Farm Progress

Policy Report: Producers must seek long-term support since current trade assistance provides only temporary relief during the trade wars.

Bradley D. Lubben

September 5, 2018

6 Min Read
TEMPORARY RELIEF: USDA’s trade aid responds to current conditions but doesn’t create a long-term strategy if trade conflicts continue.donvictorio/gettyimages

USDA’s announcement of trade assistance to producers at the end of August provides some temporary relief from the losses piled up by agricultural commodities this year during ongoing trade conflicts. But in the longer term, producers will need to focus on the underlying farm income safety net and other policy developments and decisions to work through the current economic challenges.

As the farm bill discussions move forward (and may be wrapped up by the end of September) to establish farm policy and farm support programs through 2023, the trade assistance for producers specifically addresses losses accumulated over the past several months.

As trade conflicts escalated into tariffs and retaliatory tariffs, several commodity markets suffered losses of 15% to 20% in value.

Some of the losses can be traced to good growing conditions and greater production prospects driving down prices. However, some of the losses can also be blamed on the escalating trade conflict and enacted tariffs. While total U.S. ag exports are still projected higher for the year, the diversion of exports from existing markets most affected by tariffs to other markets implies at least some increased transaction costs due to transportation differences or changes to trade relationships. Even the increased uncertainty surrounding the trade conflicts has generated increased market volatility, which tends to be bearish for agricultural markets.

Trade assistance
To address these losses in the short term, USDA announced a package of aid for producers affected by the trade conflicts. Producers are slated to receive an estimated $4.7 billion in direct payments through the Market Facilitation Program (MFP).

Payments will be paid on 50% of the 2018 production at established rates that range from 1 cent per bushel for corn to $1.65 per bushel for soybeans, with payments for cotton at 6 cents per pound, sorghum at 86 cents per bushel and wheat at 14 cents per bushel.

Payments for dairy and pork producers will be similarly based on 50% of production at the rate of 12 cents per hundredweight of historical milk production and $8 per head of inventory for pork. USDA announced that these would be the initial MFP payments, with the second 50% to be paid later if conditions warrant.

USDA also announced planned food purchases of 29 additional products, including several specialty crops, as well as beef, dairy, pork and rice for distribution through nutrition assistance programs. The total purchases are targeted at more than $1.2 billion and could help support market prices for producers. Finally, the aid package also includes $200 million for agricultural trade promotion to leverage marketing efforts of national and regional ag organizations, similar to existing trade promotion programs.

At a total of about $6 billion, this initial assistance is about half of the original announcement of up to $12 billion. USDA has characterized it as “a short-term relief strategy to protect agricultural producers” while trade talks continue. More assistance could be coming if the trade conflicts continue and are not resolved quickly.

Farm bill
As a whole, the trade aid represents an immediate response to current conditions, but doesn’t create a safety net or a long-term strategy for supporting agriculture if trade conflicts are not resolved. Producers need to look to other policy for long-term support. As it happens, the 2018 Farm Bill is nearing completion (and could be finished in September) just as the trade aid is being rolled out the door. The new farm bill would provide more certainty for a farm income safety net through 2023.

With market prices already falling to levels below the reference price for Price Loss Coverage (also the minimum price in the Agricultural Risk Coverage guarantee equation) for essentially every commodity except soybeans, it is possible that the farm bill will provide the primary protection to producers from any further market losses.

As noted, soybean prices continue to fluctuate a bit above their reference price, thus there could be further losses before the farm program safety net would kick in. Of course, the farm bill support is only limited to program commodities, so specialty crops as well as beef and pork will continue to face market pressure outside of the safety net and may call for more long-term assistance if trade conditions do not improve.

Trade agreements
On the same day the trade assistance was announced by USDA, another press conference announced a U.S.-Mexico agreement on renegotiations of the North American Free Trade Agreement. The on-again, off-again nature of the discussions on NAFTA had created additional uncertainty and pressure in the market.

With recent bilateral negotiations between the United States and Mexico to address issues apparently resolved, the next step was to get Canada into agreement, such that a final package could be moved forward, perhaps in time for Mexico’s president, Enrique Peña Nieto, to sign before leaving office at the end of his term in December.

Ongoing negotiations with China did not seem to be achieving the same progress, but some continue to be optimistic or at least hold out hope for agreement in the near term, bringing the current round of conflict to a conclusion.

Prospects with China seem to be much less certain but would be critical to resolving current conflicts and restoring market opportunities before they are lost to competitors for the long term.

While there are numerous debates about U.S. farm policy and the fairness of current trade agreements and conflicts, there is also ample evidence of the opportunity for U.S. agriculture to increasingly serve a growing and more affluent global demand. For all the assistance provided in the aid package or promised in the farm bill, the prospects for trade policy may be the most critical to the long-run outlook for U.S. agriculture.

Producer impact
In the meantime, producers need to be aware of all of the policy development and programs available. The trade assistance package will provide substantial payments to producers in the short run, even if it doesn’t “solve” the trade conflicts. The new farm bill (if passed) will provide a safety net for program commodities through 2023 that could protect producers from further market losses if conflicts continue. And any positive developments on the trade front could help the ag sector recover from the current price dip in the bottom of what was already a price and income trough.

Watching for policy developments that provide tools to producers, as well as those that create risks for producers, is an important part of the management challenge today. It is also part of the focus of the IANR exhibit at Husker Harvest Days. Whether you get the information in person at the show or online, keep your eyes to the continuing developments in the ag policy arena.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln


About the Author(s)

Bradley D. Lubben

Lubben is a Nebraska Extension associate professor, policy specialist, and director of the North Central Extension Risk Management Education Center in the Department of Ag Economics at the University of Nebraska-Lincoln. He has more than 25 years of experience in teaching, research and Extension, focusing on ag policy and economics. Lubben grew up on a grain and livestock farm near Burr, Neb., and holds degrees from UNL and Kansas State University.

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