Trade Wars Put Global Food Market in Turmoil

Sept. 24, 2018
Trade wars, both Trump's and Brexit, have begun to rile food markets in both the USA and the UK.

Food processing is one of the major business sectors being roiled by global trade wars, on both sides of the Atlantic.

The Trump administration's trade tiffs might lower the price of domestic food in the short term, but the long-term effects on the U.S. food supply are more dubious. Plus, increases in the price of metal for packaging  and for equipment have the potential to increase the industry’s expenses for a long time.

The latest trade war began when the administration announced tariffs of 25% on steel and aluminum this spring. Major trading partners like China and Canada immediately announced retaliatory tariffs on a wide range of U.S. goods, including food—both farm commodities and processed food. The war escalated from there, with Trump slapping 10% tariffs on another $200 million in Chinese goods earlier this month, and China responding in kind.

China’s retaliation targeted commodities like soybeans and pork. The immediate effect was to cause their prices to drop, which is bad for farmers but potentially good for processors—at least in the short term.

However, some situations are trickier. China’s pork tariffs, for instance, will keep American off-cuts like feet, heads and offal out of the Chinese market. This is a problem, especially for vertically integrated producers, because China is the only major market with consumers for such products; the only American alternatives are pet food producers, who will pay about 75% less. That cuts into the pork companies’ margins, which they must make up either by raising their other prices or squeezing the already tight margins for their contract farmers.

Another problem with food comes when retailers are tempted to use it to ease the price shocks for their other goods affected by tariffs. Bill Simon, a former CEO of Walmart U.S., said this week that Walmart will be forced to start raising prices soon on most of its goods, including food.

Meanwhile, trade wars threaten to have an even greater effect on the United Kingdom. As the UK struggles to work through Brexit, its departure from the European Union that voters mandated in 2016, food is turning out to be a major source of anxiety.

The UK currently imports about 30% of its food from the EU, and players in the food supply chain are uncertain about how much more that food will cost, and the increased difficulty in getting it into the country. In addition, some food producers are concerned that without EU regulatory protection, cheaper imports of food from the U.S. and elsewhere—for instance, chicken washed with chlorinated water or beef raised with growth hormones—would be allowed in and undercut domestic product.

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