ANALYSIS: US steel and aluminium tax may impact corn more than soy

It was widely anticipated, but when it came it still surprised – US President Donald Trump’s announcement that all steel imports into the US would have a 25% tariff slapped on them is the latest salvo in a deteriorating spat with China.

It is the news that many soybean farmers in the US had feared, with analysts and industry bodies identifying soybean as a potential Achilles heel in deteriorating international relations between China, the big importer, and the US – a huge supplier.

In targeting steel, however, Trump has potentially spared soybeans, but could it be at the expense of corn?

China steels the show

Despite regularly being blamed by president Trump for causing the demise of the American steel industry, China’s steel exports to the US have fallen dramatically and only amount to around 1-2% of its total steel exports.

That has left many analysts doubting whether China will target imports of US soybeans, worth $14 billion a year, in a tit-for-tat spat.

But the US does get a chunky 25% of its steel from Canada and Mexico, raising the question is it less about China and more about trying to force negotiations to reform Nafta?

“It certainly has implications for Nafta and it is likely to complicate negotiations hugely. Whatever about the trade in crude steel, there are all the goods that are being made from steel, auto being the big one and a contentious issue already in the negotiations,” said Caroline Bain, chief commodities economist at London-based Capital Economics.

This week negotiators from all three nations sat down in the seventh round of talks to discuss how to reform the agreement, which currently states 62.5% percent of the cost of cars and light trucks must be sourced from Nafta countries to avoid tariffs.

However, Trump wants that threshold to be increased to 85% and is also seeking to ensure that 50% is made in the US as part of his “America First” campaign.

Placing tariffs on steel makes things messy and raises the chance that little progress in the talks will be made immediately

“The immediate impact would be that there will be no progress made at the talks,” Bain said, adding that this could increase the risk that Trump may be tempted to try to walk away from the deal - another campaign promise he made.

She added that the longer the talks go on, the greater the likelihood that Nafta renegotiations may break down as they become embroiled in politics.

In July Mexico will hold its presidential election, with leftist, some say anti-Nafta, Mexico City mayor Andres Manuel Lopez Obrador, a front-runner to win.

And later in the year, the US will hold its mid-term elections, where President Trump may seek to use nationalistic anti-trade rhetoric to win votes – a dynamic that could escalate tensions in the talks.

And that’s where corn comes in.

Implications for agriculture

Mexico is one of the US’s biggest corn customers, with the NAFTA agreement already well-versed in the flow of US corn into Mexico and the occasionally more problematic flow of raw Mexican sugar that goes back the other way.

Through 2017, Mexico imported a total of 13.7 million mt of yellow and white US corn, according to USDA export inspection data, with some 912,000 mt exported in January already.

But the rhetoric stemming from the administration has soured relations and fostered a pan-South American trade response, with Mexico sending a delegation to Argentina and Brazil in 2017 to talk, amongst other things, corn.

Recently, the country’s statistics agency reported that Brazilian corn exports into Mexico had soared, albeit from a very low base.

For US corn voices, however, the effect of rhetoric is undone by the tangible links that bind economies together, with corn demand likely to remain robust for wholly pragmatic reasons.

“No,” is Futures International’s Terry Reilly’s emphatic response to the question of whether corn demand will suffer in the event of NAFTA unravelling.

“Because from time-to-time the US will be the only shop in town that will offer good quality corn at a cheap price… [plus] there are a lot of US plants in Mexico that depend on US corn to grind – so I don’t think it’s going to be a long-term threat,” he explains.

“Soybeans are equally untroubled; if there was a true worry out there, soybeans would have been worried overnight… If China decides to slap on a tariff on US soybean exports, it will likely be low and just make it that little bit harder to compete with South America,” he said.

That competition is something that the US farmer is already familiar with, but with the issues that South America is now experiencing with its soybean crops, it may be NAFTA and corn that stands to lose the most.