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Low soybean prices are bad for Minnesota’s soybean farmers. But that doesn’t mean they’re bad for Minnesota’s economy overall

Since the Trump administration announced tariffs on Chinese goods in March, commodity markets anticipated that China would hit U.S. soybeans with tariffs, and thus soybean prices have fallen by about 28 percent since March.

From crude oil to soybeans, international trade matters to Minnesota and its neighbors. Yet understanding whether changes in the prices of internationally traded goods and services help or hurt our regional economy is complicated. Trade policies that cause prices to rise will help some groups and hurt others, while falling prices would have the opposite effects.

Let’s examine two recent events, rising oil prices and falling soybean prices, and examine how they affect us locally. The big takeaway is that there is no one set of trade policies that is “best” or that will help all Minnesotans or all Americans. Some groups gain, other groups lose, and their positions might be reversed under different circumstances. What ultimately matters is that the pains and gains of international trade are shared among us all.

Rising oil prices

Crude oil prices rose from $45 per barrel to $74 per barrel over the past 12 months. President Trump is not happy about this, attributing the 64 percent increase to “the OPEC Monopoly.” He added, “REDUCE PRICING NOW.”

The president believes that higher oil prices hurt the U.S. economy, but this ignores the fact that Americans both buy and sell crude oil. For instance, higher oil prices hurt oil refiners and chemical companies since they purchase crude oil and use it as an input to produce products such as gasoline and plastics. Higher gasoline prices pinch households directly at the pump and indirectly through higher prices on the goods they buy at the stores (due to increased transportation costs).

However, suppose you own oils rigs in the Bakken shale oil area of North Dakota. The difference between oil at $45 per barrel and $74 per barrel might be the difference between losing money and making a profit. This in turn affects wages and hiring in a variety of support industries such as construction, trucking and railroads. Higher oil prices probably lead to more hiring, higher wages, and increased demand for drilling equipment and transportation services.

Further, the state government in North Dakota relies on oil taxes along with sales taxes on general merchandise to fund universities, roads, and other services. Higher oil prices, if they result in increased economic activity, will lead to higher tax revenues and will ease the budget problems the state has faced over the past few years.

Thus, although higher oil prices might hurt some areas of the U.S. economy, they are probably a boon to North Dakota and other areas that benefited over the past 15 years from the development of hydraulic fracking.

Falling soybean prices

President Trump imposed tariffs on $34 billion of imports from China last week, and China immediately retaliated by imposing tariffs on an equal amount of imports from the U.S. Since the administration announced the tariffs in March, commodity markets anticipated that China would hit U.S. soybeans with tariffs, and thus soybean prices have fallen by about 28 percent since March.

Soybean farmers clearly lose in this scenario. For example, Michael Petefish, president of the Minnesota Soybean Growers Association, told NPR that the tariffs would cost him “close to $250,000” this year. Petefish compared his position as a soybean farmer to being “a pawn in a high-stakes chess match.”

On the other hand, winners include American companies that use soy as an input to their production processes. For example, producers of soy milk, soy meal, and soybean oil will pay less for raw soybean and thus they can either continue to sell their products at their current prices (and increase their profits) or cut the price of their products to benefit consumers.

Like high oil prices, there is no good or bad price of soybeans. It all depends on whether the gains to producers of soy-based products outweigh the losses borne by soybean producers.

Implications for policy

There is no one price for crude oil or soybeans or any other product that is best for a particular economy. However, economists make the case that expanded trade is beneficial to countries for a variety of reasons, most especially because it helps the economy grow.

We do not argue that everyone will be better off. Rather, trade creates enough benefits so that those who gain from international trade can compensate those who lose and everyone will be better off with international trade. How could this be done? Trade Adjustment Assistance, job search programs and training programs could be expanded to help those who work in industries especially vulnerable to international competition.

A related suggestion comes from economists Spencer G. Lyon and Michael E. Waugh of New York University. They write, “The government could use a progressive tax system to provide social insurance that helps transfer resources from the winners from trade to the losers,” and argue that as an economy is more exposed to international trade the more progressive the income tax system should be. Unfortunately, the U.S. has moved in the opposite direction, with the tax system becoming less progressive as we have integrated our economy more deeply with the international system.

When the U.S. government pursues a particular trade policy, there will be winners and losers in our country. So, the government has an obligation to pursue additional policies that will mitigate the effects on those bearing the burdens of those policies.

Comments (5)

  1. Submitted by Robert Moffitt on 07/11/2018 - 09:19 am.

    Re petroleum and soybeans

    In Minnesota, there is a direct connection between imported petroleum and soybeans.

    Virtually all of our state’s refined petroleum fuels comes from the Tar Sands region of Alberta, Canada. We get very little of our oil from neighboring North Dakota.

    Thanks largely to soybeans, Minnesota is not consuming as much petroleum as it normally would during the summer. That’s because of a first-in-the-nation law that requires that virtually all of the diesel fuel sold here during the warm-weather months contain a 20 percent blend of biodiesel.

    Most of the biodiesel used in Minnesota is produced from soy oil.

    Using a locally produced (and locally grown) fuel source is good for the state’s economy, creates new jobs, and helps to reduce air pollutants and greenhouse gas emissions.

    This system will only work if the farmers who grow soybeans can make a decent living from their harvests. Let’s hope this unfortunate trade war with China (and the rest of the world) ends soon.

  2. Submitted by Neal Rovick on 07/11/2018 - 09:36 am.

    What is really interesting is that the oil shale drillers have NEVER been profitable. They have accumulated almost $300 billion in debt since 2007, up or down in oil price. With high prices, all of the costs of production rises, cutting those chances. And a big depressor of profitability is the inability of cheap transport from the 10’s of thousands of wells in these fields to a central processing/shipment/pipeline access. Couple that with Trump jaw-boning the Saudis to increase their production significantly and it is a real guess how long oil prices will stay high to limit losses to the shale drillers.

    On the other hand, the other scenario possible at this point is a Straits of Hormuz closure by the Iranians in response to Trump’s renewed attack on Iran’s oil sales where the loss of oil supplied through that area are shut-in, spiking all oil prices to a higher level than seen before. Maybe good for the shale oil people–just maybe. But bad in the end for all due to the depletion of the little water resources in the shale areas, and the spike in methane emissions from the wells that are much higher than previously stated.

  3. Submitted by Ray Schoch on 07/11/2018 - 09:36 am.

    Interesting theory

    “…When the U.S. government pursues a particular trade policy, there will be winners and losers in our country. So, the government has an obligation to pursue additional policies that will mitigate the effects on those bearing the burdens of those policies.”

    I certainly wouldn’t argue with the intellectual basis for the above, but current Republicans will, for the most part, not support the intellectual basis, nor – based on what I’ve seen over the past couple of decades and more – would they support any sort of practical application of the idea.

    When you’re a disciple of Ayn Rand, winners in the above scenarios, whether oil producers or soybean farmers, deserve all they get and more, and losers, whether oil producers or soybean farmers, are simply that: losers. Tough luck, and all that, but there’s not only nothing we can do, there’s nothing we **should** do to help those who don’t benefit from protectionist policies, or who are unlucky enough to be on the negative end of world conditions over which they have no control.

    Paul Ryan and his ilk would simply say something like “Too bad for you, but I’ve got mine.”

  4. Submitted by Gene Nelson on 07/11/2018 - 11:19 am.

    rising oil prices and falling soybean prices hurt farmers

    Johnston says…”rising oil prices and falling soybean prices”…some benefit and some lose.
    No one is winning with high oil prices and especially farmers who use a lot of energy in their business and this trade war is going to devastate them as they try to find a market for their soybeans.

    Loved Johnston’s quote of Spencer G. Lyon and Michael E. Waugh but that’s not going to happen with todays repubs or with trump.

    Not sure why anyone can get on board with either trump or todays repubs…whose values are ONLY the wealthy elite…and if you disagree…please…provide something they’ve done for the working population, much less our country as our infrastructure is crumbling and they ignore all the Russian connections and everything about life is becoming unaffordable.

  5. Submitted by Eric Jackson on 07/11/2018 - 07:57 pm.

    Comparative Advantage

    Somewhat disappointing that the professor of economics did not reference this important economic concept in international trade. Absent falsely created trade barriers, and over time, global economic trade partners will sort things out based on their natural comparative advantage.

    The key element to perfecting this model is to include all of the “cost factors” which society is now beginning to appreciate. What are the environmental and social costs, for example, of any given enterprise? Is it cheaper to produce in China because they do not account for the environmental costs of various enterprises? Is it cheaper to produce in Africa because they do not account for the social costs of various enterprises?

    These environmental and social costs of production have commonly been referred to as “externalities” because they are messy and complicated, and therefore not included in the overall cost equations.

    But if the model accurately reflects the true costs of producing Product X, including “externalities” that product should be produced in the countries with the comparative advantage, unhampered by political winds.

    Then there are the political winds.

    I would appreciate Professor Johnston’s comments.

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