It’s been 10 months since China imposed tariffs on U.S. soybeans – and the trade war still has no end in sight. The breakdown in trade comes at one of the worst financial times in U.S. agriculture’s history. An already bleak farm economy took a gut punch in 2018 as net farm income decreased to levels last seen during the farm financial crisis of the 1980s. The most recent decline came even as the U.S. Department of Agriculture infused some $8 billion of direct payments to farmers through Market Facilitation Program payments.
Our goal isn’t to argue the validity or merits of the trade war. But we will state the obvious – the agricultural sector is paying a steep price in the dispute. The purpose here is to outline key challenges about the current situation.
slow with details
“We have allocated $12 billion, some such, to farm assistance,” said Larry Kudlow, White House economic adviser. “And we stand ready to do more if necessary.”
That was March 29. Kudlow had earlier referred to the 2018 trade aid – which became the Market Facilitation Program – as a “temporary assistance measure.”
“I don’t think it’s going to get near $12 billion,” he had also said. “I think the sums are going to be much lower.”
Later that day, March 29, referring to Kudlow’s comments about being ready to provide more aid, Secretary of Agriculture Sonny Perdue disagreed.
“I’m afraid that’s not accurate,” Perdue said. “I think that possibly could be some miscommunication.”
Fast-forward to May 9.
Vice-President Mike Pence said, “We have already had preliminary discussions in the White House for additional support for farmers if this impasse with China continues.”
After the United States increased the tariffs May 10 on goods coming from China – further escalating trade tensions – President Donald Trump took to Twitter to suggest commodity purchases for food aid were possible. Perdue confirmed, later in the day, that the president had directed the USDA to work on a plan to support U.S. farmers.
That strategy is not new. The same “quick to promise, slow on details” pattern unfolded in 2018. After comments about helping farmers, the USDA in late July announced $12 billion was authorized. But it wasn’t until late August that the USDA released the allocation method – how the payments would be calculated. Of course that was further complicated when the USDA initially decided to make only half the payment. The second half of the 2018 payments to farmers wasn’t approved until Dec. 17.
Perdue outlined back in 2018 the biggest challenge with trade aid.
“Obviously this (2018 trade assistance) is not going to make farmers whole,” he said.
The trade war is causing a tremendous amount of uncertainty in farm country – as are the many mixed messages about its resolution, and whether or not there will be support if there is no resolution. We contend it’s exceedingly difficult for U.S. producers to make business and financial plans when those promises are a combination of mixed messages and light on details. It’s clear the administration’s responses are reactionary.
Should the trade war continue, a strategic plan with long-term multiple-year payment mechanisms built-in would significantly help farm managers and the farm economy. Instead it seems we are positioning for a string of one-off programs.
Furthermore producers can find little hope in the farm program. Payments on the 2018 crop, which won’t be received until later this year, will be slim for most farmers. The new farm bill passed by Congress won’t provide support until a year from now. Even then the program will almost certainly pay less than other programs paid in tough financial times.
In the absence of a clear plan, we’ve attempted to outline some key questions. We’ve also included our take – what we think is worth keeping in mind.
Question: How long until a plan for 2019 is in the form that producers can understand how it impacts their operations?
Our take: It will probably be late summer, but that’s just a shot in the dark at this point. Given the recent past, don’t hope for any real answers anytime soon.
Question: Will it be December 2019 before producers know if they are receiving a full payment – or a partial payment again?
Our take: A partial payment seems likely given the administration will, in the meantime, hope for a trade deal to avoid making the full payment.
Question: Will the 2019 program, again, support farm income? Or will the administration attempt a swipe at price support or supply control?
Our take: If trade support is necessary, income support is, in our opinion, the best route. It’s a tricky business to enact and manage price-support and supply-management programs. Those programs were sent to the agricultural-policy history books for a reason. Furthermore programs like price support could cause challenges with World Trade Organization agreements, if anybody still cares about that.
That said, the longer we head down the trade-war-aid path, the more pressure there will be to take more dramatic actions like price support – which the president suggested in his May 10 tweets – or supply control.
Question: How bad will financial conditions in agriculture become?
Our take: Things are already not good. Farm incomes are very depressed. If the United States is forced to go another year with only token Chinese soybean purchases, ending stocks are likely to be beyond burdensome. That means prices will be very depressed. Many other commodities are going to feel the spillover. And other sectors such as dairy continue to be mired in terrible financial conditions. Without significant government aid or a trade deal, things will become even worse.
Question: How do production decisions adjust?
Our take: In the short term – think this year – it’s going to be difficult for farmers to reallocate acres. Even in the long run, the prospect of shrinking soybean acres to where they need to be will be painful. That would be accomplished with very depressed prices, dis-incentivizing production. At this point, what commodity has prices that look attractive enough to start claiming acres? It’s going to be an extremely difficult situation if the trade war drags on for years. U.S. agriculture is set to pay a very heavy price.
Question: How do producers in other countries react?
Our take: This is perhaps one of the most important questions. If competitors increase production while the tariffs disadvantage American agricultural products, the impacts could be very long-lasting. It’s difficult to think that the situation will do anything to curb their enthusiasm at this point.
Question: Where and when does Congress become involved?
Our take: The 2018 Market Facilitation Program payments were made via an interesting loophole – the Commodity Credit Cooperation administrated through USDA’s Farm Service Agency. That White House-USDA decision didn’t require Congressional approval. In the meantime Congress passed the new farm bill in late 2018, which carried over the Agriculture Risk Coverage and Price Loss Coverage programs. At some point perhaps Congress will create a strategic plan to help producers weather systemic long-term and adverse price-income shocks. That’s something the current farm bill programs are not well-suited to handle.
Wrapping it Up
The take-away from this is that – whatever opinions are about the trade war, for or against – the White House and administration could do a better job managing the current realities. Put in other words, one should separate the environment – the trade war – from how the situation has been handled. In our opinions the bare minimum has been done, and sometimes grudgingly.
Perhaps what the administration is missing most is that the trade war – which has hit agriculture very hard – comes during one of the most severe economic downturns the farm economy has seen in more than 30 years. The farm economy was already on its knees dealing with depressed commodity prices, tumbling incomes and inflated ending stocks. The trade war is making matters much worse. Regardless of all the uncertainty caused by the situation and its handling, many in agriculture will likely have difficult financial decisions to make in the coming months. One could hope they have better information with which to make those decisions.
U.S. farmers and ranchers deserve better.