China Tariffs Incite Fear In Trump Heartland: Stocks In Focus

Trump's attempt to trim the $100-billion trade deficit with China has sent shock waves across the equity universe, landing the American heartland in murky waters.

Beijing has taken an aggressive stance by slapping up to 25% tariffs over $3-billion U.S. imports in response to the recent steel and aluminum import duties announced by Trump on Mar 23.

Either by chance or by design, China's retaliatory tariffs target the specialty agricultural products grown by the rural communities that had backed Trump's victory in the 2016 presidential elections.  

Republican-supporting states like Iowa and Illinois, as well as the remaining nation's bread basket will be in trouble soon if agricultural exports to the key overseas market tumble.  

Trump stated that trade disputes are "good" and "easy to win", while the consensus view of economists believe that "all parties lose".

The ripple effect of these trade restrictions might hit the U.S. agricultural business, as well as Trump's supporting force in November mid-term elections.

Beijing Hostile Over Political & Retaliatory Causes

China has often levied tariffs on nations for retaliatory and political interests.

Last year, South Korea was targeted on account of Seoul's choice to host the U.S. Terminal High Altitude Area Defense missile system, which Beijing deemed to be an insult. In sync with this, the South Korean economy downsized $6.8 billion, on grounds of a tourism boycott from China.

Also, earlier in 2008, Beijing's nationalists had urged a prohibition against the French supermarket chain — Carrefour Group — after Tibetan liberation supporters' advocates objected the Olympic torch's course through Paris.

China had also barred banana imports from Philippines due to its territorial disagreements with the latter.

Trump Heartland in Murky Waters

American trade supporters have cautioned that Beijing's tit-for-tat tariffs will impact large volumes of U.S. agricultural exports grown in the heartland states which had voted for Trump.

China has levied tariffs up to 25% on 128 American goods, majorly including luxury agricultural products such as nuts, dried fruits and ginseng. Other products like pork, scrap aluminum and specialized steel products have also been included in this list.

A 25% charge over pork will heavily weigh over Iowa, producing nearly one-third of the aggregate U.S. pork. This mid-western American state had witnessed strong backing for Republicans in 2016.

Furthermore, almond, nuts, and other dry fruits hit by the tariffs imposed by China are the staple products of California's Central Valley. Despite California supporting Democrats, farmers of Central Valley had voted for Trump.  

The U.S. Department of Agriculture predicts that its farm income this year will slide to the lowest level, since 2006.

Now, it remains to be seen if this downtrend will also impact the President's support for the upcoming mid-term elections this November.

American Food Industry at Stake

American agriculture is one industry that stands to suffer the most in the ongoing U.S.-China trade war.

Exports have altered the U.S. farm economy in recent decades, as investments on massive livestock operations, high-yield seeds and more resourceful logistics have made American farmers the prime supplier of food stuff globally.

Nevertheless, China is the biggest export market of U.S. agriculture products. Soybean shipments to the nation accounted for more than a third of the aggregate U.S. yield in 2017. This East Asian nation is the largest meat consumer in the world and imported nearly 309,000 metric tons of pork from the United States last year. Beijing is also regarded as the second-best export market for U.S. cotton, after Vietnam.  

However, now it is feared that the recently-levied $3-billion tariffs will drag down revenues and profitability of the U.S. agricultural companies.  

Notably, per media reports, domestic demand for meat-based products has been gradually declining in the United States. At this stage, trade restrictions in the prime overseas market will possibly become the biggest setback for the American meat-product companies.

Stocks in Focus  

We have zeroed in on four U.S. agricultural stocks that investors might want to recall in their watch list. These stocks currently carry a favorable Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold), and have performed better than the Zacks Consumer Staples sector over the past  year.

These stocks seem to be promising investment bets at the moment. However, widespread concern regarding the probable impact of Beijing's tariff program evokes apprehension toward these choices.  

Let's delve deeper to have a fair idea of the stocks' individual skill sets.

Industrias Bachoco, S.A.B. de C.V. IBA and its subsidiaries is a premium poultry producer of the United States and Mexico. Over the last year, the stock has rallied 12.7%, as against the 1.2% loss incurred by the sector. The company is poised to boost near-term profits on the back of elevated sales, increased investments in growth-oriented projects and strategic acquisitions.

Tyson Foods, Inc. TSN is a U.S.-based renowned multi-national food company. The stock has rallied 10.6%, as against the 1.2% loss incurred by the sector, in a year's time.

Higher sales of protein-packed brands, synergies secured from the AdvancePierre' buyout (June 2017) and gains from tax savings are anticipated to bolster the company's profitability in the quarters ahead.

Pilgrim's Pride Corporation PPC produces, processes, markets and distributes frozen and fresh chicken products in the United States, Mexico and the U.K. In the last year, the company has gained 7%, as against the 1.2% loss incurred by the sector. Ongoing portfolio strategy, the GNP Company (January 2017) and Moy Park (September 2017) buyouts, as well as stronger sales from Mexico and new European operations are likely to drive the company's profitability in the near term.

Sanderson Farms, Inc. SAFM produces, processes and sells frozen, fresh and prepared chicken products. The stock has appreciated 13.7%, as against the 1.2% loss incurred by the sector in a year. The company is poised to boost near-term profits on the back of increased market prices for dark meat products, increased productivity and stronger corn, as well as soybean exports in overseas markets like Argentina. However, slump in white meat prices and a supply glut might dent bottom-line results.

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