It is frustrating to see that China’s decision to hit American pork with a 25 percent tariff is also depressing Canadian hog prices.
The recent decline in the hog market is not all caused by the trade friction between the two super powers — an expanding American herd is also an influence — but the tariffs are the major factor.
As you might know, in response to the plan by U.S. President Donald Trump administration’s to impose tariffs on steel and aluminium, China responded with its own threats on a host of U.S. goods.
On April 1 it said it would impose the 25 percent tariff on pork and more than 100 other items. On April 4, in response to further provocation from the U.S., it threatened tariffs on another 106 products, including soybeans.
On April 6 Trump threatened tariffs on another $100 billion in Chinese goods and China warned of a “fierce counter strike” if the U.S. followed through.
The fear of such tariffs and then the announcements themselves have weighed heavily on hog prices for the past month.
Cash prices in the U.S. western corn belt between March 1 and April 5 declined about 27 percent, while the Signature Five price in Canada slid 21.5 percent.
At the time this was written, it was not clear if the two parties would actually follow through on all the threats.
Trump’s negotiating strategy in many situations is to drop a figurative bomb to spark outrage, focus attention and force concessions and then allow others in his administration to try to calm the situation and add clarity. Trump then slides in with another tweet or two to show he is willing to be reasonable, at least until the next early morning tweet storm.
I have seen some analyst comments that if a real trade war develops, the U.S. with its booming and diverse economy would be able to weather the turmoil better than China. That may be true, but it can also be argued that China’s authoritarian political system gives it a resolve that the United States might not be able to sustain.
Chinese leader Xi Jinping just got the communist people’s congress to abolish the two-term limit on holding the presidency.
Chinese leaders don’t like to lose face and they have no need to pander to the public.
However, there are mid-term congressional elections in the U.S. this fall, and the governing Republicans in the agricultural Midwest don’t want their farmer constituents to be angry. The Republican hold on the House is at stake.
In 2017, China demand accounted for about 20 percent of American pork exports by volume, and the value was a little more than US$1 billion.
Meanwhile, those imports made up only about one percent of what China consumes.
They are mostly self-sufficient, producing 97 percent of their needs. They should be able to easily replace American product with pork from Europe, Canada and elsewhere.
However, the U.S. might be hard pressed to find other outlets for what it would have sold to China.
Its largest pork export market is its southern neighbour, and Mexican-American relations are tense to say the least.
Until now American hog producers were looking at a pretty good year. Recent profitability and demand from new U.S. slaughter plants had producers expanding.
The U.S. Department of Agriculture’s March 1 pig report showed the breeding herd up two percent from last year and the total herd up three percent.
However, the price decline in the past month now has producers chalking up losses.
Canadian producers are caught in the crossfire.
Prices here are closely linked to the Chicago live hog futures market, modified in part by the exchange rate.
As noted, cash prices here are down, but not quite as much as in the U.S.
The market will see adjustments. Canadian prices might hold up if processors here are able to sell more pork to China. On the other hand, more American pork could come into Canada.
We can only hope that the U.S. and China will pull back from the brink of trade war and put the tariffs on hold while they move to the negotiating table.
Trump’s arguments about steel are weak, but he has a point about China unfairly accessing American technology through theft or strong arm tactics.
If the rhetoric is muted and negotiators are given room for give and take, a win-win deal could be made.
But alas, nuance and compromise are not Trump’s forte.