I got the tariffs and grain question via email from a contractor I used to work with. While I do live and work on the same family farm I grew up on, I don’t follow the grain markets day to day like I do stocks. Unlike the Imbecile-in-Chief, I know how tariffs work though. Yes, I’ve written about Trump’s maniacal pursuit of a Recession before.
Before one talks about the tariffs, one must talk about all of the other problems selling to Asia.
Ordinary Asia Scams
Hostage Grain
Foreign grain sales are a game of whack-a-mole. Grain sales to Asia are a game of whack-a-mole with gangsters. Far too many of them will agree to a purchase price, have the grain graded at shipping port, then once the grain arrives at their port claim it “failed grade” or some other lie to re-negotiate the price. I have friends in the grain marketing business and most of the Asian buyers they won’t even return email or phone calls from anymore. You either agree to a decimating cut to the price, or you eat the cost of shipping that grain to another buyer. Almost impossible to find another buyer that will purchase grain sitting in the ship at that port. Let us not forget you have to rent the ship if it isn’t unloaded right away.
Last Minute Port Change
The other big scam, given I live in the Midwest, I hear about a lot, is last minute port change. Most grain, no matter what type, raised in the Midwest goes down the Mississippi and out the Gulf of Mexico. No matter what the Imbecile-in-Chief says, it’s the Gulf of Mexico. Once Putin’s favorite bratwurst bun is out of office everyone will continue to call it the Gulf of Mexico.
When negotiating with Midwest elevators and terminals the Asian buyers will be repeatedly told the price being quoted is for shipment from the Gulf of Mexico. For mass quantities of grain, nothing is cheaper than sending it down the Mississippi. A single grain barge can old up to 52,000 bushels of grain. Take a look at the featured image and count the number of barges one tug is pushing.
By contrast a single hopper bottom semi can legally haul just under 1,000 bushels. A 62-foot railcar holds roughly 3,900 bushels. Shipping containers can hold between 1875 – 2200 bushels depending on grain type and your permits. Surface transportation has weight limits on bridges and roads. It also takes far more fuel. Buyers are only willing to pay for transportation from the port. Many/most try to get a delivered to their port price. If you have to drag the grain from the Midwest to either coast, it ain’t cheap.
Grain sellers spend weeks slamming head against desk dealing with this even without tariffs.
Currency Manipulation – Non-Cash Purchase
For the boring explanation of currency manipulation I’m going to send you to Wikipedia.
The other one I’ve had friends in the business tell me about, and no I won’t finger them, is the Non-Cash Purchase. Supposedly going on for a few decades now. Basically started happening once our national debt got close to $20 trillion. You can find the National Debt Clock here.
To fund the excessive spending of our government, it sells T-Bills (Treasury Bills). These are basically bonds sold at a discount based on many market factors and the ability of our government to pay. This is why you hear so much chatter about defaulting on our debt. Any time there is a shutdown and a debt limit hit we could miss payments or default on said debt. Given the Imbecile-in-Chief in office, this is a serious possibility. You can find a good article about which countries hold the most U.S. debt here.
What I’ve been hearing, and that chart gives it credence, is that China has been making grain sellers in particular, but other sellers as well, accept T-Bills instead of cash. Basically shifting America’s debt from governments to American businesses. When Reagan was in office there were news articles about China being the largest holder of American debt.
National Debt Side Note
Despite what frothing at the mouth Communists who currently control both houses say, America can never be debt free. The debt needs to be smaller, which is why we cannot have tax cuts for the rich that the current Imbecile-in-Chief wants. You have to take the money from the people that actually have it.
Why can it never be debt free? Your 401K and/or IRA will have a portion of your money in “Government backed securities.” You saw that and didn’t think anything of it. Generally that is either T-Bills or U.S. Savings Bonds. Both of them are National Debt. The government pays you a small amount of interest in exchange for you loaning it money.
Once the government allowed banks to split and bundle mortgages then sell it off as a Mortgage-Backed Security, the bottom fell out. Mortgages were always 6-7.25%. Passbook savings always paid 5.25%. Prior to Syphilis Willie taking office, this was always true. His dabbling got banks to sell mortgages off and fund themselves with fees instead of mortgage interest. Watch this movie if you don’t remember how that turned out.
Prior to that manipulation, and Internet stock brokers, Americans had a high savings rate. Many Americans bought U.S. Savings Bonds with their tax refunds and kept the rest in passbook savings at their local bank. Then they got CDs that paid higher interest rates. We weren’t a debtor culture.
Tariffs 2.0
Baseline
Selling grain to any foreign country boils down to two things, assuming there is not an embargo:
- Quality of the grain
- Final cost per bushel at destination port
Quality
America has high quality grain. We spend an awful lot on grain handling infrastructure. Brazil does not. A Brazil company has a soybean crushing facility in Illinois. One time, probably due to a short crop here, they had a supply problem. They were either going to have to shut down the facility or import grain. They bought a bunch of soybeans from Brazil because their process really needed to run continuously. After they unloaded those railcars they had to shut down for days anyway.
Shipment was full of Brazilian Wandering Spiders. Their bite can be deadly to humans.
America has specialty grains too. You see a corn or soybean field and think they are all the same. Not true. Some soybean varieties are bred to be high oil content for use in crush facilities. Read the label on the back of your vegetable oil bottle.
Generic vegetable oil is almost always soybean oil. Other grains like Canola and Corn have the type of oil on the front of the label because they can get a premium for it.
Some varieties of soybeans are bred to be high protein for various food stocks. Sometimes they are the “cereal fillers” you read about on various labels, other times they are livestock feed. Other varieties are specifically bred to become Tofu. Same kind of specialties happen with corn. High in protein, high in oil, some corn bred to have higher starch content primarily for the ethanol markets.
Buyers can ask for specific types of these grains and get them here.
Final Cost
This is where tariffs come in, but they are way down the list. Transportation matters more than actual bushel price. Bunker Fuel is a low grade fuel oil that is extremely polluting. One could almost say it is the scrap of the fuel refinery. In international waters, this is what the ships burn because there is nothing cheaper. When they get near territorial waters they usually have to switch to regular diesel. The price of bunker fuel and the distance contributes greatly to the transportation cost.
If China can purchase grain from Australia, that is the shortest ocean ship route. If you can deal with the weight limits of bridges and roads, railcars from Russia can be the shortest trip. Yes, if the final destination for the grain isn’t at the port, and the port isn’t at the mouth of a major cargo carrying river, you will have to unload onto rail and truck, but once it is at the port, you have it.
Ukraine can be another source for them when Russia isn’t invading and terrorists aren’t trying to sink cargo ships in the Red Sea. Then there is Brazil, the U.S., and Canada. Probably a few other countries that export grain I forgot to mention.
Where Tariffs Fit In
Purchase decision is basically a formula.
QualityCost + BushelCost + TransportationCost + Tarrifs + RiskFactor + TimeFactor
Quality cost is what you have to do to make the grain useable or to remove the deadly insects after it arrives.
Bushel cost is the price per bushel you agreed to with the seller. We just discussed transportation.
Risk factor is the transportation risk factor. Will terrorists sink the ship? What if the train gets held up due to Russian winter in mountains. Is it hurricane season for that shipping route. Did they use too cheap a shipper? You know, one that doesn’t maintain their vessel so they take out a bridge. Since most shipping companies rely on the weight to hold containers in place instead of tying them down, can we pay to be on the bottom so our containers aren’t lost at sea?
Time factor is influenced by risk factor and influences the risk factor. Will the grain arrive on or before the day you need it? If you are feeding livestock, you cannot accept a week or a month’s delay when you are out of feed. The livestock will starve to death. You have to purchase at least some of your grain from a supplier that can get it there on time, no matter the cost. Loss of the livestock is usually a higher cost.
Unless tariffs are excessive, like the ones being levied now, both time and quality matter more.
Only So Much
Y’all go to the supermarket and never consider having fist fights over the last gallon of milk, loaf of bread, piece of meat. American agriculture has created a land of plenty. Some large corporate farms have also started operations in Brazil.
Every farmer listens to the weather reports for their location, America in general, and Brazil. In particular the crop forecasts from Brazil. For certain, Brazil raises an ocean of grain. They have shitty infrastructure and drug lords which keeps most of the grain trapped in country because it cannot be cost effectively moved to a port in a timely manner. That said, money can fix infrastructure.
Money cannot fix the weather.
Climate change has dramatically shifted planting and harvest schedules. Some regions of America are really no longer viable for the crops they used to raise. The Texas wild fires wiped out up to 10% of American beef production in a matter of days. A combine fire during harvest can burn over a mile of crop in just minutes. Everything is dry then. You don’t hire anyone that smokes because of that.
Ending Stocks
Before everybody got fired by Imbecile-in-Chief, the USDA routinely publishes ending stocks reports for various grains. This is a ball park estimate of grain not yet used or spoiled. Every country has to keep track of ending stocks of grain month by month. It is how you avoid famine. When you no longer have enough grain to feed your people you have to purchase grain from abroad. Period. When you have barely enough grain to feed your people/livestock/etc. you block all exports.
If your closest supplier has a failed or short crop, they will stop selling you grain to feed their own nation.
Embargos
Jimmy Carter was one of the nicest individuals anyone could ever meet. Despite being a peanut farmer, he did not understand global grain supply. The Russian Grain Embargo was an unmitigated disaster that devastated the American economy almost as much as Trump’s tariffs will.
For those too young to remember, the Carter administration blocked the sale of grain to Russia. Back then Russia was teetering on bankruptcy and its agriculture industry was, how shall we say, not far above horse drawn. They routinely had failed wheat crops and had to purchase huge quantities of grain.
Today, when Ukraine isn’t being bombed and invaded, it can produce massive quantities of grain. Not really the case during the Carter years. The thought behind the embargo was to starve out the Russian people to force a regime change or to force it via bankruptcy. Russia just bought more grain from Brazil, Australia, and other countries. It drove up prices there which encouraged investments and technology upgrades. In America International Harvester went out of business, the economy tanked and there were massive layoffs, much like you are going to see with tariffs.
Summary
Every country targeted by Imbecile-in-Chief’s tariffs will target agricultural products with their reciprocal tariffs, if they don’t outright ban purchase of American agricultural products. Many have already hit American whiskey which is another grain customer for farmers.
Brazil and Australia will once again be the beneficiaries of blatant stupidity. Their prices will go up. More investment will occur in agriculture technology and transportation infrastructure to meet demand in both of those countries.
The only real hope of selling grain to other countries is that the global supply evaporates or their ports become so snarled ships cannot deliver grain on time. I’m told it is a real problem in Brazil. Uncertain about Australia.
Once again, the American farmer will take it up the ass. This time because an Imbecile-in-Chief wants to bankrupt America for himself and to keep himself out of prison, where he is most definitely headed. This was Putin’s plan all along when he had his Oligarchs funding Donald with billions for decades. America fell with the election of Putin’s deepest mole. Putin conquered us without firing a shot. You just haven’t come to the full realization yet.
