Macquarie Group Ltd picks this winner from the escalating Trump trade tariff

President Trump is the kind of guy that has to get the last word – and he’s done that again in the trade spat with China when he threatened to triple the tariffs from Chinese imports to US$150 billion.

The latest outburst from the US president is probably a reaction to China’s response to Trump’s initial trade barrier proposal to punish the Asian nation for intellectual property theft.

The escalation in trade tension has greatly increase the chance of this becoming a full-blown trade war, which would be devastating to Australia’s (and the rest of the world’s) economy.

China is moving to impose tariffs on a range of US imports including agriculture such as soy beans and fruits. This would be a big blow to American farmers as the country is the biggest soy bean producer and exports about a third of its production to China.

I think a trade war is still an unlikely outcome as both countries know there’s too much at stake although hubris could prompt leaders from both sides to make irrational decisions.

But if there is a silver-lining, a trade war could leave some ASX-listed companies better off. Macquarie Group Ltd (ASX: MQG) has looked at our agri-stocks and has picked one clear winner to beat the “Trump Grump”.

The broker believes that crop protection products and seed supplier Nufarm Limited (ASX: NUF) will be a net beneficiary if US farmers are priced out of the Chinese market. This will favour their Latin American rivals and Nufarm generated 28% of its earnings before interest and tax (EBIT) from that region.

“68% of NUF’s Brazil business is exposed to the products impacted. So, based on FY17 reported revenue, this amounts to ~$503m of revenue, or 16% of NUF’s group revenue, which is likely to benefit from this tariff,” said Macquarie.

“A potential slight offsetting negative is NUF’s exposure in the North America but impact is not material we suspect.”

On the other hand, Nufarm’s peer Incitec Pivot Ltd (ASX: IPL) could suffer a little from the trade war. The fertilizer producer could see demand for its product fall off in the US, although demand in LatAm countries like Brazil could increase.

The issue is Incitec’s 850,000 tonne ammonia plant in Waggaman, Louisiana. This plant accounts for around 17% of the company’s FY18 EBIT and while Incitec could ship this to LatAm, this will increase costs that Incitec may not be able to recover.

The impact on Graincorp Ltd (ASX: GNC) could be pretty muted as well, according to Macquarie. While Graincorp could benefit from China shunning US sorghum producers (sorghum is on China’s target tariff list), the grain only accounts for 12% of total grain crops on the east coast of Australia.

Any benefit for Aussie sorghum exports could be eroded by falling wheat prices as US producers may have to dump their products into alternative markets.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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