Trade Disputes Heat Up, USDA to the Rescue?

Posted by David Widmar on July 2, 2018

By David Widmar and Brent Gloy

Ongoing trade disputes have put a damper on commodity markets and have again strained farm budgets.  Against this backdrop, the Secretary of Agriculture has been consistently telling farmers that USDA is prepared to support them as the trade dispute plays out (for example, 1, 2, 3).  While these plans have been kept a secret – apparently to prevent other countries from knowing the details – angst has begun to brew about what might be in store as the Chinese prepare to implement a 25% tariff on soybeans imported from the U.S.

The challenges with the government stepping in to backstop U.S. farmers from trade fallout was perhaps best summed up by the Chairman’s of the Senate Ag Committee, Pat Roberts:

“I’m just saying I don’t know how we implement this, I don’t know what kind of cockamamie scheme that we could come up with that would be fair, that would be at least somewhat responsible.”

All of this has us curious about what sort of plan might be in the works. In short, we have no idea of the specifics. However, we thought we thought it might be helpful to think about different types of government support and how they might fit into today’s situation.

Before diving into the details, we must offer a caveat. This post is in no way meant to be a comprehensive review of detailed policy options at the federal government’s disposal. Furthermore, this post is not written to argue what’s better or best. Instead, this is a broad review of general program mechanics and how they might function. Most importantly, we hope this post spurs a healthy debate on the topic, and further conversation – and articles and research- into a comprehensive program.

Income Support

In general, income support programs have been common in recent years. This type of assistance generally involves making payments directly to producers.  A key feature of an income support program will be the USDA making a payment on a per acre, or per bushel basis.  Examples include the former direct payments program, the current ARC and PLC programs, and occasional disaster relief payments. It’s worth noting these programs typically have some formula for calculating the value of the payments and is usually linked to actual or benchmarked (average) historical production.  However, policymakers have been careful to tie these payments to historical production to be able to classify them as de-coupled payments under WTO rules.

For policymakers, an appeal of an income program would be the speed it could be rolled out. Furthermore, the impacts of the program would likely be apparent.

On the other hand, a challenge with such a program is the mechanics of calculating a payment can get rather complicated (consider how ARC-CO payments get calculated). Will payments be based on actual production of commodities impacted by the dispute, or historical production, or what? Some farmers might find themselves disappointed when working through the math.

Price Support

Echoing an earlier era of agricultural policy, the USDA could initiate a program to support commodity prices.  In recent memory, programs such as the Loan Deficiency Program (LPD) have acted as a price support programs.

The general feature of these types of programs is to support the price that producers receive for commodities. In this case, the support would likely be to soybeans. The amount of any payment would be a function, in some manner, of the bushels of the commodity raised/marketed.

For whatever it’s worth, it would seem that a price-support program would likely run into issues with standing WTO trade agreements. Price support programs are generally frowned upon as they distort markets (who remembers the red box, amber box, and green box conversations from the early 2000’s?). However, it seems one could legitimately ask if WTO agreements/concerns would limit tools considered by the current administration.

Ultimately, the big challenge with price-support programs is picking the price level. Too high and it encourages additional production, too low and it doesn’t provide meaningful support. A secondary issue is how the program will impact burdensome ending stocks (the actual problem). A price support program could compound issues if it encourages strong production in the future.

A key feature to look for in a price support program would be announced price targets, and/or actions to boost market prices.

It seems the USDA has the most freedom to operate in this space through the Commodity Credit Corp (CCC) and Section 32 (here and here).

Supply Management

Another support program from the past is supply control. The goal of such a program would be to impact planted acres to reduce stocks and lift prices. The last time this type of support was widely used was the Payment-In-Kind (PIK) program deployed during the height of the Farm Financial Crisis. Ending stocks in the 1980’s, much worse than today, plagued the commodity markets.

Indirectly, the Conservation Reserve Program (CRP) has served as a bit of a supply management tool. Acres were enrolled rapidly in the late 1980’s, but have since declined when commodity prices and farm incomes were strong.

The main advantage of such a program is that it directly reduces production and, eventually, stocks. For programs like CRP, the market still allocates acreage among different crops, but there is initially less land in production.

Supply management programs have many challenges. First is the uncertainty from managing production when yields also impact production. A second challenge is the pace and visibility of change. Any impacts can take growing seasons to materialize and are difficult to tangibly recognize in a global marketplace. It seems the interest in this type of program is almost nonexistent.

As you might expect, a key feature of such a program would be details to limit or encourage acreage shifts.

Wrapping it Up

Stepping back and thinking about the current situation, it’s hard to believe where we are today. It seems nobody would have guessed in 2016 we’d be in the middle of such a trade dispute.

As we noted, there are several ways the USDA could step-in to support producers. The three broad categories we outlined are programs to 1) support farm income 2) support commodity prices and 3) manage supply. It’s important to note that these categories are not mutually exclusive (a program can overlap categories) or exhaustive.

It’s important to recognize not all government programs are created equal, and each has different mechanics and impacts.

Whatever the plan, if there is a plan, there are four key questions we’ll focus on:

#1) Does the plan primarily support income, prices, or supply?
#2) Is this a short-run or long-run plan?
#3) How might the plan impact production beyond 2018?
#4) Does the program attempt to raise the tide for all farms, or support those that appear to be “worse off.”

Of course, we could be getting ahead of ourselves here. As the USDA has pointed out, they first have to see damages from China’s trade policies. It seems a lot could depend on how the USDA and the administration measure and interpret any impacts.

In the meantime, many are likely thinking of the quote President Ronald Regan made popular: “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.”

Additional Links

Below are a few links we wanted to share those interested in digging into the details a bit more:

Agricultural Policy Analysis Center: “Without improvements in 2018 Farm Bill proposals, Emergency Payments or a 2019 FB may be on the horizon

AgWeb: “Trump Administration Considering ‘Tariff Payments’ to Farmers

Interested in learning more? Follow the Agricultural Economic Insights’ Blog as we track and monitors these trends throughout the years.  Also, follow AEI on Twitter and Facebook.

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