MI Prospects
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Helen Plant, Senior Analyst, AHDB Market Intelligence Jack Watts, Lead Analyst, AHDB Market Intelligence
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What does the US election result mean for grain markets?
Last week’s US election result means change in leadership and political priorities and so likely change in policy. Given the scale of the US’s significance in global grain and oilseed markets, the implications could potentially be wide reaching.
Introduction – why the US matters
The US is the world’s largest producer of both maize and soyabeans, as well as the fifth largest wheat grower (behind the EU, China, India and Russia). More importantly, it is a significant supplier of these commodities onto the world market (Figure 1).
As a result, what happens in the US has far reaching impacts across global grain and oilseed markets. Following the 8 November election, there is a new Republican President, Donald Trump. After eight years of a Democratic President, this will likely bring shifts in US policy, including for agriculture. Drawing on what we’ve heard during the election campaign and in the early days since, this article seeks to explore some of the areas that could be impacted.
Initial market reaction
First though, let’s look at how the markets reacted to what was an arguably unexpected result in light of the pre-election polls.
Initially, financial markets, including Wall Street, fell (somewhat) and investment money headed for gold, the Yen and Swiss Franc – all markets viewed as ‘safe havens’. However, these effects haven’t lasted too long. Similarly, while grain prices dropped slightly following the announcement, a far bigger reaction was seen to the USDA’s monthly supply and demand estimates, released that evening (read more here).
Longer term, given this election result probably means change, greater levels of uncertainty are likely to persist in markets. From a UK perspective, there is particular twist, with the pound picking up to its highest levels against the dollar since early October (Figure 2).
This lift was partly attributed to the potential for UK interest rate rises but there is a wider view that £/$ exchange rate uncertainty is likely to persist for some time yet, which could help sterling find a relative level of support. Though that doesn’t mean stability – if anything, volatility could well be higher as markets react to the ‘story of the day’, whether Brexit or Trump focused.
Ethanol looking safe?
Around 14% of global maize demand is attributed to bio-ethanol production in the US. The Renewable Fuels Standard (RFS), which sets the volume of ethanol to be blended into gasoline, is key to the amount of maize used for ethanol. Any reductions to this mandate would likely mean more US maize looking for homes, which could pressure global feed grain values.
While there are mixed opinions on ethanol and wider renewable energy across the Republican party, Donald Trump pledged to ‘protect the Renewal Fuel Standard’ this August, at a rally in Iowa. Furthermore, utilising both ‘traditional and renewable energy sources’ to ‘make America energy independent’ are priorities for Trump’s presidency, according to the President elect’s website.
Interestingly, three of the top ten maize growing states, Iowa, Wisconsin and Ohio were important swing states in this Presidential election (Figure 3).
Reducing regulation
Reducing regulation is described as the ‘cornerstone of the Trump Administration’ on the President elect’s website. For agriculture, two of the main issues referenced are policies implemented by the Environment Protection Agency (EPA), specifically:
- Waters of The US – Clarifies how the waterways protected under the Clean Water Act are defined and what standards are applicable.
- Clean Power Plan – announced in August 2015, this targets reducing carbon emissions.
During the campaign, Donald Trump was quoted as saying he would ‘end the EPA intrusion into your family homes and your family farms’. It’s worth noting that the EPA is responsible for implementing the Renewable Fuel Standards (RFS) and pesticide regulation, so this stance also raises questions about how these policies could be affected. Could these regulations also be in the Trump administration’s sights? Or could this mean a change in the government department responsible for implementing them?
The President elect’s website also promises to ‘dismantle the Dodd-Frank Act and replace it with new policies’. This complex piece of legislation was implemented in the wake of the 2008 financial crisis, with the aim of decreasing the amount of risk in the US financial system and protect consumers. However, critics argue the regulation is excessive and limits bank lending. For agriculture, the Act impacts on how futures markets operate and so potentially the ability to hedge price risk.
From a UK perspective, this would leave open an interesting question in terms of financial services. Would a post-Brexit UK follow a US style route (with less regulation) or more closely regulated EU style route? Impacting this will be whether or not the UK can remain some ‘pass-porting rights’ in terms of ease of trade with the EU, as well as public sentiment, given the fallout of the 2008 crisis is still being felt.
The end of TTP and TTIP?
Withdrawing from the yet to be ratified Trans-Pacific Partnership (TTP) was a key campaign pledge for Donald Trump, so it does seem likely that this will be the end of deal as it stands. In a speech on trade in Pittsburgh, he said that America does ‘not need to enter into another massive international agreement that ties us up and binds us down’. This points to the EU/US Transatlantic Trade and Investment Partnership (TTIP) talks also grinding to a halt.
Talk on China
The rhetoric with regards to China has been strong. This includes labelling the country as a ‘currency manipulator’, as well as accusations that China participates in ‘unfair subsidy behaviour’ and has been involved in ‘the theft of American trade secrets’.
However, from an agricultural standpoint, China is an important trading partner for the US. Specifically, last season of the 57Mt soyabeans that the US exported, just under 30Mt (57%) went to China (Figure 4). Depending on how the relationship unfolds, could we see China switching origins to buy more of its requirements from South America and so US soyabeans looking for homes? From an EU perspective, this would place increased pressure on the GM authorisation process, which at times has struggled to keep up.
Country by country trade deals – opportunity for the UK?
Several campaign speeches made reference to favouring bilateral or country by country free trade deals. As such, could the UK move from the back to the front of the queue for a free trade deal, once it leaves the EU? Given the focus on protecting American interests, any such deal, would be more likely to be limited in scope, though it would demonstrate a US commitment to free trade.
For the UK, such a deal could have two types of potential implication:
- Strengthen the UK’s negotiating position in terms agreeing a trade deal with the EU, if one is not concluded by the time we leave the EU.
- Or it could complicate negotiations with the EU, if a UK/US deal is seen as a way for US goods to enter the EU by ‘the back door’.
There’s also a ’wild card’ scenario, in light of the offer already made to the UK by New Zealand and Australia, could the US offer to lend negotiating capacity to the UK once a US/UK deal is concluded? Perhaps not that likely but it is a thought that occurs, given the capacity built up for the TTP negotiations, which look set to be discontinued.
Concluding comments
The most immediate impacts are likely to be felt through any currency shifts, though longer term there are many more questions than answers. Some of the key watch areas to date are around US trade policy, environmental regulation and its relationship with China.
However, there are potentially wider implications as this is now the second time in 2016 when the polls have been proved wrong. The opposite result to what was predicted by the polls and backed by the political establishment occurred in both the UK referendum on EU membership and the US presidential election. This throws up a greater level of uncertainty on how the political future will unfold, especially in light of the French and German elections coming up in 2017.
Key points
- US is major player in global grain markets and the change in President will likely mean shifts in policy
- Initial market reaction = uncertainty over currency moves
- Key areas of uncertainty around US policy are around free trade deals, the role of the EPA and the relationship with China
- Could the UK benefit from a ‘country by country’ free trade deal approach?