Under the USMCA, Canada established tariff rate quotas (TRQs) for 13 categories of U.S. dairy products.[i] Up to the defined quota amount, these products were to receive tariff-free access to the Canadian market. However, last year, Canada reserved between 85 and 100% of the TRQs for many of the product categories exclusively for Canadian dairy processors. As a result, TRQs were substantially under-filled for many of the products (Figure 1a).[ii]
In May 2021, the U.S. filed the first official grievance under the USMCA, claiming that Canadian dairy quota administration procedures were in violation of USMCA trade obligations. In a decision publicly released on January 4, 2022, the dispute settlement panel found that, “The current Canadian system, which sets aside significant TRQ volumes only for processors, does not pass muster under the Treaty.”[iii] Canada is now required to reach agreements with the U.S. on the allocations process or face retaliatory trade sanctions.
In an upcoming working paper, Chris Wolf and I calculate the economic costs of these Canadian dairy quota restrictions for the U.S. dairy industry. We find that the effective trade barrier created by Canadian quota allocation practices was as much as 71% to 94% more restrictive than the negotiated quota for some products.
Figure 2 plots the total TRQ value versus actual imports under USMCA holding current prices and quota fill rates constant. The administrative trade barrier created by Canada dairy quota allocation practices equates to approximately $1.27B in lost trade, or 67% of the total TRQ value, between now and 2030.
Figure 1: USMCA Dairy Quota Fill Rates (2021)
Figure 2: Total TRQ Value versus Actual Imports
[i] Canadian Dairy Quotas are defined in Chapter 2 “National Treatment and Market Access” of the United States-Mexico-Canada Agreement (USMCA).
[ii] Data for this figure are obtained from the Canadian Government Supply-Managed Tariff Rate Quota Utilization Tables (https://www.international.gc.ca/trade-commerce/controls-controles/supply_managed-gestion_offre.aspx?lang=eng&type=Utilization%20Tables#data)
In March of this year, inflationary pressures alarmed the U.S. economy as the consumer price index increased by 8.5 percent, the highest increment in the last 41 years. The Federal Open Market Committee (FOMC) promptly adjusted the federal funds rate (FFR), its main policy tool for regulating inflation. Among other effects, a higher FFR triggers increases in short- and medium-term lending rates (with indirect influence on long-term rates). Rising interest rates consequently serve as disincentives for borrowing. When loan volumes decrease, the money supply circulating in the economy is controlled, thus eventually lowering inflation.
How do these FOMC decisions affect farm lending? Based on available farm lending rates from the 10thFederal Reserve District, average variable farm interest rates for the 1st quarter of 2022 for short- and long-term loans were 4.93 and 4.56 percent, respectively. These levels are expected to go up with further FFR hikes projected this year. However, current interest rates are still below the most recent highs (6.50 and 5.89 percent, respectively) registered when FFR was at its post-recession peak (2018) of 2.5 percent (Figure 1). Shortly before the onset of the Late 2000s Great Recession (in the last two quarters of 2016), short- and long-term farm interest rates were even higher, reaching 9.15 and 8.36 percent, respectively.
Figure 1: Average Quarterly Variable Farm Interest Rates for Short- and Long-Term Loans, 10th Federal Reserve District, 2002 (2nd Quarter) to 2022 (1st Quarter)
Source: FRB Kansas Agricultural Credit Survey
How would the farm lending sector fare under these conditions? Several studies establish the farm sector’s resilience and ability to maintain good credit standing even during periods of economic adversity. During both the late 2000s recession and the current pandemic conditions, loan delinquency rates among farm borrowers were significantly lower than their non-farm borrowing peers. Moreover, the surge of banking failures in 2007-2009 only included a negligible fraction of agricultural banks. This year, as the economy deals with new challenges, farm lenders already have expressed their confidence in the farm sector’s ability to withstand evolving economic concerns. After all, its latest balance sheet credentials are strong.
Trends in the valuation of farmland, the major asset in the farm balance sheet, have usually been regarded as a critical barometer of the sector’s financial health. Latest national estimates from the National Agricultural Statistics Service (NASS) reported in August 2021 indicate a 7 percent increase in farm real estate values compared to August 2020 levels, with cropland values registering larger increases (7.8 percent) than pasture values (5.7 percent). Notably, average 2021 farmland values in all states in the Southern region increased over their 2020 levels, with the growth in the Southern Plains exceeding the national rate at 9 percent, while the Southeast, Appalachian, and Delta states registered annual increments of 2.7, 2.4, and 1.6 percent, respectively (Figure 2).
Figure 2: Average Farm Real Estate Values per Acre, U.S. and Southern Regions, 2017-2021
Source: USDA, National Agricultural Statistics Service
More recent, survey data for the 1st quarter of 2022 from two Federal Reserve Districts – Seventh (Iowa, and most of Illinois, Indiana, Michigan and Wisconsin) and Tenth (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and Western Missouri) – reflect a sustained acceleration trend in farmland values at even more substantial year-over-year gains of more than 20 percent.
As inflationary and economic growth concerns persist, the farm economic outlook may be tempered by the effect of rising input prices on farm incomes; consequently, slowing down and limiting future farmland valuation gains. Nonetheless, lenders expect the farm sector to hold its ground, given some liquidity cushion accumulated over sustained growth in recent periods. Hopefully the sector will continue to uphold its usual prudent borrowing behavior, making borrowing decisions that are practical, cautious, and not necessarily driven by the credit limits commanded by appreciated collateral property – much like what caused the 1980s farm financial crises.
The latest estimates for meat trade were released last week by USDA FAS and ERS. These monthly estimates include export and import data for beef, pork, and other meats during April. We’ll focus on pork and beef in this article and the different trends of each sector.
Pork exports were down nearly 20 percent both during April and year-to-date as compared to 2021. Declines in shipments to China are the biggest driver as U.S. pork exports to China are about 70 percent lower, so far in 2022, compared to 2021. Exports totaled 529 million pounds during April. Mexico and Japan were the largest volume destinations for U.S. pork and accounted for more than half of total pork exports.
Beef exports during April were up about 6 percent above April 2021 and totaled 304 million pounds for the month. Japan, South Korea, and China were again the largest volume destinations for U.S. beef during April and were each up about 8 percent compared to last year. Year-to-date, beef exports to China (up 43 percent) and Taiwan (up 44 percent) make up the largest increases compared to 2021. Beef exports to Mexico were about 24 percent lower during the first 4 months of 2022 as compared to 2021.
On the import side, both pork and beef imports were higher than a year ago. Pork imports were up 49 percent in April and beef imports were 7 percent. On the beef side, imports from Mexico (up 19 percent) and Brazil (up 51 percent) showed the largest increases from a year ago. Pork imports from Canada are the primary contributor to the increase and made up more than half of the pork imports during April.
Since the early 2000’s, global economic growth has been driven by emerging market and developing economies (Figure 1). Since 2000, the average annual increase in Gross Domestic Product (GDP) from this group of nations has been five percent, compared to just under two percent for advanced economies. The “altered economic landscape” of the 21st century that drove this growth includes technical change (the internet, and access to it), lower transportation and communication costs, reductions in tariff rates and other barriers to trade, in general, lower costs of international trade. This transformation reduced poverty and improved living standards across much of the globe (Krueger, 2006).
Average incomes in the largest economies within the category of ‘Emerging market and developing economies’—Brazil, Russia, India, China, Mexico, Indonesia, Vietnam, Philippines, Thailand, Malaysia, a group that accounts for half of the world’s population—started to rise rapidly in 2003 (Figure 2) (IMF, 2022). Measured in current $US, the average income in these ten countries (weighted by population) from 1980 to 2002 increased from $433 to $1,232, about $35 per year. Incomes grew from $1,356 in 2003 to $6,319 in 2020, about $275 per year.
Figure 2. Emerging Economies Gross National Income Per Capita and World Per Capita Grain Use
This economic activity has had a direct impact on grain markets. While world grain consumption (barley, corn, millet, mixed grains, oats, rice, rye, sorghum, and wheat) increased steadily from 1980 to 2002, per capita grain consumption was flat to trending lower from 1980 to 2002. Beginning in the 2003/2004 marketing year, per capita consumption began to increase along with incomes in emerging economies, from 312 kg per person to 364 kg per person in 2021/22, an increase of 17 percent. As incomes grew in emerging economies, so did the demand for grain—for food, feed, and fuel—in the subsequent marketing years. For comparison, per capita grain use in the rest of the world (all countries other than emerging economies) increased seven percent from 2003/04 to 2021/22. Measuring consumption on a per capita basis accounts for overall population growth experienced in these emerging economies over this time span.
Since 2003, there have been five marketing years in which a decline in production has been associated with a drop in per capita use: 2006/2007, 2012/2013, 2015/2016, 2017/2018, and projections for the new marketing year, 2022/2023 (Table 1). In 2012/13 and 2015/16, the setback in grain use was short lived, in that after a one-year decrease, consumption increased to a new, higher level in the year following. That increase in use coincided with increased production and a continued rise in average incomes.
Table 1. World Grain Production* and Per Capita Grain Use
Due to mostly geopolitical events, the 2022/2023 marketing year for grains is shaping up as a short crop year. Inflation, rising interest rates, and lingering pandemic impacts are among the factors limiting economic growth prospects in the near term. Among the factors that will determine whether we extend the recent trend in world per capita grain use are future crop production levels and global economic conditions. The combination of a short-crop and a slowdown in income growth can impact per capita grain use beyond the current marketing year.
References:
Krueger, Anne O. “The World Economy at the Start of the 21st Century”, International Monetary Fund, Annual Gilbert Lecture, Rochester University, New York, April 6, 2006. Accessed May 31, 2022 and available online at https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp040606.
Questions regarding fence disputes are a regular inquiry at the National Agricultural Law Center. For such a common issue, one would assume that this area of the law is relatively straightforward, but that is not always the case! All fifty states have passed laws relating to fences and livestock running at large, but there are significant differences between the states and sometimes even within the same state. For example, Texas is an “open range” state which means that livestock owners are not required to fence in their livestock; however, counties can, and have, adopted local stock laws that effectively close the range in those counties. It can be very difficult to determine whether a Texas county has adopted a local stock law closing the open range in that county because older records are often hard to find and may not be found online.
The confusing nature of fence laws causes numerous problems across the country, but a few general rules apply to most of the southern states. If you have livestock, you typically have a duty to keep them on your property (except for some counties in Texas.) What constitutes a legal fence is typically found in your state law, but the fence must be sufficient to keep your livestock on your own property. The last area where significant questions arise covers maintaining and paying for the boundary fences between neighbors. Once again, this area of the law is highly dependent on where your property is located. It is dependent on the state, but some states have antiquated fence laws which further complicates the problem. To read your state fence law, click here.
If you do have a fence issue with your neighbor, the cheapest way for both parties to resolve the dispute is to come to an agreement that everyone can accept. Fences are not cheap, but lawsuits will typically cost more in the long run.
