When Donald Trump was elected president, a lot of people were very surprised. It’s safe to say that his presidency has been a series of surprises, for just about everybody. Including the food and beverage industry.
We pondered what a Trump presidency might mean to the food and beverage industry back in November 2016
Halfway through Trump’s first term, his administration’s impact on food and agriculture mostly mirrors its larger impact on business as a whole. He campaigned as a businessman, promising to remove regulatory shackles and to improve the business climate.
But with trade, with regulations and especially with the government shutdown that greeted 2019, the Trump administration’s effect on the food & beverage industry has been decidedly mixed.
Early in his administration, Trump regularly touted the rising price of stocks as an indicator that his economic policies were successful. But the stock market proved volatile, and food and beverage companies were no exception. Collectively, stock prices for the top 10 American food processors fell 14 percent from January 2017, the start of Trump’s term, to last December.
Observers say Trump’s administration has come up against an eternal truth of public policy: It’s seldom a matter of simple, direct cause and effect.
“All of this stuff is connected,” says Derrell Peel, a professor and livestock marketing specialist at Oklahoma State University. “You can’t just mess with one part of it and assume that it won’t have any impact anywhere else.”
Trade is arguably the area where the impact on food has been both the most immediate and the longest-lasting. Trump, who during the campaign railed against “one-sided” trade deals that were “raping our country,” made two decisions early in his administration with wide-ranging consequences: withdrawal from the North American Free Trade Agreement (NAFTA) and tariffs on imported aluminum and steel.
The NAFTA decision drew considerable attention from the food industry, since a lot of food crosses the Canadian and Mexican borders, in both directions. But the issue has been at least temporarily resolved with the replacement for NAFTA: the U.S., Mexico and Canada Agreement (USMCA), reached last September.
Considering the vehemence with which Trump criticized NAFTA while campaigning, the USMCA is remarkably similar. It preserves American access to Canadian and Mexican agricultural markets at virtually the same levels; the biggest change is increased penetration of the Canadian dairy market.
USMCA slightly increases the quota of American dairy products that can be sold in Canada without triggering Canadian tariffs, and makes Canada raise its prices for certain dairy-derived ingredients like milk protein concentrates and milk powder, making American equivalents more competitive.
The Canadian dairy market was a particular bugaboo of Trump’s, which he targeted in tweets like “Canada charges the U.S. a 270% tariff on Dairy Products! They didn’t tell you that, did they? Not fair to our farmers!” But USCMA is expected to raise the American share to the Canadian dairy market only from 3.25 percent to about 3.6 percent – an increase of about $70 million.
“At the end of the day, this is not a trivial thing,” Andrew Novakovic, a professor of agricultural economics at Cornell University, told CNN. "But the United States is a big market, and this is a relatively small amount of dairy products relative to the total."
USMCA still must be ratified by the legislatures of all three nations. Whether this happens may depend on the blowback from a more drastic trade decision in March 2018: tariff of 10 percent on imported aluminum and 25 percent on imported steel.
These tariffs, of course, thrilled domestic metal company CEOs, several of whom gathered with Trump for a photo op when he signed the measure. But for food and beverage companies, it’s a triple whammy. It raises the prices of aluminum and steel they need in the short term, for cans and other packaging; and in the long term, for equipment; and it is sparking retaliatory measures in food trading.
Before Trump initiated the tariffs, he received a letter from several major beverage companies and industry groups, including the Beer Institute, Coca-Cola, PepsiCo and Molson Coors. The letter estimated that a 10 percent tariff on imported aluminum, which soon came to pass, would cost the beverage industry $256.3 million.
Canned foods as well as beverages are being affected by higher metal prices. Some observers point out that this impact is falling disproportionately on lower-income consumers, who are more likely to depend on canned goods.
“Global tariffs on steel and aluminum will have a unique impact on the [consumer goods] industry, acting as a tax on consumers and creating competitive dislocations in the marketplace,” says Michael Gruber, vice president for government affairs at the Grocery Manufacturers Assn. “Any increase in costs of foods, beverages and consumer goods resulting from these tariffs will be felt by all Americans, but most acutely by consumers who rely on shelf-stable, canned food products.”
The administration at first tried to downplay the effect of the tariff on can prices. The day after Trump announced it, Commerce Secretary Wilbur Ross, in an appearance on CNBC, held up a can of Campbell’s soup and claimed that the tariff would add only six-tenths of a cent to its cost. But canning industry executives promptly replied that the increase would be closer to four cents. And in a conference call with stock analysts the following month, Anthony DiSilvestro, Campbell’s chief financial officer, cited “double-digit increases on steel and aluminum” as a factor in the company’s struggles.
In any case, there seems little doubt that the metal tariff has had an impact on the food and beverage industry. The 14 percent drop in the collective stock price of the top 10 publicly traded food processors took place entirely after March 2018, when the tariff was signed.
The impact is even more acute for smaller processors, says Phil Kafarakis, president of the Specialty Foods Assn. (www.specialtyfood.com). “Our community is much smaller than the big brands, so it impacts them even harder and even faster,” Kafarakis says. “Anything that might happen to a Kraft or a Cargill or a Campbell’s or a Conagra, it might take them four or five months to see the impact. My members will see the impact in a matter of weeks.”
This impact is not confined to the direct effect of higher metal prices. China, the European Union and other nations promptly slapped retaliatory tariffs, and even bans, on a number of U.S. goods – including food. These measures mostly targeted commodities, and often seemed designed to hurt farmers in states that had voted for Trump, such as China’s boycott of U.S. soybeans.
The measure with the most direct impact on processors probably is China’s punitive tariffs on several major categories of U.S. meat products, like a 62 percent tariff on pork (on top of an existing 12 percent one). This mostly affects farmers and ranchers raising beef and pork. But to retaliate for the metal tariffs, China also began keeping out or heavily taxing off-cuts like chicken feet and hog offal, for which there is virtually no domestic market.
See what the supply chain predictions looked like when the tariffs first went into effect
Meatpackers have taken to selling this material to pet food processors or just discarding it. If the situation continues much longer, it will profoundly affect the economics of meat processing, says Kafarakis, a former meat industry executive: “That’s the balance in making sure a strip steak doesn’t cost $200.”
As for commodities, export restrictions are driving down their domestic prices. Soybean prices, for instance, have dropped 11 percent since China stopped buying them last April. China had been buying up to 20 percent of the U.S. crop. This is good news for food processors right now, but if the situation continues, the long term is liable to be different.
“Ultimately the second round of plantings for soybeans is going to be vastly affected. They won’t plant as much,” Kafarakis says. “The economic impact of all these things across the entire supply chain truly will affect consumers at the grocery store.”
There’s even a possibility that the trade wars will undo USMCA, which is Trump’s signature trade triumph to date. The metal tariff led Mexico, the biggest market for U.S. dairy products, to slap a retaliatory tariff of 20-25 percent last summer on American cheeses – which it was free to do once Trump repudiated NAFTA. USMCA would presumably rectify that situation, but it still has to be ratified, and the metal tariffs may give both Canada and Mexico a motive to slow-walk, or even reject, ratification.
“I think there’s an expectation in Canada and Mexico, or maybe there’s ultimately going to be a demand, that the U.S. revisit the steel and aluminum tariffs as a condition for ratifying the new agreement,” says Peel of Oklahoma State.
Irregularity on regulation
One area of business where Trump promised to make a difference is regulation. He regularly denounced “job-killing regulations” on the campaign trail, and soon after taking office, he announced a policy of requiring federal departments to cancel two of their regulations before any new one could take effect.
The Trump administration has engaged in high-profile attacks on regulations in several sectors, most notably environmental restrictions on coal and other carbon-based energy. But when it comes to food, observers say that the policy of the FDA and other federal agencies under Trump has been surprisingly consistent with previous administrations.
“There’s a lot more regulatory consistency [in food] over the two administrations than really in almost any other area I can think of,” says Douglas Kantor, a partner with Steptoe & Johnson (www.steptoe.com), a law firm that specializes in governmental matters. “If you look at EPA, the Dept. of Education, and Labor, they’ve all changed things significantly; but in food, FDA really hasn’t. They’ve just kept pursuing the same stuff.”
Perhaps the most prominent example of this continuity has been a pair of label regulations, started under the Obama administration, that have gone forward under Trump: an initiative under USDA to require identification of food containing genetically modified organisms (GMOs), and one under FDA for revising information on the Nutrition Facts panel.
Both regulations are scheduled to be implemented on Jan. 1, 2020. The USDA published the final rule for GMOs in December, specifying that the term will be “bioengineered.” The Nutrition Facts panel will show more facts, most notably an entry for “added sugars.”
Melissa Grzybowski, a regulatory specialist with Food Consulting Co. (www.foodlabels.com), isn’t surprised at these measures going through, given their years of momentum.
“The Nutrition Facts label was well on its way and many companies had already made the changes,” Grzybowski says. “It's not surprising FDA continued this initiative. The USDA was required by law to determine GMO labeling regulations. This initiative also seemed to be well on its way.”
However, others suggest that the follow-through may be at least in part due to the leadership of FDA Commissioner Scott Gottlieb. Allen Sayler, senior director of food consulting services at EAS Consulting Group LLC (easconsultinggroup.com), calls Gottlieb “a tireless advocate for food safety and for FDA” who is committed to a professional approach.
“It appears that Dr. Gottlieb has the full confidence of the administration, and he has gone forward with a number of initiatives that seem to indicate that when it comes to food safety, this is not a political issue with this administration,” Sayler says.
The result, he says, is that prior initiatives in food regulation probably will be allowed to move forward: “This administration has not made an effort to initiate new food safety-based regulations, [but] it doesn’t appear that it has impeded the ongoing effort to implement what has already been started by the prior administration.”
The USDA and FDA also have taken a positive attitude in their routine regulatory interactions, says Andrew Lorenz, president of We R Food Safety! (werfoodsafety.com), a consulting firm specializing in compliance and safety issues.
“On the USDA side we are seeing the current acting administrator doing outreach to both the industry and the various consumer groups,” Lorenz says. “Overall, senior USDA FSIS [Food Safety and Inspection Service] management under the acting administrator has been positive. On the FDA side we are seeing a similar trend.”
But for 35 days, from late December to January, there was a huge disruption in that positivity: Inspectors weren’t getting paid. A large contingent of both USDA and FDA inspectors had their paychecks delayed since the start of 2019 due to a government shutdown. As of press time, the shutdown was suspended but not resolved.
There’s another labor issue that’s liable to affect the food industry long after the shutdown is forgotten: Trump’s attitude toward immigration.
Many sectors of the food industry depend on immigrants, including undocumented immigrants, as a source of labor. Trump, of course, made curtailing illegal immigration the cornerstone of his campaign. His administration has followed through, at least in terms of enforcement.
The Immigration and Customs Enforcement service (ICE) conducted numerous enforcement actions on food processing facilities during 2018. Some of the higher-profile ones include: a meat processing plant in Morristown, Tenn., raided on April 6, with 97 arrests; a bakery in Chicago, audited in June and July, with a net loss of about 800 workers, or roughly a third of its workforce; a meat processing plant in Salem, Ohio, raided on June 19 with 146 arrests; a tomato plant, a potato processing facility and a cattle feedlot, all in O’Neill, Neb., raided on Aug. 8, with 133 total arrests.
In fiscal 2018, which ended in October, ICE conducted 5,981 workplace audits (for all business sectors, not just food) and filed 779 criminal charges, a 10-year record, according to an analysis by USA Today. Interestingly, of those 779 charges, 113 were against management employees, a rise of 82 percent over the previous fiscal year – but the 666 charges against workers constituted a rise of 812 percent.
The labor situation probably will be tricky for the food industry for a while. Immigrants often are the best if not only labor option for many food plants, due to factors like remote location, seasonality and unpleasant work conditions. An unemployment rate of only 3.9 percent at the end of 2018 increases the labor squeeze. But the Trump administration is unlikely to scale back aggressive immigration law enforcement in the workplace, as the Obama administration did in 2013 – and Trump will undoubtedly enjoy political support for that position.
Our 2019 Manufacturing Outlook touches on immigration as it relates to the labor force
More generally, Trump’s political success when it comes to food will depend on whether most people are able to buy it. With low unemployment and low inflation, they probably will. During Trump’s term so far, food prices have risen only about 1 percent for a family of four.
Peel, however, believes that if tariffs stay in place over the long term, consumers will eventually feel the effects.
“At some level, I think there’s a feeling out there that, well, the economy is still strong, so [the trade war] isn’t really having an impact,” he says. “My reaction is, the economy has taken a bunch of body blows, and taken them well so far, but at some point, the cumulative effect is that it will start to have an impact.”