As billions of government dollars flow to Midwest corn, soy, and wheat farms this summer, a handful of farmers will get nothing.
Based on USDA criteria for payments, some good marketers were punished. By forward-contracting crops they could not cannot claim a 5% loss on inventory, as USDA CFAP rules stipulate.
Others simply produce something, such as hay or alfalfa, that don’t appear on the list of covered commodities.
This raises all kinds of questions, but two stand out:
- Will government assistance stifle the motivation for farms to pivot, to produce things with higher demand?
- What does this say about the fairness of the state’s assistance to businesses in need during a crisis?
“It says we have a farm bill that doesn’t function well in this environment,” says Ag Economic Insights economist David Widmar. “When it was passed in 2018 we were already in a trade war. The Farm Bill doesn’t have mechanisms to deal with what we’re dealing with now.”
Farmers already have protection against revenue loss or price dips. They are called ARC and PLC. These programs were supposed to mitigate the movement from high to low commodity prices over the last several years. Even so, since last year half of farm payments were coming from ad hoc payments based on the trade war (MFP); now CFAP payments balloon discretionary payments to farmers even further.
The old days of disaster payments should be behind us, right? The current ad hoc relief headed to farm mailboxes feels, well, political.
“MFP payments, and now CFAP to a large degree, were implemented at the discretion of the administration and the secretary of ag,” notes Widmar. “I’m not sure we can truly say it’s one party’s prerogative to reward a specific voting bloc. The USDA has a lot of freedom for using CCC funds on a year-to-year basis, but Congress has to pass funding to replenish (or refill) the CCC account; Congress has been doing that in recent years.”
Ad hoc payments are a symptom of a tough farm economy. A big challenge is building a mechanism to get money to producers, and that includes congressional parameters around who qualifies for payments.
So what happens when USDA has money available in CCC, and the agency sets a goal to provide financial support for farm businesses? You base the qualifier on price and grain remaining in storage.
“In one way CFAP for grain producers – at least thus far - acted like a fully subsidized price insurance program for stored grain,” says Widmar. “The government is paying up losses on this grain. It’s not ideal, but there aren’t many good answers. There are winners and losers in every program.”
And, granted, USDA has recently broadened the array of commodities covered by CFAP. To qualify for payments USDA says you must prove “a 5%-or-greater price decline or who had losses due to market supply chain disruptions due to COVID-19 and face additional significant marketing costs.”
Shortcomings throughout history
One could argue there are shortcomings in all government safety net schemes, going back generations. Congress put limitations on the Obama administration on how to make CCC payments because there were concerns the government would use payments to influence a voting bloc.
“As Mark Twain said, history doesn’t always repeat itself, but sometimes it rhymes,” notes Widmar.
Think about how government aid for agriculture has changed over time. At one point we tried to manage production (and thus profitability) through set asides; then we tried programs to manage price. Now we use programs to prop up farm income.
One could argue that throwing money at agriculture’s problems is not going to spur innovation. Farmers produce things. Things people want. But why grow something new when you can just keep getting Uncle Sam dollars for growing something that fewer and fewer end users need or want?
In any industry, when disruptions happen and the ruthless hand of the market is allowed to work, there will be winners who make adjustments, and losers who go out of business. Sounds heartless, but that’s how the free market works. Without market disruption IBM would be out of business because no one needs punch clocks any more. It would not be around to set new standards in cloud computing and nanotechnology. It would not have become a major research organization that holds the record for number of U.S. patents generated by a business over the past 27 years.
But when is it appropriate to let Black Swan events disrupt an industry, and when is it appropriate to offer financial aid with the direct purpose of keeping people in business? If the disruptive events are short-term, relief is needed. I think we can all agree that the airline industry should not be allowed to go out of business due to COVID-19, because most humans believe a coronavirus vaccine will come along and make travel commonplace again.
Same for agriculture – people gotta eat. It’s essential. But let’s review some recent demand shocks: the self-inflicted trade war with China boosted Brazilian farm wealth to record levels, and that won’t change. Then COVID-19 broke vulnerable supply chains and slammed ethanol demand. So two of the most important demand drivers for corn and soybeans have been put on the ropes, for who knows how long. Some demand loss is permanent, some is temporary.
So, should corn and soybean farmers start growing tomatoes or hemp? We all know it’s not that simple. There are very few alternatives that are appealing for corn and soybean farmers in 2021.
“It’s hard for us to make big structural adjustments in the short run,” says Widmar. “In this economy, producers are looking for the least bad alternative. There’s an investment timeline in play. There will be some innovation and adjustments, but it takes time.”
How much government support agriculture, or any industry gets, is a fine balancing act. There are tradeoffs between the inconvenience of cancelled public events and wearing a mask, and controlling disease enough so that the economy can at least limp along until a vaccine saves us.
“We approached the virus in a precautionary way – that’s why we shut down the economy,” says Widmar. “Now we’re doing everything we can to support the ag and general economy, but we won’t be able to evaluate how well we did until later.”
Reset risk management
With so many demand shocks working against you, it’s easy to think your risk management has become inadequate. But there are things you can control and things you cannot control. Know the difference.
One thing you control is 2021 crop budgets, including land rents. Consider what percent of your farm revenue is a function of government payments and what is coming from the market. Avoid making capital purchases without considering what portion of your income is tied to an ad hoc program that may not exist 12 months from now.
And remember, the crops you raise today will not get an ARC/PLC payment until the fall of 2021.
“We’re in this tight spot where we’re facing a lot of headwinds and not a lot of good options,” says Widmar. “Some producers will look at alternative enterprises; some producers are just going to ask, ‘How do I get better at what I’m doing now?’”
In either case, breaking even can be pretty tough if you’re paying high cash rent. There’s not a lot of wiggle room with corn at $3.20, so take advantage when the market gives you profit opportunities.
We hear more and more farmers saying out loud how they are ready to give up on farming. Will we always have too much production and too little demand? Can farms today pivot quickly between different crop alternatives when the market signals them to do so?
Meanwhile, this policy question – how big the government farm safety net should be -will linger. We’re only at the beginning of the debate.
What’s your take?
Email Wilson at email@example.com.