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Mexican retaliation over Trump trade talk could hurt corn farmers

Paul Davidson
USA TODAY

Mexico is upping the ante in its escalating war of words with President Donald Trump over trade policy by aiming squarely at the nation’s midsection: the corn belt.

And that’s making U.S. corn farmers nervous.

In response to Trump’s threats of a border tax, Mexican Senator Armando Rios Piter said last week he plans to introduce a bill requiring the country to stop buying corn from the U.S. and shift those purchases to Brazil and Argentina.

Citing Trump's "anti-Mexican position," Rios Piter said in an interview, "It's time to think about how to shift the place where we are putting our money. If we stop buying their corn, farmers would have a good idea how important Mexico is" and realize "that taking this position is not a good idea."

Trump has proposed a 20% tax on Mexican imports to pay for a border wall. He also signed an executive order to renegotiate the North American Free Trade Agreement (Nafta) with Mexico and Canada as part of his efforts to close the massive U.S. trade deficit and encourage manufacturers to bring production back to the U.S. or keep it here.

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But that could harm sectors like agriculture that enjoy a trade surplus with the rest of the world. About 15% of the record 15.1 billion bushels of corn produced in the U.S. last year was exported, and Mexico recently surpassed Japan to become the top buyer, says Paul Bertels, chief economist of the National Corn Growers Association. About 27% of U.S. corn exports annually, or $2 billion worth, is shipped to Mexico, mostly for livestock feed.

“If the No. 1 market is unhappy, it’s in your interest to take notice,” Bertels says.

A loss of that market -- and possibly even just an intensifying standoff with Mexico -- would push down prices for Midwest corn farmers. "It's definitely going to make it harder for me to make a profit," says Bob Hemesath, a corn farmer in Decorah, Iowa. He says he's receptive to Trump's efforts to improve U.S. trade policy but doesn't want the nation's farmers to be casualties.

Uncertainty over the latest skirmish may prompt some farmers to switch acreage from corn to soybeans as they plot their spring plantings over the next couple of weeks, says Chad Hart, an agricultural economist at Iowa State University.

At least to some extent, Rios Piter is likely posturing to give Mexico negotiating leverage with the U.S., some economists say.

“Mexico wants to show that they are going to drive a hard bargain,” Hart says. The country, he says, is demonstrating that it’s “ready to respond to policy changes in the U.S. definitively and quickly.”

Ross Piter says he's "not bluffing." "It's important to stand up and say this has consequences."

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While marshaling support for his bill in the Mexican legislature likely would be an uphill climb, Mexican officials are devising precisely those kinds of measures if Trump follows through on threats to impede Mexican shipments to the U.S., says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. "Plans are being laid as we speak," he says, adding that U.S. beef, poultry and pork exports to Mexico also would be vulnerable.

A shift to South America would not be easy or inexpensive for Mexico. Midwest corn is mostly delivered to northern Mexico by rail while product destined for the southern part of the country largely arrives by ship from the Gulf of Mexico, Bertels says. Sourcing the southern Mexico deliveries from South America would be far more viable than those destined for the north, Bertels and Hart say.

Overall, Hart estimates, the switch would add 40 cents to 50 cents a bushel to the price Mexican buyers pay for corn. Corn for May delivery is currently trading at about $3.75 a bushel.

And while Mexico legally could take the brash step, the U.S. could challenge it under Nafta’s terms, Hart says. Yet instead of further setting back U.S.-Mexico relations, Hufbauer says the move likely would "energize (members of Congress) who have not bought into Trump's trade agenda."

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Sen. Charles Grassley, R-Iowa, was among the lawmakers who met last week with Peter Navarro, head of Trump’s fledgling National Trade Council. In an interview, Grassley says he stressed to Navarro that if Nafta is overhauled, “you better have strong agricultural provisions...Mexico is a big importer of American corn and we want to be sure we don’t lose that market.”

If that happened, the country almost certainly would pick up other overseas customers.Brazil and Argentina couldn't meet both the fresh Mexican demand and current orders, forcing their existing buyers to turn to the U.S., Hart says.  But the higher shipping costs would dampen demand and suppress U.S. corn prices just as farmers have started to recover from a two-year downturn. After peaking near $7 a bushel in 2013, corn futures prices bottomed out at about $3.30 last year, Bertels says.

“I’m nervous because of the unknown,” Hemesath, the Iowa corn farmer, says. But he isn’t backing away from corn. “I’m waiting for it to play out.”