Bleak outlook on US-EU trade relationship

Professor Alan Matthews provides an in depth authoritative look at the US-EU trade relationship in 2025: https://capreform.eu/navigating-the-eu-u-s-trade-relationship/

He expects the relationship to break down in 2026.  How should the EU respond?  There aren't many or indeed any good choices.   Retaliation is not very effective given the EU's limited ability to inflict pain on the US economy.

However, that does not mean a passive acceptance of the status quo.   Matthews argues:'The necessary response is to reduce our dependencies to allow more room for manoeuvre in any future stand-off, recognising that this is easier said than done.'

US tariffs will hit EU agri-food sector

Professor Alan Matthews examines the likely impact on the EU agri-food sector of 25 per cent tariffs imposed by the United States: http://capreform.eu/trump-ii-tariffs-and-the-eu-agri-food-sector/

It's not good news for the sector which has an overall trading surplus with the US.   Some niche or more up market products may be able to withstand the resultant price hike, but products more to the commodity end of the spectrum will be hit.

The EU doesn't have many options.  The favoured one of retaliation is unlikely to help the sectors that will be most affected.

The usual suspects continue to subsidise

The OECD Agricultural Policy Monitoring and Evaluation Outlook 2024 has just been published and provides a comprehensive analysis and global reference on government support to agriculture across 54 countries, which shows that total support to agriculture averaged USD 842 billion per year during the 2021-23 period.

Support remains concentrated in a few large economies, with China, the United States, India and the European Union representing 37%, 15%, 14% and 13% of the total respectively. Although public support for agriculture has declined since 2021 it remains near historic highs and is still not sufficiently directed at critical innovation, productivity and sustainability goals, according to a new report from the OECD.

In this context, the share of estimated support dedicated to general services such as innovation, biosecurity or infrastructure averaged only 12.6% of total support in 2021-23. While it has been fairly stable since 2020, this share is well below the 16% seen at the beginning of the 21st century. These services are key elements in countries’ efforts towards sustainable productivity growth – the ability to produce more with less while reducing demands on the environment.https://doi.org10.1787/74da57ed-en

US faces challenge in shifting food mountain

We all know that government policies often have unintended consequences. So it has proved in the United States with President Trump's trade war leading to a mountain of food that hunger charities are finding it hard to cope with.

The US administration intends to buy up $1.2bn of foodstuffs over the next year to help out farmers suffering from new tariffs on their produce in China and elsewhere. Sales of US soyabeans to China have been badly hit while pork, a staple product in many mid-western states, faces a 60 per cent tariff in China and 20 per cent in Mexico. Indeed, nearly half the purchases to be made will be of pork.

The purchases will increase by more than 50 per cent the amount that USDA purchases for donation. It is estimated that 40 million households in one of the richest countries in the world are 'food insecure'. However, the challenge is to find enough trucks and drivers to mood the before it spoils. Milk may be the biggest difficulty because of its short shelf life and one is often talking about distances between the producing and recipient areas.

With the average farm business earning 20 per cent less this year, if nothing else it shows the continuing political clout of farmers. There are mid-term elections coming up and although farmers are not numerous, the votes of them and their families can be crucial in tight Senate races, of which there are a number this year. Moreover, many farmers are bedrock Trump supporters.

Trump administration looks to bail out US farmers

The Trump administration is looking into ways of offsetting the financial losses American farmers have suffered from its trade battle with China. Beijing is set to raise duties by 25 percentage points on Friday on $34bn of US goods in retaliation for new American tariffs. Among the biggest targets are soyabeans, the largest agricultural export to China.

The threat has pushed the US soyabean price below $9 a bushel, an unprofitable price for many farms. Last week, futures slid a further 4 per cent.

Consideration is being given to using the Commodity Credit Corporation set up in 1935 by President Roosevelt. It has $30bn in borrowing authority from the Treasury and latitude in how its funds are spent. Congress in March broadened its authority by lifting curbs on its authority to support crop prices and remove commodity surpluses.

Farm groups have set to head off President Trump's aggressive trade tactics against China, Mexico, Canada and the EU without success. There is concern that in the lomg run tariffs could lead to more land being converted to soyabeans in Brazil.

Hedge fund moves into agriculture

A leading New York-based hedge fund is moving into agriculture through a vehicle called the American Farmland Company. Optima has $6 billion funds under management. It plans to start its swoop by investing in arable land in Arizona and vineyards in California.

It has no European plans at present and the predominantly smaller nature of most farms in Europe may make it a less attractive location. Even though the US subsidises its farms, especially its larger ones, making farm investment even more attractive, the sheer complexity and the CAP and the uncertainties surrounding its future may be an off putting factor. In the States the initial plan envisages up to 15 farms with an average size of 500 acres, so the involvement is modest.

It is the longer-term strategy that is interesting. Dixon Boardman, Optima's chief executive, believes that economic recovery, continued population growth and increased incomes, especially in emerging markets, will create increasing demand for food. The diminishing availability of arable land, especially in China, is also seen as a key factor. In other words, a food security crisis leading to increasing prices is seen as being on the agenda.

Boardman argues that farmland is an asset class that has been overlooked by many investors. I am not so sure that is so true in the UK where interest has waxed and waned over the years with companies like Sentry Farming eventually pulling out of farm management. Boardman argues that in the US farmland has generated revenues exceeding 15 per cent per annum in the past five years, but part of that has been fed by the biofuels boom which is of questionable net environmental value. He also points out that the farming sector has low debt which is an attraction in the current crisis.

The sector produced a return of 31.7 per cent in America between June 2007 and June 2009, according to the National Farming Index. Over the same period the S&P 500 index declined 35.9 per cent.

Only a small proportion of American farmland, estimated to have a value of around $2 trillion, is owned by institutional investors. Boardman is confident that farmers will sell up: 'Farming is much more than a commercial choice than a lifestyle choice in America. A lot of these farmers are getting old and the next generation is not always interested in taking over these farms.'

In the UK farmland values in southern England have long been boosted by interest from the City. Sporting assets such as shooting and fishing are a key attraction, along with opportunities to stable and exercise horses. However, these activities may be undertaken alongside a commercially managed farming operation. There may be inheritance tax advantages in investing in farmland.