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US Farm Belt at Risk on China Tariffs: ETFs in Focus

Sanghamitra Saha
Inside Agriculture ETFs' pain in U.S.-China trade spat.

Trade war tensions seem to have peaked between the United States and China. President Trump first announced tariffs on steel and aluminum going on to impose 25% import duties on $50 billion worth of Chinese goods. In retaliation, China slammed an equal measure of tariffs.

In response to the retaliation, Washington published the names of Chinese goods worth $200 billion, on which 10% tariffs will be enacted. Trump has even gone on to say that if Beijing continues to hit back, the United States will impose a total tariff on $550 billion in Chinese goods — an amount exceeding even the total U.S. imports from China last year (read: These Sector ETFs Are Set to Sizzle on Earnings).

Notably, Beijing’s tit-for-tat tariffs target U.S. agricultural and food exports. The Department of Agriculture predicted that U.S. farm income will decline this year to “$60 billion, or half the $120 billion of five years ago.” As China’s tariffs directly hit the U.S. farm belt, agricultural ETFs are likely to bear the burden in the coming days.

Below we highlight a few ETFs that may fall flat in the days to come (read: China Tariffs Target US Farm Belt: Stocks and ETFs in Focus).

Teucrium Soybean ETF SOYB — Down 7.6% in Past Four Weeks

China purchases about half of the U.S. soybean and is the second-largest buyer of American cotton. So, reflecting China’s 25% tariffs on U.S. soybean imports, USDA recently cut its forecast for soybean exports in the 2018-19 marketing year by 250 million bushels. The agency USDA forecast soybean inventory for 2018-19 crop year will rise about 50% higher than the earlier estimate to record level.

It also lowered its prediction for “the average farmgate price for soybeans to $8.00 to $10.50 per bushel, down from $8.75 to $11.25.” The global soybean surplus will jump 13% from its previous estimate, per USDA. As a result, the fund is down 9% in the past month (as of Jul 13, 2018).

Invesco DB Agriculture DBA — Down 5.2% in Four Weeks

Along with China, Mexico announced tit-for-tat tariffs for the metal tariff it faced.  Mexico targeted pork legs and shoulders from U.S. suppliers, which account for about 90% of the country’s $1.07 billion annual imports of the cuts.

In any case, U.S. pork production is on its way to reach an all-time high this year and is poised to rise next year. Cash hogs may average about 42 cents a pound in 2019, marking a 7.7% decline from this year, per USDA. Thanks to this, U.S. pork producers are likely to forego more than $2 billion per year due to declining hog futures prices, according to Iowa State University economists' projections.

As the fund DBA has double-digit exposure (11.58%) to soybeans and 7.76% focus on lean hogs, it lost about 5% in the past month (read: Mexico Pork Tariff Threats Put These ETFs & Stocks in Focus).

E-TRACS UBS Bloomberg CMCI Agriculture ETN UAG — Down 13.4% in Four Weeks

The underlying index measures the collateralized returns from a basket of 10 futures contracts representing the agricultural sector. The commodity futures contracts are diversified across three constant maturities from three months up to one year and are designed to be a representative of the entire liquid forward curve of each commodity in the Index.

Soybeans take the highest spot in the index with about 22.77% weight, followed by Sugar (17.43%), Corn (17.04%) and Soybean Meal (7.69%).

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PWRSH-DB AGRIC (DBA): ETF Research Reports
 
TEUCRM-SOYBEAN (SOYB): ETF Research Reports
 
E-TRC UBC AGRIC (UAG): ETF Research Reports
 
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