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Analyst advises to keep eye on currency as well as tariffs

WASHINGTON, D.C. — Both U.S. and Chinese tariffs took effect on Friday, and the clash over trade isn't expected to end anytime soon.

Markets fluctuated until June employment numbers seemed to steady investors. But much of the billions of dollars in Chinese tariffs focus on U.S. agricultural production, and it has farm market analysts worried.

If farmers managed to sell soybeans early in the spring, they may be getting over $2 a bushel more than neighboring farmers who were slower to sell, said Shawn Hackett, president of Hackett Financial Advisors, Inc. Right now, the price for many farming commodities is dropping below the cost of production, meaning farmers lose money each time they sell.

His recommendation to farmers is, if possible, don't sell until the markets show signs of improving. If they can wait long enough and the trade war ends soon enough, producers will be able to sell for slightly higher prices.

Even during the turbulent next few months, there will be times when prices rise, but farmers will need to pay attention in order to get the temporarily higher prices, he explained. The first sign of an upswing will likely be the first sign of the downswing, too – the currencies of other countries.

In China, Mexico and other countries, the value of the currency compared to the U.S. dollar has decreased in recent weeks. This is caused by concerns of local residents about possible tariffs by the United States.

Hackett said the decrease in value of the currency means the tariffs the U.S. has imposed are basically breaking even. While Mexico and China are paying higher prices, when the prices are translated into U.S. dollars, it is about the same.

The Chinese stock market has also been down about 25 percent in recent weeks. “I think the market thinks the Chinese have more to lose in a trade war,” Hackett said. “Everyone is getting more nervous. Everyone's worried it'll be a stalemate and (a trade war will) be there for months.”

According to the Office of the U.S. Trade Representative (USTR), a 25 percent tariff will be added to incoming Chinese products, covering trade of approximately $34 billion in 2018. The list of products being taxed was determined by a 90-day process and the USTR is providing an opportunity to exclude certain products from the list. Exclusions will be good for one year.

The USTR started investigating the Chinese government’s actions regarding technology, intellectual property and innovation almost a year ago. The result is a list of more than 800 categories that can be found on the website.

It includes items such as compression-ignition engines to be installed in ag machinery; dryers for ag products; machinery for packaging products; parts of poultry-keeping machinery or poultry incubators and brooders; parts for ag, horticultural, forestry or beekeeping machinery; machines for sorting seed, grain or dried legumes; and machinery for preparation of meat, poultry, fruits, nuts or vegetables.

From the field to the supermarket, ag products imported from China will be hit with the new tariffs.

In retaliation, China has begun to impose 25 percent tariffs, also on about $34 billion worth of U.S. imports. During a news briefing in Beijing, Foreign Ministry spokesman Lu Kang said China is opposed to trade protectionism and unilateral pressure will be futile, but it will fight back when its interests are threatened.

On Thursday, Chinese Commerce Ministry spokesman Gao Feng said about $20 billion of the goods subject to U.S. tariffs are supported by foreign investors – including the United States.

Some U.S. goods were denied entry at Chinese ports on Friday as workers tried to determine if the tariffs were yet in effect. The products were allowed in to be subject to the new tariffs last Monday. U.S. products that will now be levied in China include fruits, wine, automobiles, soybeans, ginseng, pork and about 125 other ag goods.

Many are worried it will escalate before it gets better, and that’s bad news for U.S. farmers who have been hit with many of the tariffs. Even the corn market, a commodity that is not sold in large quantity to China, has been impacted by the fear, Hackett said. The markets are impacted by the weather and other issues, but he knows of no reason for corn prices to be down.

Soybeans, on the other hand, are exported to China in larger quantities than to any other country. The market has taken the largest hit, Hackett said, but there is no other market to fill the Chinese need and, eventually, they will have to come back to the U.S. for their supply.

In the meantime, farmers might be getting 30 cents less per bushel – a small amount that quickly adds up and impacts farmers.

Hackett is more concerned about the North American Free Trade Agreement (NAFTA). If renegotiations fail, the markets will take a harder hit than with China, but fear has attention set on China right now. NAFTA negotiations had cooled off in recent months, waiting until the Mexican presidential election. While the election recently took place, no one appears to be talking about NAFTA again.

Hackett hopes the delay in NAFTA talks will be beneficial, a period to cool off before returning to negations. New leadership often leads to big changes over previous leaders, and Mexico’s new president has said he wants to make a deal.

In addition to tariffs and elections, President Donald Trump’s comments about possibly leaving the World Trade Organization have impacted the markets. Hackett said leaving the WTO would “fracture the system we’ve had for a long-time.”

He thinks Trump is watching the markets; if they get bad enough, Hackett thinks Trump will pull back because he wants to keep control of Congress in November. “If he feels the market movements are impacting Republicans’ chances, he’ll stop,” Hackett said.