VOL. 42 | NO. 17 | Friday, April 27, 2018
Tennessee’s economy at risk in this battle of wills
By Hollie Deese
In an escalating back and forth over trade, Tennessee farmers like John Neal Scarlett are caught in the middle, worrying if politicians are keeping their best interests at heart when talking tough on trade issues.
Scarlett works more than 1,000 acres on New Market Farms in Jefferson County, just east of Knoxville. Previously, it was a dairy and diversified row crop operation, but at the end of last year he shut down the dairy portion to focus on corn and soy, top exports for the state.
“We were losing nearly about 18 percent of our gross revenue,” Scarlett says of his decision to eliminate dairy. He even made the decision before Dean Foods, a dairy product manufacturing company, sent out letters eliminating contracts with 11 farms across East Tennessee earlier this year and more than 140 farmers over all in Indiana, Kentucky, Pennsylvania, Ohio, New York, North Carolina and South Carolina.
A surplus of milk and growing competition led to the decision by Dean, which industry leaders suggest could be caused by global production, an increase in the popularity of nut and soy milk and a generation that just doesn’t drink as much cow’s milk.
Some Dean Foods subsidiaries include Purity, Mayfield Dairy, Land O’Lakes and TruMoo.
“There was a lot of things that were coming together that we could see didn’t look good. So, we chose to exit on our own terms rather than somebody else’s,” Scarlett explains.
So, when China recently announced retaliatory tariffs on 106 U.S products, designed to target up to $50 billion of U.S. products annually, it included some of the biggest exports in the state, from tobacco and soybeans to cars and planes.
The move came 24 hours after President Donald Trump unveiled tariffs on Chinese products, including steel and aluminum, for what he described as unfair trade practices.
And that makes Scarlett and lots of other farmers a little nervous.
Tennessee exported $1.5 billion in farm commodities in 2016, including $422 million in soybeans, $96 million in cotton, $79 million in tobacco, $87 million in corn, $53 million in beef and $23 million in pork, USDA statistics reveal.
“It wouldn’t be the first time that things have got out of hand,” Scarlett adds. “I just hope the trade folks that are negotiating spend some more time diffusing this situation. It couldn’t come at a worse time for farmers and ranchers in America.”
Trump states targeted
Tennessee has 65,900 farm operators and another 4,980 agriculture-related jobs, USDA statistics show. That’s about 71,000 jobs in agriculture. The state also employs 941,000 in auto-industry jobs.
That’s more than one million jobs that could be impacted by Chinese tariffs.
Aluminum and steel manufacturing, the industries President Trump’s proposed tariffs aim to protect, employees far fewer. There are 5,400 aluminum manufacturing jobs and 10,000 more at supply firms in Tennessee, The Aluminum Association reports. There are 1,040 structural iron and steel workers in Tennessee, according to the Bureau of Labor Statistics.
Vanderbilt law professor Tim Meyer, an expert in public international law with an emphasis on international economic and energy law, says there’s a set of tariffs China has already imposed in response to the steel tariffs.
Sorghum, soy and autos tariffs are in response to the much more substantial tariffs the Trump administration has proposed on a huge range of Chinese products, particularly technological products.
“The Chinese are going to retaliate, and they’re going to retaliate by imposing a whole set of tariffs on a whole range of US products,” Meyer explains. “And those products are very deliberately chosen to be products that are important to the economy in the states that voted for President Trump. So, it’s not an accident that they are targeting agriculture and autos, in particular.”
Farmers could see their incomes hit, maybe hard, and the effect could be huge on the American agriculture economy.
“China is the largest consumer of American agricultural products, like sorghum and soybeans,” Meyer says. “You are, potentially, talking about reducing the profits of American farmers substantially, as well as American automakers.”
Meyer adds there is still hope this won’t escalate into a trade war because the substantial set of $50 billion in tariffs that the Trump administration has indicated it’s going to impose on a number of Chinese products have not yet been imposed. Likewise, the Chinese have not actually begun the retaliatory tariffs.
“That gives some room for them to negotiate, some room for them to back down,” Meyer acknowledges. “I don’t think we are, yet, in a full-blown trade war. I think we are in a period in which the two governments are, in a reciprocal fashion, ratcheting up the tension in the hopes of wringing concessions from the other.
“We’re still, very much, in negotiation mode.”
But if it were to go past posturing, the effects could be devastating for Tennessee’s farmers.
“It’s going to have a considerable effect,” Scarlett says. “We would like to see (Trump) work for free trade, because trade is... that’s what we live and die on. We would hope that our leaders, the trade officials and the American leaders, would put more effort in to diffuse a tense situation.
“I don’t know what the end game will be, but I would hate for us to get in a spitting contest and have agriculture as the only soldier in the fight on this thing, because it could really have some far-reaching consequences.”
Scarlett can’t say how much of his own product goes to China, only that the U.S. supplies about 65 percent of China’s soybean purchases. But selling products into foreign markets is becoming an ever-larger slice of his business. And 20 percent of farm income comes from trade.
The USDA reports there were $140 billion in exported farm products in 2017, leaving a surplus close to $21 billion. Numbers for 2018 are expected to be a little less.
“There’s very few industries that are doing that,” Scarlett says. “We’ve spent decades working for free trade, and everything economic-wise points to that being the way to go. So, it makes it tough when we start down this road. It’s hard to say we’re protecting one industry at the expense of the other stuff. Does that make sense?”
Jai Templeton, Tennessee’s commissioner of agriculture, points out that China is one of the state’s largest foreign markets for agricultural products, sourced from across the region and shipped through Tennessee. In 2016, Tennessee exported nearly $1.5 billion in farm commodities worldwide. Of that total, $422 million was soybeans, $96 million was cotton and $78 million was tobacco.
“Those cash crops – along with pork, beef and wheat – are all on the list for retaliatory tariffs for a country that has historically been a primary destination for Tennessee’s agricultural exports,” Templeton says.
“Maintaining this critical trade partnership with China is extremely important. The Tennessee Department of Agriculture is closely following the tariff situation, and we are actively seeking additional trade opportunities with other nations.”
NAFTA still shaky
Tariffs are not the only possible disruption for a market that is already at the whims of everything from tough talk to bad weather.
“The administration is talking, once again, about terminating NAFTA,” Meyer explains. “Many producers, but in particular American farmers like those in Tennessee, rely on NAFTA for access to farm markets, in particular to Mexico.”
The North America Free Trade Agreement was signed by Canada, Mexico and the United States in 1994, creating a trilateral trade bloc. Shortly after President Trump was elected he said he would begin renegotiating the terms of NAFTA, a top priority being reducing the US trade deficit.
US trade representative Ambassador Robert Lighthizer announced last week that the idea has been floated again of the United States withdrawing from NAFTA as a negotiation tactic, both to force Mexico and Canada to conclude the negotiations, as well as to force congress to adopt NAFTA 2.0.
“That is fraught with peril, both for the Tennessee economy, with the producers that rely on access to Canadian and Mexican markets, as well as for the broader nation,” Meyer says. “If Mexico and Canada don’t come to the table and reach a new agreement, if Congress doesn’t adopt a new agreement, you could find yourself without preferential access to our two neighbors.”
For Scarlett, it is business as usual at the farm, playing catchup on nice days to account for the extended cold this winter, while waiting to see what each week’s news brings on trade while he thinks about the 50 percent drop in farm income he has had over the past four years.
“The tariffs probably couldn’t come at a worse time, to be honest,” Scarlett says. “The more trade and the more markets we have, the better off we are. I understand these trade negotiations get messy sometimes, but I don’t want agriculture to be the only whipping boy.’’
With so many moving parts in agriculture, farmers have to be educated, knowledgeable and experienced at many different skills, from mechanical to watching the markets to having to lobby for themselves and educate others on agriculture, says Will Freeman, public information officer with the Tennessee Department of Agriculture.
“I’m sure a lot of people are just waiting and seeing at this point what’s to come and hoping that it doesn’t have too big of an impact for us,” Freeman adds.
The bad news? China could switch from the U.S. – including Tennessee – to Brazil for its massive soy bean needs. The good news is that might force current Brazil buyers to look to U.S. growers. -- Photograph By G. Rowsey, Courtesy Uunversity Of Tennessee Institute Of Agriculture
One possible positive revolves around soybeans.
As China has moved to Brazilian soybeans, other countries that import Brazilian soybeans might be forced to buy American. But that’s the only positive right now, Freeman adds.
“What we would hope is that, obviously, China would continue to purchase our exports without an increased tariff,” Freeman adds. “But if other countries do adjust and come to buy these commodities from us for similar or same prices, that would, I assume, be best-case scenario.”
Investors not happy
Trip Miller, a managing partner at Gullane Capital Partners in Memphis, says these types of tariffs on exports from the United States are bad for U.S. agriculture and the average farmer.
And that makes it bad for investors.
“From a commodity standpoint, it is bad for the agricultural side of Tennessee’s economy,” Miller explains. “But what we don’t know is, is this just a lot of powerful grandstanding by our government and the reaction by China, or not?
“What I would say is that global trade wars are bad for everyone. Nobody wins those. I’m a capitalist. My job is based on whatever the market serves us up. We’ve got to react to it and try and make money for our investors off of it. But I’ll be frank. I don’t get this one.”
Neither do the farmers like Scarlett.
“Agriculture doesn’t need to take the brunt of whatever’s going to happen,” Scarlett says. “If we’re protecting steel and aluminum, what are we protecting it for? Because, when agriculture is affected, it affects steel. It affects aluminum. It affects local tax bases. It affects schools and hospitals.
“If you don’t have agriculture, you don’t have grocery stores, and you don’t have delivery drivers, and you don’t have the bread. You don’t have the cereal. You don’t have the milk. You don’t have cotton for your clothes. You don’t have the soybean products that we use in the paints and the soil and the ethanol in the gas and on and on and on.
“So, it’s a pretty big deal when somebody affects agriculture.”