Ag Markets Stay Focused as Tariffs Take a Turn Globally

- 8 minute read or Click here and save for later -

Our last Economic Minute came out after the April 2 tariff announcement, but before the early April stock and bond market chaos. Following stock and bond market sell offs, the reciprocal tariffs set to go in effect on April 9, were paused that same day helping limit, but not eliminate, the markets’ shakiness. But many other tariffs were not paused, including an extra 10% baseline import tariff and 145% additional import tariffs on Chinese goods announced April 9. After the U.S. announced the substantial tax on Chinese imports, China announced 125% additional tariffs on U.S. exports in return. By May 10, the significant additional U.S. tariffs on Chinese imports were reduced to an additional 30% and China reduced theirs to 10%. Needless to say, there is a lot of economic news to cover since our last writing. 

From an agricultural economics perspective, April into early May saw relatively limited surprises as compared to the general macroeconomy. As we await further federal developments in tariff and economic policy, the more traditional springtime agricultural market drivers – planting progress, weather patterns, old crop supply and projected new crop supply – are steering grain markets. 

Federal funds rate stayed the same, again

At the May 6-7 Federal Open Market Committee (FOMC) meeting, the Federal Reserve kept the federal funds rate at the target range of 4.25-4.50%, as widely expected by forecasters and traders ahead of their meeting. They also continued their previously announced plan to slow the reduction of the size of the Federal balance sheet. This slowdown in reducing its bond holdings results in a more neutral open market operations policy as compared to the more aggressive contractionary monetary policy action they took when the economy was previously growing too fast in 2022-2024. They made no changes to reserve requirements. The Fed’s cautious monetary policy choices reflect the mixed bag of economic data they had to interpret: high March inflation numbers, stable April unemployment data and a negative first estimate of Q1 2025 gross domestic product growth. 

Let’s talk about inflation first. 

On April 30, the Bureau of Economic Analysis (BEA) released the Personal Consumption Expenditure (PCE) Index for March, providing insights into inflation trends. The report only reflects data up to March and does not account for any tariff turmoil that occurred in April. According to the release, the Core PCE – which excludes volatile food and energy prices and is the Fed’s favored inflation measure – experienced a 2.6% increase year-over-year. On a monthly basis, it remained nearly unchanged with less than a tenth of a percent increase. Overall PCE inflation was at 2.3% year-over-year, also showing minimal change with a slight decrease of less than a tenth of a percent. The relatively flat monthly trends in inflation were viewed positively, as flat growth is preferable to upward trends. That said, both PCE inflation and Core PCE remain too high, coming in above the Federal Reserve's inflation target of 2%, which signaled them not to lower the fed funds rate.

A nuanced detail that received little attention in media coverage was the retroactive adjustment of February's PCE inflation, which was increased by 0.2 percentage points to 2.7%. This adjustment indicates a more aggressive inflationary environment than previously reported in February. 

The fear for the next PCE report at the end of May would be a reversal of the flat trend back towards growth in inflation. The May inflation report will be the first to truly incorporate the impacts of the 10% baseline April tariffs – as well as the much higher additional tariffs on Chinese goods – for two major reasons. 

First, PCE inflation data lags a whole month behind by the time it is publicly released, so this last report missed all April data. Second, this may seem obvious, but it takes goods a long time to cross the Pacific in a cargo vessel. It varies, but a rough time reference for the journey is one month. Most ships in port in April and the goods in stores right now are from ships that left overseas ports before the April 2 announcement. The first ships that faced the higher 145% additional import tariffs on Chinese goods only arrived at U.S. ports at the very end of April, and the goods on those ships will barely affect the May report. Then, during negotiations in Geneva on May 10, the U.S. and China agreed to revised additional tariff rates for imports from China. This means the next wave of ships arriving will face an additional 30% tariff instead of 145% for the next 90 days – or until a different agreement is negotiated. This lag in policy-to-shipping impact is really starting to show just now, as U.S. ports began to see 30-40% declines in port activity in April and early May.

After the newly negotiated May deal, port shipping may rebound to more typical levels. That said, it is important to recognize May’s negotiations only focused on deescalating April’s actions between China and the U.S. Meaning tariffs, both globally and more specifically with China, still remain elevated beyond where 2025 began. Further, Chinese non-tariff barriers implemented prior to April 2, are not explicitly addressed by May’s 90-day pause.

On the same day as the inflation report, the BEA released its first advance estimate of the Gross Domestic Product (GDP) for Q1 2025, which showed a decline of 0.3% in GDP. Economists anticipated a slowdown from the range of 1.6-3.1% quarterly GDP growth seen in 2024, though the extent of which growth would slow was not accurately anticipated by most. Economic forecasts for Q1 ranged significantly with a healthy margin of error, and negative growth GDP was at the lower end of expectations.

Here’s why the negative growth may not be as alarming as it seems.

The Q1 decline in GDP was heavily influenced by a surge in imports, likely a result of companies attempting to get ahead of impending tariffs. Since imports are subtracted in the GDP calculation, it had a significant impact, swinging net exports and final GDP numbers into negative territory. Additionally, reductions in government spending contributed to the decline in Q1. Just as I am intending this article to come across, the Fed was clear to make this distinction about GDP being on stable ground in their May meeting press release. They wrote, “Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.”

It is important to note that a single quarter of GDP decline does not constitute a recession. 

Typically, two consecutive quarters of decline are required to meet the technical parameters of a recession, as defined by the National Bureau of Economic Research (NBER). NBER considers factors such as depth, diffusion and duration (specifically NBER looks for duration of “more than a few months”) to mark periods of U.S. business cycle expansion and recession. Therefore, while the current GDP situation is not ideal, it does not yet signify a recession by the traditional NBER definition.

The last major economic data comes from the Bureau of Labor Statistics (BLS) latest job situation report. In April, the national unemployment rate remained unchanged at 4.2%, while job growth experienced a slight decline. This report offered less dramatic news compared to the other economic indicators. The Fed agreed, saying in their post-meeting press release, “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.”

As these economic developments unfold, analysts and policymakers – including the Fed – will continue to monitor the data closely to assess the broader implications for the economy. For now, the Fed’s interpretation is to hold steady and wait to make any changes. The market still expects the Fed will (eventually) resume decreasing rates, but that target month is now forecasting the next 25 basis points cut, or -0.25%, would be at the July or possibly September meeting, not June’s FOMC meeting. 

Resumed rate cuts are especially expected if economic growth does not rebound in Q2 2025 and/or unemployment increases. However, if inflation stays high at the same time or increases now that we start seeing ships at port facing additional tariffs of 10-30% depending on country of origin, the Fed will be in a difficult position to justify a rate cut as that could further increase inflation. Slowed growth + inflation = stagflation, and that’s not good.  

There are some expectations that inflation may not increase as much as previously forecast now that the import tariff on Chinese goods decreased from 145% to 30% under the current U.S. and China 90-day agreement negotiated in Geneva. That’s a big economic positive.

Let’s turn to the ag markets, where we thankfully have a little less to talk about. 

As previously negotiated on March 6, goods covered in the Harmonized Tariff Schedule of the Agreement between the United States of America, United Mexican States and Canada (better known by the acronym USMCA) remain exempt from additional tariffs for now. USMCA includes most agricultural commodities, and Canada and Mexico are the top two destinations for U.S. agricultural goods.

While there are a multitude of springtime agricultural market drivers that can affect grain and oilseed prices, planting progress, weather patterns and old crop supply tend to have the most notable impacts year-after-year. Although there are regional variations in planting and weather this spring, in general, acres are coming along nicely after a rainy start. It looks like that huge 93.5 million prospective planting corn acreage could not only be achieved – it could be exceeded.

The great weather and high acres are starting to soften some old and new crop corn prices both on the futures market and in projected prices in the Worldwide Agricultural Supply and Demand Estimates (WASDE). The USDA wrote in their May WASDE, “With total U.S. corn supply rising more than use, 2025/26 ending stocks are up 385 million bushels from last year and, if realized, would be the highest in absolute terms since 2019/20…The [2025/26] season-average farm price is projected at $4.20 per bushel, down 15 cents [as compared to 2024/25].” In other words, higher expected supply at the end of this growing season without enough corresponding demand results in forecasted lower prices.

Turning to soybeans, planting progress is also coming along nicely with favorable weather, but good weather early in planting is more important for corn than beans. This weather nuance on top of the reduction in acres (caused by those expected increased corn acres), has helped the soybean market stay remarkably resilient despite the looming on and off again threat of tariff implications with China. Roughly one in every four soybeans in the U.S. are exported to China, so the 90-day pause that reduced the additional 145% April tariffs to an additional 30% was welcome news. However, if a deal is not struck to further reduce tariffs between the U.S. and China and address Chinese non-tariff barriers enacted prior to April 2, there could still be significant price implications later this summer and fall. 

But for now, between the expected reduction in soybean acres and the trade dynamics, prices on the mid-May markets and in the May WASDE both increased – a double win. The May WASDE reported, “The 2025/26 U.S. season-average soybean price is forecast at $10.25 per bushel, compared with $9.95 per bushel in 2024/25.” In general, soybeans are seeing the opposite supply and demand fundamentals as described above in corn. 

Regardless of these fluid dynamics, corn and soybean prices remain low on an annual basis. With economic news and federal policy shifting faster than ever, how do you stay ahead of the curve and make decisions that move your operation forward? Join Compeer Financial for an exclusive AgriMindset webinar, Sustainability and Tech Insights to Impact: Navigating the Changing Equations. Jennifer Coleman, director of communications at The Directions Group, and I will chat about key trends driving change in grain and livestock production and offer practical insights to help you adapt. Don’t miss this opportunity to gain clarity on what’s impacting farm profitability and how to manage risk in a rapidly shifting landscape.

For monthly updates on ag commodities, inflation and economic trends and more, subscribe to Compeer’s Economic Minute e-newsletter and tune in regularly to our Agri-Mindset webinars.

The information provided is accurate to the best of the author’s knowledge at time of publishing. It is presented “as is” with no guarantee of completeness, accuracy or timeliness, and without warranty. The information is educational in nature and not investment, legal, accounting, tax or other advice of any kind.