How the New NAFTA Will Impact Grain Prices

How the New NAFTA Will Impact Grain Prices

Grain prices have ticked higher in recent days thanks to NAFTA 2.0 being completed between the United States, Canada and Mexico.

Now… the deal’s name isn’t original.

The United States-Mexico-Canada Agreement, or USMCA, doesn’t roll off the tongue…

And… nothing really changed except for a few revisions around the Canadian dairy market, environmental and labor standards, and how automobiles will be manufactured and transported across borders. It’s NAFTA 2.0

The only thing that does matter is the impact on sentiment for grain prices.

Today, I’m going to explain why this relatively mundane trade deal is a bigger deal than what’s being reported by the mainstream press.

Here’s What Changed in NAFTA

The agricultural markets are very unaffected by this deal. More of the focus centered on automobiles, and Canada’s dairy market.

There are four significant changes:

More access to Canadian dairy market for U.S. farmers: This was a significant sticking point for the Trump administration. The $16 billion Canadian dairy market isn’t large compared to other commodities. But Trump had pushed on this since the start of new negotiations. Under the Trans-Pacific Trade Agreement, Canada was offering trade partners access to 3.2% of their dairy market. The USMCA, will offer U.S. farmers access to 3.6%.

Extended Copyright Laws:The U.S. has been in a trade war with China over intellectual property rights. At least that’s been a major issue for Trump’s negotiators. This new deal includes extensions on copyrights for the author – up to 70 years past their death. That’s up from 50 years. The law also extends pharmaceutical patents to protect them from generic competition.

Higher Wages for Auto Workers:The new deal has a provision that mandates that 40 to 45 percent of automobiles must be assembled by workers earning at least $16 per hour. Mexico also agreed to allow workers the right to form a union.

Higher Origin Standards:The deal also says that 75% of automobile components must be manufactured in the three nations in order to qualify for zero tariffs. That figure is up from 6.5% in NAFTA.

Over-hyped NAFTA 2.0?

None of these provisions are earth-shattering.

And now that a deal is in place, the question is how soon the member nations will ratify a deal. The Trump administration is dealing with a rabid fight over his Supreme Court nominee, so it wouldn’t be surprising if this deal was approved by Congress and it received very few headlines. However, given that Democrats are likely to secure the House of Representatives in November, they may be reluctant to give Trump another economic win.

Mexico would like to ratify the deal before President Enrique Peña Nieto steps down in November, which puts the G20 conference that month as a logical destination for the signatures of Trump, Nieto, and Canadian Prime Minister Justin Trudeau.

All Eyes on China

The deal is important because of China.

No, China isn’t involved in this deal.

But with NAFTA 2.0 resolved, the United States’ top trade negotiators can turn their attention – 100% of their attention – to working on a bilateral deal with China. Soybean and corn prices are facing harvest pressures, but prices are actually looking better than initial estimates.

Add the $1.60 payment on 50% of production, and March 2019 beans are sitting at $10.50 (on the $8.90 that we saw today).

Looking forward, all eyes will remain on the Chinese economy.

If their markets continue to struggle, and concerns about GDP start to flare, we might see them return to the negotiating table by the end of the year.

Further, entering midterm elections in the U.S., China will be watching things closely.

If the Democrats when a few more seats, we might see China double-down in their approach to the trade war, hoping that the liberals will be more interested in compromise.

Conversely, if Republicans remain in power, China might start to think America is more united than originally thought, and thus, trade needs to be a bit more reciprocal.

Ultimately, just the speculation of a deal would be positive for corn prices, soybean prices, and canola prices.

On the flipside, as discussed in this morning’s FarmLead Breakfast Brief, there is still some potential impact to the grain markets in Canada and Mexico with the USMCA now completed. Very explicitly,  China may be slightly less interested in pursuing deeper trade talks with them, now that this updated NAFTA has been agreed to. [1]

About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.

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