transfer specifically,” Robison said. “Oftentimes when U.S. companies go into China, they frequently have to participate in joint ventures with Chinese firms and are required to turn over their technology in these agreements. These joint entities may be linked directly to the Chinese government, so this has competitive issues and privacy issues.”
Robison said over 40 percent of the Chinese GDP is driven by investment (think infrastructure), followed by trade, and their trade opportunities are essential to their economic growth. However, he noted, “The U.S. has the upper hand in the trade negotiations, given the trade deficit of 375 billion dollars and a significantly smaller reliance on exports as a percentage of GDP. The U.S. economy has fared much better through the trade negotiations than China’s economy.”
Regarding USMCA, the renegotiated North American Free Trade Agreement, Robison noted we have an agreement with Mexico and Canada. After debating the agreement in Congress, the U.S. is likely to pass the agreement into law. The politics in Canada create some concerns; however, Canada has a high dependency on trade, so it is expected they will eventually endorse the agreement. Mexico, he said, has the highest dependency on trade with the U.S. and was first to embrace the new agreement.
Robison addressed the U.S. national debt (now over $22 trillion), and said while the level is concerning, it does not exceed the national debts of other countries, like Japan and several members of the Euro area, as a percentage of GDP, though it remains a drag on productivity. Looking to the future, the Euro area has significant challenges with Brexit and weakness in Italy. For example, bank nonperforming loans are still extremely high in Italy (14.4 percent), compared to the U.S. at under 3 percent.
In summary, Robison noted, “Today we are seeing narrow margins in agriculture, though the outlook improves if the U.S. gets a trade deal with China and USMCA passed into law. The profit margins from 2004 through 2014, which were very strong, is not the norm for agriculture.” He noted that other factors influencing commodity prices include interest rates, Federal Reserve policy, dollar strength, oil prices, emerging markets and the commodity cycle. 
-
Lynn Jaynes
- Managing Editor
- Progressive Forage
- Email Lynn Jaynes
