By David Widmar and Brent Gloy
It’s been ten 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 fell to levels last seen during the farm financial crisis of the 1980s. The most recent decline came even as the USDA infused some $8 billion of direct payments to farmers through Market Facilitation Program (MFP) payments.
Our goal isn’t to argue the validity or merits of the Trade War. Although, we will state the obvious and point out that the agriculture sector is paying a very steep price in the dispute. The purpose here is to outline key challenges about the current situation.
Quick to Promise, Slow on Details
March 29th, White House Economic Advisor Larry Kudlow said “We have allocated $12 billion, some such, to farm assistance. And we stand ready to do more if necessary.” Kudlow previously referred to the 2018 trade aid – which became MFP – as a “temporary assistance measure” and said “I don’t think it’s going to get near $12 billion. I think the sums are going to be much lower.”
Later that same day referring to Kudlow’s comments about being ready to provide more aid, Secretary of Agriculture Sonny Perdue responded that “I’m afraid that’s not accurate.” Adding “I think that possibly could be some miscommunication.”
Fast-forward to May 9, Vice President 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 U.S. increased the tariff on goods coming from China on May 10th – further escalating trade tensions- the President took to Twitter to suggest commodity purchases for food aid were possible. Secretary Perdue confirmed, later in the day, that the President directed the USDA to work on a plan to support U.S. farmers.
This strategy is not new. In 2018, the same “quick to promise, slow on details” pattern unfolded. After passing comments about helping farmers, the USDA in late July announced $12 billion was authorized. It wasn’t until late August that the USDA released the allocation method – how the payments would be calculated. Of course, it was further complicated when the USDA initially decided to only make half of the payment. The last half of the 2018 payments to farmers wasn’t approved until December 17th.
Secretary Perdue outlined the biggest challenge with Trade Aid back in 2018: “Obviously this [2018 trade assistance] is not going to make farmers whole.” Beyond just making them whole, the trade war and the many, many mixed messages about its resolution and whether or not there will be support if there is no resolution cause a tremendous amount of uncertainty in farm country. We contend it is exceedingly difficult for U.S. producers to make business and financial plans when the promises are a combination of mixed messages and light on details. It’s clear the administration’s responses are reactionary. However, a strategic plan with long-term, multiple-year payment mechanisms built-in – should the Trade War continue- 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 made 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.
How long until a plan for 2019 is in the form that producers can understand how it impacts their operations?
Our take- probably late summer, but that is just a shot in the dark at this point. Given the recent past, don’t hope for any real answers anytime soon.
Will it be December 2019 before they know if they are getting a full or partial payment, again?
Our take- this seems likely given the administration will, in the meantime, hope for a trade deal to get out of making the full payment (see Kudlow’s thinking back in July 2018 ).
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. These programs were sent to the ag policy history books for a reason. Furthermore, programs like price support could get us into challenges with WTO 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 10th tweets) or supply control.
How bad do financial conditions in agriculture get?
Our take – things are already not good. Farm incomes are very low. If the U.S. is forced to go another year with only token Chinese soybean purchases, ending stocks are likely to be beyond burdensome, meaning prices will be very low. On top of that, many other commodities are going to feel the spill over. On top of that, other sectors such as dairy continue to be mired in terrible financial conditions. Without significant government aid or a trade deal, things will get even worse.
How do production decisions adjust?
Our take – in the short term (think this year) it is going to be very difficult for farmers to reallocate acres. Even in the long-run, the prospect of shrinking soybean acres where they would need to get to will be painful because it will be accomplished with very low prices dis-incentivizing production. At this point, what commodity has prices that look attractive enough to start claiming acres? It’s going to be a very, very difficult situation if the trade war drags on for years and U.S. agriculture is set to pay a very heavy price.
How do producers in other countries react?
Our take – this is perhaps one of the most important questions. If competitors ramp up production as the tariffs disadvantage American agricultural products, the impacts could be very long lasting. It’s hard to think that the situation will do anything to curb their enthusiasm at this point.
Where and when does Congress get involved?
Our take- the 2018 MFP payments were made via an interesting loop-hole, the Commodity Credit Cooperation (CCC) administrated through FSA. This 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 ARC and PLC programs. At some point, perhaps Congress will step up with a strategic plan that helps producer weather systemic, long-term, adverse price/income shocks – something the current Farm Bill programs (ARC/PLC) are not well suited to handle.
Wrapping it Up
The take away from this is that – whatever your 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- with 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 low commodity prices, tumbling incomes, and high ending stocks. The Trade War making matters much worse. Regardless of all the uncertainty caused by the situation and its handling, many in agriculture will likely have hard financial decisions to make in the coming months. One could hope that they have better information with which to make those decisions.
U.S. farmers and ranchers deserve better.