“It was the best of time, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” Charles Dickens seems to have captured the state of affairs with the United States tariff regime when it comes to Canada.
In the game of Trump tariff dodgeball, Canada was left standing along with Mexico. Canada’s agriculture sector has emerged from the announcement largely unscathed. The only sector that was targeted was automobiles which will have a 25 per cent tariff on non-CUSMA content.
The biggest shock to the markets was the level of the tariffs announced by the U.S. administration. Although these tariffs may be adjusted in the coming weeks, they have raised the real possibility of a global recession in the second half of the year.
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Stock markets have imploded since the announcement as the market was not anticipating the magnitude of the tariffs. The tariffs imposed by the U.S. administration averaged 22 per cent and is the largest average tariff rate since 1909. The announced average tariff rates of 22.5 per cent even exceeds the 19.8 per cent enacted by the infamous Smoot-Hawley tariffs in 1930.
The impact of the tariffs on commodities has been very negative for crude oil, but more modest for agricultural commodities. The main reason for this price behaviour is that crude oil demand is linked to economic growth. A slowing U.S. and global economy will curb demand growth of energy and energy products.
Agricultural products don’t usually see a drop in demand during recessionary times. The fact of the matter is that people tend not to change their food consumption during tough economic times. Families do change their consumption patterns by moving to lower cost alternatives but generally eat the same amount through recessionary times.
Oilseeds are most vulnerable to tariffs as a portion of vegetable oil demand is result of biofuel use. This links vegetable oil prices to economic growth. Tariffs also are going to play a large role in determining oilseed prices. Soybean markets were roiled by the imposition of a tariff of 34 per cent on U.S. soybeans. This likely means that current U.S. sales to China will be cancelled ending stocks will rise. The reaction was similar to the canola tariffs that were put in place by China earlier this year. This will create a headwind for oilseed markets unless there is a ceasefire in the trade war. The good news for farmers is that canola values have partially recovered the losses experienced since the imposition of the Chinese tariffs on canola oil and meal.
Grain markets have essentially moved sideways through the past week, despite the tariff announcements. Corn and wheat markets have been in a trading range for the past month and really haven’t responded to the recent tariff announcements. Corn markets are vulnerable to a tariff sell-off but the main importer, Mexico didn’t see additional tariffs other than those for autos. Wheat markets were also not impacted by the announcement because Mexico is also a major purchaser of wheat.
Wheat exports from the U.S. are led by Mexico, which has bought 3.95 million tonnes so far this crop year. The Philippines has imported 2.6 million tonnes, while South Korea accounted for 2.4 million tonnes. The tariff rates for the top five wheat importers other than Mexico average 28 per cent. Canada should be taking advantage of the U.S. tariffs and reminding the countries that our wheat is available to replace U.S. wheat sales.
Additional meat sales to Asia from Canada should also be pursued by exporters. Although China has imposed import tariffs on Canadian pork, significant markets such as Japan and South Korea should be pursued. This is a time to remind U.S. customers around the world that Canada is open for business.
