USDA to pay farmers for trade retaliation

Commentary by Marlin Clark

USDA dropped the first shoe in the trade-war compensation package Monday, Aug. 27. They announced a “first round” of payments to farmers whose commodity prices have been hurt by the current round of trade actions by President Donald Trump against China, and by the Chinese retaliation.

They are holding the second shoe at arm’s length, suggesting the possibility of more payments.

Originally, the talk was that $12 billion might be spent. Our government will make $4.7 billion in direct payments immediately, with the bulk going to soybean producers. $3.6 billion will be paid in soybean price compensation, with the formula figured at $1.65 per bushel times 50 percent of production.

This is good news for soybean producers, but producers of other exported commodities are not happy that the emphasis is on soybeans. Corn producers, for example, get a penny a bushel.

Some initial news reports, depending upon their political bias, are emphasizing the idea that the payments go mostly to Midwest voters, critical to mid-term elections. Western producers of other exports in states where the Democrats are expected to win anyway are out of luck, according to the theory.

Major export

Lost in the argument of who gets what is the fact that soybeans represent 60 percent of our exports, and have been heavily targeted by the Chinese for retaliation.

In addition to applying tariffs, the Chinese are actively involved in sourcing other high-protein commodities to substitute for American beans.

This payment represents only a third of the arguably $2 per bushel drop in the price of soybeans since the trade wrangle began.

Also lost is the fact that this payment represents only a third of the arguably $2 per bushel drop in the price of soybeans since the trade wrangle began.

November soybeans put in a high the 29th of May in the peak of the planting delay frenzy. At that point, the market worried about the size of the crop because of late planting and a poor start to the crop in wet conditions. As the crop got planted and began to look better, prices declined.

As the tariff war developed, that decline accelerated. By the middle of July, November futures were at 8.26 1/4, $2.34 1/4 off the high.

Some reporters suggest this price decline is all because of trade issues, but that is simplistic. In fact, it is hard to determine what is caused by trade, and what is caused by current thinking that we are having the third big crop in a row.

News this week that the Midwest Crop Tour is projecting the soybeans at 53.0 bushels per acre, significantly higher than the 51.6 of USDA, is an indicator of a bigger price problem than what we can blame on China.

Those of us who did not survive the agricultural downturn that started with the Carter embargo have mixed emotions about the aid package announced Monday.

First look indicates that President Trump is serious about not sacrificing the American grain farmer on the altar of free trade. The cynic in me wishes something like this had been done in 1980 when it was critical to me.

A little history

The Carter embargo in January of 1980 was a reaction to the Russian intervention in Afghanistan. The American farmers thus became a pawn in international relations.

In some ways, the embargo was revenge for the large 1972 Russian purchases of grain that helped run prices to 125-year highs. The Russians cleverly made many small purchases at the same time, so that the total volume of business was not realized until after the fact.

World food prices increased by 50 percent, which was not politically acceptable in some quarters. The fact that it brought profit to American farmers for the first time in a decade was lost in the thinking of non-farmers. It was thus convenient to attempt to reverse the bounty by restricting grain sales to Russia.

The effect in this country was to drop the price of grain, to close many export elevators, and to kick off a farm depression that gutted the Midwest.

The immediate effect may have been to elect Ronald Reagan as President instead of giving a second term to President Carter. The Midwest voted for Reagan, who promised to end the embargo.

Few non-ag pundits seemed to understand that cutting farm income by 25 percent cut the net income by 100 percent or more.

The embargo is now seen as the first big step in a disaster that washed out a high percentage of young, highly leveraged farmers and eventually ruined small towns and bankrupted agricultural banks.

Fast forward

So, today our administration is taking steps to compensate farmers for trade decisions beyond their control. This was promised by the Carter administration, but is seems in hindsight that the real attitude then was that the prices were just going back to where they were before the Russian purchases put in a price bubble.

The fact that this lower level was unprofitable was ignored. Our current administration says this price slump is temporary, and suggests that the trade dispute will all work out. Let us hope that it does.

At current production levels of corn and soybeans, we need more exports, not less.