Editor’s note: The following was written by Carl Zulauf, Ohio State University ag economist, and Krista Swanson, Gary Schnitkey, Jonathan Coppess and Nick Paulson with the University of Illinois Department of Agricultural and Consumer Economics for the university’s Farmdoc Daily website Sept. 25.
This article examines payments by the 2018 Market Facilitation Program in the context of its objective to compensate U.S. farms for tariff-related losses.
Potential implications for future farm safety net policy are drawn, especially in light of a 2019 MFP 2.0 program with an expanded set of crops. Among potential implications are the likelihood of a 2020 MFP, a return to land retirement programs and growing pressure to rewrite farm safety net programs.
Distribution of 2018 payments
Payments by the 2018 MFP program (“MFP 1.0”) total $8.47 billion across nine commodities. Soybeans account for 85% of the payments.
Payments by MFP 1.0 are for tariff-related losses using an international trade model benchmarked to 2017 trade flows. A principle concern is damage incurred from China’s imposition of tariffs on its imports of U.S. farm products, in response to tariffs imposed by the U.S. on imports from China.
The counter-tariffs raise the price of U.S. farm exports, shifting China’s imports to other exporters, notably South America.
Precise dating of the impact of China’s counter-tariffs on U.S. farm prices is difficult. On April 2, 2018, China implemented tariffs on $3 billion of U.S. imports, including some farm products, in response to the March 22 announcement of U.S. tariffs on $50 billion or so of Chinese goods.
Tariff-related announcements, implementations and negotiations continued throughout April and May, including an April 4 announcement by China of a potential 25% import tariff on a list of 106 U.S. products. The list included soybeans, corn, ethanol, sorghum and beef.
Given this timeline, quantity of exports in the May 2018 WASDE (World Agricultural Supply and Demand Estimates) is considered to largely predate impact of China’s counter-tariffs on exports of U.S. farm products. Quantity of exports in the May 2018 WASDE are thus compared with quantity of exports in the latest (September 2019) WASDE.
For five of the seven MFP 1.0 commodities in WASDE, post–tariff changes were less than 5% of total U.S. exports reported in the May 2018 WASDE. Double-digit declines in exports have, however, occurred for sorghum (-29%) and soybeans (-11%).
Note, the change is calculated for combined exports over two crop or calendar years to capture the shifting forward of U.S. exports to avoid tariffs. Such shifting was widely reported for U.S. soybean exports to China.
Impact of tariffs on U.S. exports is expected to increase over time as other countries increase production in response to higher prices and net returns. In the case of U.S. corn and soybean exports in 2019, an additional negative factor is the recovery of production in Argentina from the severe drought that impacted their 2018 corn and soybean crops.
WASDE forecasts for U.S. exports have in general continued to decline since May 2018, except for pork. The continuing decline in exports is largest for milk and corn — 9 percentage points.
Given the additional deterioration in U.S. farm exports and likely cross-commodity effects, it is not surprising MFP 2.0 is larger than MFP 1.0. Forty different commodities are listed as eligible for MFP 2.0 payment.
They include 16 commodities currently not listed as eligible for farm bill Title I commodity programs: alfalfa hay, almonds, cranberries, cultivated ginseng, dried beans, fresh grapes, fresh sweet cherries, hazelnuts, hogs, macadamia nuts, millet, pecans, pistachios, rye, triticale and walnuts
MFP 3.0 in 2020 cannot be ruled out given the on-going decline in U.S. farm exports, debate over small refinery exemptions from the ethanol mandate, and 2020 elections.
Given the decline in U.S. farm exports from various tariff wars amid growing farm production in other countries, notably in South America and the former Soviet Union, and with biofuels under strategic threat from a worldwide move to electric motor vehicles, a return to chronic, large U.S. farm surpluses cannot be ruled out.
The strategic threat from electric motor vehicles cannot be overstated. For the 2018 crop year, 5.3 billion bushels of corn were converted into ethanol. This use translates into 30.3 million acres of corn, or 9.5% of all U.S. principal crop acres using the 2018 yield of 174 bushels per planted acre.
At the very least, the U.S. farm sector is swimming against the tide of electric motor vehicles.
If chronic U.S. surpluses take hold, sharply lower prices will result, bringing large spending on farm supports, particularly by the PLC (Price Loss Coverage) program. Large spending will bring pressure to change U.S. farm safety net policy.
A return to annual land set asides cannot be ruled out. They were eliminated in the 1996 farm bill, in large part due to a policy of expanding demand for U.S. farm products that dates to the 1950s.
Removal of acres via conservation programs is another option. Democratic Presidential candidate, Senator Elizabeth Warren, has proposed this option.
In short, the U.S. farm and agribusiness supply sector needs to consider the distinct possibility of a shrinking U.S. farm production sector.
Concurrently, history and political economics suggest supporters of any ad hoc policy will seek to transform ad hoc spending into annual program spending. Farm policy examples of annualizing ad hoc spending include transforming the market loss program of the late 1990s and early 2000s into the Counter-Cyclical program by the 2002 farm bill and routinely capitalizing ad hoc disaster assistance into expanded crop insurance offerings.
It should thus be expected that attempts will be made to annualize MFP.
The most straightforward way to annualize MFP is to raise support in the current farm safety net (higher Agriculture Risk Coverage coverage, higher PLC reference prices and enhancements to crop insurance).
MFP 2.0 complicates this approach. It is the largest expansion in farm support since parity support was extended to almost all U.S. farm commodities to stimulate production during World War II.