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July 27, 2018

Tariff Bailout for Farmers—or for Trump?

 |  By: Dairy Talk

The other night on the news, President Trump was seen tossing green seed corn caps embroidered with “Make Farmers Great Again” out into a crowd of Iowa farmers. He was in the Midwest to tout his $12 billion aid package to counter the impact of retaliatory tariffs placed on dairy, soybean, pork and other ag commodities by Mexico and China.

 

The scene was eerily reminiscent of our president tossing out rolls of paper towels to Puerto Ricans a few days after Hurricane Maria savagely destroyed their island last September.

 

Let’s hope the aid promised to farmers is a more effective response than the $4 billion FEMA poured into Puerto Rico 10 months ago. Only in the past few weeks has power been fully restored to the island—and just the slightest breeze can still knock out Puerto Rico’s rickety electrical grid.

 

The thing farmers have going for them is that they can vote in the upcoming mid-term elections. Puerto Rico’s Achilles’ heel is that its citizens can’t.

 

USDA has promised aid to farmers will start flowing by September. It’s still not clear what form that aid  will actually take, but economists with dairy organizations estimate the tariffs will cost dairy farmers $1.8 billion this year alone. Most dairy organizations were grateful for Trump’s largesse.

 

But some in Congress aren’t, and the criticism isn’t just coming from Democrats. “[Tariffs] are a massive tax increase on American consumers and businesses, and instead of offering welfare to farmers to solve a problem they themselves created, the administration should reverse course and end this incoherent policy,” Bob Corker, (R-Tenn.) told the Washington Post.

 

Sen. Chuck Grassley, (R., Iowa), said farmers need “markets and opportunity, not government handouts.”

And Sen. Ron Johnson, (R., Wis.) went even further in his comments to USA Today: “This is becoming more and more like a Soviet-type of economy here. Commissars decide who’s going to be granted waivers. Commissars in the administration figuring out how they are going to sprinkle around benefits.”

The aid, when it comes, will likely come in three forms: Direct payments to farmers, food purchases that will be redistributed to charitable feeding and nutrition programs and trade promotion to develop new export markets.

No one is sure how the direct payment program will work. But some analysts say this program could actually be bearish long term—keeping some farms in business that might have exited and help already profitable farms expand. Much will depend on how much money is distributed, how it’s distributed (will every farm get the same amount or will payments be made on production history?) and how long will payments be made.

Food purchased and redistributed to feeding programs could buoy markets, but they will also displace retail sales. Other countries could also challenge U.S. subsidies made on exports to expand trade. If the World Trade Organization rules against the U.S., other countries could then impose countervailing tariffs and create an even bigger mess.

On the crop side, if direct payments are made to soybean farmers and soybean prices remain depressed, that will mean cheaper feed and better milk-feed margins. While that might not be enough to spur expansion, it won’t discourage feeding more soybean meal or reduce milk production per cow.

In other words, the whole idea that “tariffs are great and trade wars are easy” should really be re-stated as “tariffs are terrible and trade wars can lead to recession or worse.” We’re obviously not there yet. But it’s going to be a messy fall, and a messy mid-term election season. And that’s what this aid to farmers is really all about.

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