The Trump Administration appears to be making good on President Trump’s Twitter pronouncement that his administration will direct more aid in place of trade for American farmers and ranchers.
Today’s news comes a day after China announced it will increase retaliatory tariffs on numerous U.S. products, including agricultural products such as soybeans and pork. China’s move was in response to President Trump decision last Friday to raise tariffs to 25 percent on $200 billion worth of U.S. imports from China due to his dissatisfaction with the pace of trade negotiations. Both Department of Agriculture officials and farm state senators are reporting the administration plans to tap an 84 year old law to spend as much as $15 billion to farm businesses without needing approval from Congress.
It is not clear exactly how the administration will make these payments, or if the administration even knows how it will. Just two weeks ago when White House economic advisor Larry Kudlow was asked if a second round of payments would be made he stated “We have allocated $12 billion, some such, to farm assistance. And we stand ready to do more if necessary.” A statement Agriculture Secretary Sonny Purdue referred to “as not accurate.” Instead stating “We have been very clear to the agriculture community that we did not anticipate nor should they anticipate a 2019 Market Facilitation Program.” And even today there is crosstalk within the administration. Farm Service Agency Administrator Richard Fordyce was quoted saying that he has not received any instruction as of yet regarding another round of trade mitigation payments. Moments later USDA Undersecretary for Trade Ted McKinney contradicted him, stating a new trade mitigation package is days, not weeks away.
One thing clear is that there will be additional bailouts and they will be costly. One of our greatest concerns when the administration announced plans for the first round of Ag bailouts in July 2018 was that this “temporary” government program would be anything but. Welp, hate to say told you so.
As long as tariffs remain a centerpiece of President Trump’s trade policy, American agricultural exports will be a target of retaliation, giving the President a political motivation to direct aid to a constituency that voted overwhelmingly for him in 2016.
The 2019 round of bailouts is likely to be more expensive AND more distorting. A common complaint from agricultural special interests was that the methodology for the trade bailout payments didn’t provide enough subsidy to certain commodities (namely corn and wheat). So one can expect their payments to increase. There is also the question of what to do with the couple dozen specialty crops the government directed $1.2 billion toward purchasing “excess quantities” and dumping on food assistance programs. Finally there are numerous other crops that have suffered major losses because of tariffs, but not received any direct support from Washington, such as ginseng and seafood.
Undersecretary McKinney says the formula will be different this time. He also says the administration wants farmers to plant for the market instead of payments.
With a new formula comes a new set of winners and losers. If the administration doesn’t want to influence planting decisions, then the payment will have to be tied to something other than actual bushels planted or harvested. The most likely measure is what other farm bill income entitlement programs use to calculate payments—base acres. A standard across-the-board payment made on every base acre, or some percentage of base acres, would be non-distorting. It would also be a direct revival of the discredited Direct Payments program. Direct payments were, wisely, eliminated in the 2014 farm bill and generated nearly all of the projected savings from the Ag safety net portion of the bill. While it’s been long established that those claimed savings are fake news, raising direct payments from the dead would be a final nail in the cost savings claim coffin.
As Senator Ron Johnson (R-WI) described this latest misadventure in agriculture policy last year, “This is becoming more and more like a Soviet type of economy here: Commissars deciding who’s going to be granted waivers, commissars in the administration figuring out how they’re going to sprinkle around benefits. I’m very exasperated. This is serious.”
And it’s about to get more serious.