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US agricultural producers concerned as NAFTA talks loom

Talks over the North American Free Trade Agreement are looming even larger for U.S. agricultural producers in the wake of President Donald Trump's decision to tie steel and aluminum tariff exemptions for Canada and Mexico to a successful outcome of efforts to renegotiate the 24-year-old trade deal.

Hitching the long-term status of the Canada and Mexico exemptions — as well as a substantial portion of the U.S. agricultural industry's export fate — to NAFTA talks has raised the stakes for Trump and U.S. Trade Representative Robert Lighthizer to strike a deal, University of Michigan Professor Kyle Handley told S&P Global Market Intelligence in an interview.

"They've prolonged this period of uncertainty," he said. "The specter of protectionism is hanging over them."

Trump signed orders March 8 to impose a 25% tax on all U.S. imports of steel as well as a 10% tariff on all U.S. aluminum imports. The tariffs are set to take effect March 23. However, Trump gave a temporary exemption on the tariffs to Canada and Mexico, making them contingent upon the U.S. successfully renegotiating NAFTA.

But prospects for a revised NAFTA remain dim, with talks on only six of the document's 30 chapters completed after seven rounds of negotiation. The next round of talks is expected to take place in April in Washington.

In 2017, Canada was the second-largest single export market for U.S. agricultural exports after China, accounting for $20.4 billion, according to the U.S. Department of Agriculture. Over the same period, exports to Mexico totaled $18.6 billion, making it the third-largest market for U.S. agricultural exports.

"As long as that remains one of his options that he's blustering about," Handley said, "I think it's going to be difficult for U.S. firms ... to make certain decisions about future production and where they're going to sell their goods."

"We simply don't know how these negotiations are going to work out," he added.

Trade war fears

Trade associations and experts on U.S. agriculture said they were still concerned about retaliation to any long-term tariffs on aluminum and steel.

Dave Warner, a spokesman for the National Pork Producers Council, said in a statement via email that the organization is concerned that other countries could target U.S. pork exports in response. The meat was one of the top-five U.S. exports to both countries in 2017, according to the USDA.

"We've had some concerns about the fate of NAFTA before the steel and aluminum tariffs were even considered, and those concerns remain," Warner said. "Separately, we're concerned about retaliation resulting from the tariffs. Kevin Skunes, president of the National Corn Growers Association, said that retaliatory measures could drive up costs for farmers, adding that Mexico was the top export market for the product in 2016-17, with 548 million bushels of corn sent to the southern neighbor over that span.

A trade war "could also increase the prices farmers pay for necessary equipment, such as tractors and combines," Skunes said. For some industries, the exemptions offer some hope for a negotiated resolution instead of a trade war.

Mark Powers, president of the Northwest Horticultural Council, which represents fruit growers in Washington, Oregon and Idaho, said the exemptions provided much-needed details on who would be subject to the tariffs.

"There's more clarity, and that's a good thing," he said in an interview. The exemption also means that "there's more time for the three countries to address the United States' concerns," a positive development since other countries appear interested in talking to the administration about the concerns instead of levying retaliatory tariffs on products.

Collectively, the council's members ships about 30% of their produce overseas, including about $500 million in combined exports to Canada and Mexico, Powers said.

Shifting those sales to other markets in the face of retaliation would be "extremely harmful," he said.

Products at risk

If the NAFTA talks fail and Trump decides to lift the tariff exemptions for Canada and Mexico, some major U.S. exports to those countries could suffer.

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For 2017, vegetables, fruits, beef, pork and dairy products were among the top U.S. exports to Canada, while corn products, beef, soybeans, pork and wheat were among the largest to Mexico, according to the USDA.

U.S. agricultural products have been a prime target for retaliatory tariffs. In 2009, the U.S. canceled the "Cross-Border Trucking Demonstration Program," which allowed Mexican trucks to operate in the U.S., spurring Mexico to implement retaliatory tariffs on a number of U.S. exports, including agricultural goods.

As a result, U.S. producers, such as members of the National Potato Council, lost business to counterparts in Canada, which was not subject to Mexico's tariffs, said Executive Vice President and CEO John Keeling.

The two countries resolved the dispute in 2011, but many former buyers of U.S. potato products, such as French fries, have continued to rely on other sources, Keeling said in an interview.

"You don't ever get the whole market back," he said.

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Some of the biggest names in U.S. agriculture could also be exposed to retaliatory tariffs. For White Plains, N.Y.-based Bunge Ltd. and Chicago-based Archer Daniels Midland Co., Mexico is a market for products ranging from cornstarch to wheat flour, according to SEC filings.

St. Louis-based Monsanto Co., whose products vary from soybean seeds to insecticides, said its international sales "were principally to customers in Brazil, Argentina, Canada and Mexico" during its 2017 fiscal year.

Canada and Mexico were also major markets for Springdale, Ark.-based meat packer Tyson Foods Inc. During the company's 2017 fiscal year, Tyson reported $3.9 billion "related to export sales from the United States" to international destinations, including both Canada and Mexico.

The companies do not break out their total sales in either Canada or Mexico, and none of them commented for this story.

Tough rhetoric

Trump's decision to impose the tariffs was based on what he said was a growing national security threat because of American dependence on foreign steel and aluminum for military equipment as well as an economic threat because of the shuttered smelters and factories in the U.S.

Many trade experts see Trump's move to tie the tariff exemptions for Canada and Mexico to NAFTA negotiations as a leveraging tool.

The stakes are high for U.S., Mexican and Canadian producers who receive duty-free benefits under NAFTA. Canada, in particular, has pushed back with threats of retaliation.

"We are in the process of renegotiating NAFTA and I don't want the president to think that he can put tariffs on Canadian aluminum and steel without facing consequences," Prime Minister Justin Trudeau said, according to a report by The Toronto Star.