Prolonged Tariff Dispute Threatens the Farming Industry: Lessons from the 1980s

President Trump's protectionist trade policies have been one of his more contentious economic policies garnering resistance from critics of all political leanings. The tariff dispute between the United States and China is the most well-known consequence of these policies and has resulted in economic growth worries. The U.S. stock market sat on the brink of a full-on bear market at the end of 2018 but recovered sharply in the first two months of 2019. Observers continue to monitor negotiations between top U.S and Chinese conveys that have yet to produce a decisive trade agreement.

Soybean and corn farmers are two groups within those observers that are watching closely in hopes of seeing their markets improve. According to Reuters, USDA Chief Economist Robert Johansson reported that “under the trade dispute, exports to China alone have plummeted by 22 million tonnes, or over 90 percent.” The dramatic reduction in Chinese exports so far has weighed on the latest 2019 projections which suggest the value of U.S. farm exports could fall from $1.90 billion to $1.41 billion. If no deal is reached, farmers could experience an abrupt demand shock which could lead to souring financials and eventually balance sheet trouble.

The shock-like force could be similar to the one the agricultural sector felt in the early 1980s. The crisis is explained in an FDIC case study that examined the forces at play in that period. A combination of declining exports, high debt, and rising interest rates caused real farm income to fall from $92.1 billion in 1973 to $22.8 billion in 1980 to $8.2 billion in 1983. The sharp decline in income wasn't isolated though; it followed a boom period that fueled optimism and speculative activity.



The initial boom period was ushered in by a sharp rise in farm exports caused by various favorable macroeconomic factors and improvements in productivity as a result of technological advancements. From 1970 to 1979, exports rose from $6.7 billion to $31.9 billion sparking heavy demand for new land which lead to the price increases in the chart above. With the return on the farmland so high, farm owners felt comfortable almost tripling farm real estate debt from $29 billion to $71 billion from 1970 to 1979.

The boom began to unwind as interest rates were raised to combat the large inflation of the 1970s. High rates did two things. First, the cost of debt shot up and farmers could not afford the new higher cost of debt when income started to fall due to lower farm income. Second, higher interest rates made the dollar appreciate against the currencies of countries that were major agricultural importers. Consequently, the price of farmland decreased, defaults increased, and debt/liabilities fell dramatically as farmers sought to secure balance sheets.


Data from USDA


The tariff dispute between China and the U.S. has created a similar environment for farmers in 2018-2019. Income had already been on a moderate downtrend during when President Trump assumed office. 2018 income is forecasted to be almost 20 percent lower than the year before, and recently, Reuters reported that the 2019 projected number was forecasted down an extra 10 percent after data was established. Of course, the $69.4 billion assumes that the tariff dispute will be resolved. If tariffs remain and exports stay low, income will definitely come below projections.

Optimism for a trade deal and a return to the status quo of farm exports still remain the most likely, but the current administration has proven to be unpredictably at times. For that reason, the danger of a demand shock producing consequences similar to those seen in the 1980s remains.
 










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