An Eye Toward Exports

U.S. farmers grow crops with feeding the nation in mind. The promise of exporting is a motivational force for farmer's to produce as much as they can. But domestic farmers face tough competition from countries with export-first strategies. Not to mention the pressure from fluctuating currency values and unfavorable price distortions. Making a go at farming is a hard row to hoe.

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American agriculture is all about gaining access to export markets for food and feed.

That’s because we always have cheap leftovers.

But agricultural exports from the United States meet stiff competition from other countries—places like Brazil, Argentina, Australia, New Zealand—where those competing countries intend to grow more than they use.

They produce for export. America produces first, and then tries to export as much as we can.

In terms of American agricultural production and policy, exports are the carrot on a stick that keep farmers growing surpluses.

It (food) is cheaper that way.

In America, we know most of what we grow will be utilized here, with only a fraction sold to foreign buyers. After domestic demand is filled, by reducing surplus stocks, exports decide prices our farmers receive for almost everything they grow.

Unfortunately, exports are predictably static while rising food imports and health concerns for US consumers rise.

Food demand is inelastic. We stop eating when we feel full.

Ever since USDA decided to allow more foreign beef in, and Smithfield started importing hog feed into their pork stronghold in the southeastern United States, American farmers have learned that we aren’t immune to the world wide web of trade where currency values and value added tax (VAT) can distort prices in favor of our trading partners.

But our political leaders aren’t so quick to catch on because now in exchange for having China offset South American beef imports into America by buying more of our beef, we’re going to buy unlabeled, possibly tainted VAT poultry meat from China.

That’s also one reason why crops like corn or wheat grown in America today cost more to produce than they’re worth.

Also called sales taxes, China levies VATs on imports as well as exports. As an example of its effectiveness, a recent reduction in the VAT on soybean imports from 13% to 11% has accompanied a surge in soybean imports to China, where cargo ships are backed up waiting to unload.

Analysts say the added supply might lower the price of soybean meal in China, a protein supplement for livestock and poultry.

If that’s the case, it (food) is about to get cheaper there.

VAT is an illusion paid for by consumers. Detractors of WTO-compliant VATs say they are regressive and raise the cost of food and other essentials for poor people, making them pay more taxes than they really deserve.

The way that works is if an exporter or importer can show a loss on goods they sell, a tax credit backed by the VAT to recover their loss is the result. The World Trade Organization (WTO), to which we, the US, belong, says that’s ok. And China recently removed other taxes on services, replacing them with a VAT.

But so far America hasn’t done anything like that.

It’s all just other people’s money until you get down to the farm level where income and expenses must balance out. Markets manipulated overseas really hurt our bottom line.

Value added taxes affect currency values. US farmers can’t benefit from VAT tax rebates or price manipulations while selling into what is basically a currency-value dominated marketplace where WTO and trading giants like China call the shots.

Maybe that’s why Archer Daniels Midland (ADM), the grain-exporting powerhouse that refers to itself as supermarket to the world, and a few members of Congress, have been looking around Washington for support of a Border Adjustment Tax (BAT). BATs would most likely be in violation of WTO rules by unfairly penalizing imports for no good reason other than to keep them higher priced and out. We’ve been here before with WTO rulings against Country of Origin Labeling (COOL) for US beef, pork, and poultry deemed illegal in foreign run WTO courts.

The long game might be that border taxes are a Trojan horse exporters like ADM support in hopes they might replace other US taxes, like corporate income tax. In that case ADM would be allowed to function tax-free.

That’s because consumers pay VATs and BATs. Food corporations doing business in the US could conceivably operate free from taxes other than those they pass along in their pricing. One problem with that is that no US consumer or wage earner gets to operate the same way.

Death and taxes…

You can’t escape them.

ADM netted $1.279 billion last year. Earnings before income taxes, depreciation and amortization (EBITDA) were over twice that much. So levying a BAT on imports while eliminating corporate income tax would suit ADM to a “T.”

Retaliation is a real possibility. If the US adopted a border tax on behalf of ADM et al., in the end it would be US farmers facing lower farm gate prices, and consumers, who paid the price via higher priced VAT taxed consumer goods. That’s why retailers like Walmart and Target are in opposition.

Anything that raises product costs usually reduces sales.

Considering the countries of origin of the merchandise retailers handle these days, it’s easy to understand why they feel that way.

Agriculture is an easy target in trade wars. Trade disputes usually result in depressed prices and a boon to consumers by lowering food costs, which in turn frees up money to buy more consumer goods — like imported stuff sold at Target and Walmart, and a boon to exporters like ADM when commodity prices fall.

Trade disruption always, inevitably, impacts farms as time sensitive perishable surpluses start piling up in rural America.

Low prices stimulate demand…But…Opening new doors to trade benefits traders, not producers, because farms are selling the equivalent of day old bread below their cost of production.

It (food) is cheaper that way.

 

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