NAFTA and agriculture

There was some interest in this topic but not a whole lot. So I will put up a short post, which will be pretty straightforward. I will discuss U.S. exports today.

The key thing to keep in mind is that agriculture is a global market. So if third-countries displace American agricultural products in the Mexican market, then American producers will be able to export their products to the places the third-country used to sell to. But if Mexico just reduces its consumption of all agricultural imports, then U.S. producers will lose unambiguously.

Mexico takes 8% ($1.8 bn) of American soybean exports. It takes 21% ($2.4 bn) of U.S. corn exports. It takes 11% ($0.9 bn) of our wheat exports.  It turns out that 36% of U.S. corn travelled to Mexico by sea in 2007-10. See page 10. The share is even higher for other products: 55% for wheat and 38% for soybeans; see pages 20 and 23. I used USDA data to calculate costs per ton-mile for soybeans: subtracting out $230,000 per ship Panama Canal tolls for cargoes from the U.S. costs gives you an average cost per ton-mile of 49₵ from the U.S., 43₵ from Argentina, and 39₵ from Brazil; fixed costs come to $5.70 from the U.S., $7.20 from Argentina, and, inexplicably, only $2.70 from Brazil.

With that data in hand, let’s look at those three markets and imagine that Mexico slaps MFN tariffs on the U.S. while opening to the South Americans. 

Soybeans: Mexico could easily supply itself from Argentina and Brazil. Landed costs to Mexico are already cheaper for the Latin American nations, even with higher transport costs; only South American export taxes keep us competitive.

Slap a 4% tariff on American exports (while removing them on the South Americans) and Argentina and Brazil would drive us out of the market. But remember that soybeans are sold in a world market. So more South American exports to Mexico means less South American exports to somewhere else. American production will fill up the gap. When it all shakes out, you would have a small loss for the Americans, a small gain for the Argentines and Brazilians, and about a wash for the Mexicans. 

Corn: The U.S. and Argentina have more or less the same corn production costs. But transport costs from Argentina are quite a bit higher. If Mexico imposed MFN tariffs on corn and suspended them on South American exports, the landed cost of U.S. maize would still be about 13% less than Argentine corn. Americans would lose sales via a general cutback in Mexican purchases, not a switch to South America. 

Lose-lose, although more for Mexican consumers, since U.S. producers would presumably find alternative markets. That said, Mexican corn farmers would gain, and rural voters are a major constituency, about 30% of the electorate. (See page 10. Rural voters punch slightly above their weight in turnout terms: see page 9.)

Wheat: See soybeans. 

Upshot: ending NAFTA would not be catastrophic for American soy and wheat exporters, but both would have to discover new markets right quick or suffer some unpleasant transition costs. It would be a clear boon for Argentine and Brazilian farmers, who could capture a whole new market. Mexican corn farmers will gain; Mexican consumers will lose.

Still, NAFTA probably won’t end.

Comments

[J.H.]

Interesting, but then was the furore over NAFTA by Trump and his supporters about agriculture or manufacturing? I might be mis-remembering, but I seem to remember a lot of the talk about jobs migrating was in relation to manufacturing jobs and less agricultural jobs.

In regards to the effects of a NAFTA collapse on agriculture though, what about the effects on beef, poultry and pork? You've spoken on crops but not livestock. Any chance of doing a short post on that?

And I would imagine that a reshuffling of agricultural trade would be interesting in terms of exactly which markets the US producers turn to with the loss of the Mexican market. The EU market is of course an option, but only insofar as the crops are not GM if I remember rightly. I think Russia still bans imports from the West, which leaves Asia, Oceania and Africa.

The increased gains for Argentina and Brazil are interesting as well as a Trump inspired demise of NAFTA sounds like it might just rekindle Latin American trade and integration...which would be a silver lining in my book.

[Noel Maurer]

The farm furore over NAFTA is strong, but in reverse: farmers really don't want to see it go away. And they're right: they've got a protected market there. It'll take work to sell more to Asia if the Mexicans start buying Argentine and Brazilian wheat and soya, while American corn farmers will just lose.

But it won't be as catastrophic as they're suggesting. Annoying, problematic, but not catastrophic.

[J.H.]

Hmm...I suppose overall it won't be catastrophic, but a couple of individual farmers might lose out big time. And that fear would definitely drive a strong response to the prospecting of losing NAFTA.

I was wondering though what the longer term prospects might be for American v Latin American wheat and soya in Asia though. Yes agricultural products are sold on a world market, but what is the landed costs for American v Argentinian v Brazilian wheat and soya in Asia? If the Latin American crops are more cost competitive in Asia (which I am assuming might be the case since that is where they are being sold now as opposed to the American produce), then a Argentine-Brazilian shift to Mexico will see Asian consumers getting wheat and soya for higher prices, but they may still seek the Latin American wheat and soya...which in turn could spur Argentine and Brazilian farmers to put more land under wheat and soya no? If so then when they do begin to produce more wheat and soya, provided their prices don't increase in response to the increased demand for their wheat/soya from both Mexico and Asia then they can out-compete the American producers in both Mexico and Asia and that would spell trouble in the long term.

All of that though hinges on two speculations - 1. that the Argentine and Brazilian farmers can put more land under wheat and soya and 2. that their prices won't increase to the point where American wheat and soya remain competitive.

[Noel Maurer]

Check the links! They have the information you're looking for, I think.

U.S. farmers are very worried about Brazilian soya, much less so Argentine wheat.