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Protectionist rhetoric darkens agricultural markets

Agricultural trading bosses gathered in Lausanne, Switzerland for the FT’s Commodities Global Summit have warned against closed borders and potential trade wars as rising protectionist rhetoric casts a shadow over their ability to access global markets.

David MacLennan, Cargill chief executive, says raising tariffs will hurt the world economy, and Carl Casale, head of CHS, a leading US grain co-operative, highlights the damage it would wreak on the country’s farming sector, already suffering from years of lower prices.

With farm earnings projected to fall for the fourth consecutive year while a stronger dollar reduces the competitiveness of agricultural exports, there was “not a lot of resilience within the system to absorb trade disruptions,” Mr Casale told the summit audience in Lausanne.

Protectionism would also be bearish for the well-supplied markets if it stymied trade flows and some countries would end up not being able to sell their production, say analysts. It is a stark contrast to the surge in grain prices during 2007-2008 and 2010 when droughts curtailed the production of Russian grains, and Moscow implemented trade restrictions.

“Right now it would contribute to lower prices,” says Abdolreza Abbassian, senior grains analyst at the Food and Agriculture Organization.

The pressure on the agricultural sector due to lower prices is unlikely to abate with plentiful supplies coming from most key producing regions. “At the moment, the crops have been very good in the US, with record crops in Brazil and Argentina and good crops in Russia and Ukraine,” says Chris Mahoney, chief executive of Glencore’s agricultural unit.

Mr MacLennan told the FT summit that trade was likely to come after the three leading priorities for the Trump administration — healthcare, tax reform and infrastructure. However, US president Donald Trump’s pursuit of building the wall between the US and Mexico has exacerbated worries about how he will handle the North American Free Trade Agreement between the US, Canada and Mexico that he has pledged to renegotiate.

Away from Switzerland, Juan Carlos Baker, Mexico’s deputy economy minister, says that Mexico is considering cutting the import tariffs to grains from Brazil and Argentina to zero — the same terms as US farmers now enjoy.

Although importing grains from faraway South America, rather than the US next door, might sound uneconomic, that was only because Nafta made it cost-efficient to rely almost exclusively on the US, says Mr Baker.

“US exports are by train. Bringing goods from Argentina or Brazil is by ship, which is still very cheap,” adds Mr Baker, who points out that if the US had to pay tariffs on its exports, both their grains and the agricultural commodities from South America would be on an equal footing.

Bosco de la Vega, head of Mexico’s National Agricultural Council, a leading farming lobby group, told the Financial Times that about 25 of his 300 members were “actively” looking for new suppliers outside the US.

The idea was not to try to go individually but to group several firms into bigger orders for economies of scale, he adds.

José Calzada, the Mexican Agriculture Minister, and Mr de la Vega expect to travel to Brazil, Argentina and Russia within the next 30-40 days to seek deals. Mexico wants to import corn and soyabeans from Brazil and Argentina while it is seeking to import wheat from the Black Sea producers including Russia.

Mr de la Vega says his members are very worried. “[US protectionism] has become a real threat. It’s time to reconsider the future and diversify exports,” and he adds: “The uncertainty is what is hurting us.”

Concerns have been also been rising on the other side of the border. The US National Grain and Feed Association, recently announced that it would “fight tooth-and-nail to preserve the many positive features” of Nafta for US agriculture.

Executives of another US farming lobby, the US Grains Council, have travelled to Mexico to try and soothe worries among their customers about the potential trade tensions between the US and Mexico.

In Lausanne, Cargill’s Mr MacLennan acknowledged that some people felt that trade was making their lives worse, not better, by contributing to job loss and social inequality. However, he notes that trade agreements were an “easy scapegoat” for a wide range of social challenges”.

“Trade is not the reason so many citizens face hardships around the world. But it has become a convenient excuse,” he says.

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