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By Staff | Jul 20, 2018

What are the objectives of Trump’s promise to have farmer’s backs as the trade wars take big slices of U.S. net farm income? The tariffs are negatively impacting many business sectors from nails to autos and the U.S. Chamber of Commerce has strongly come out against Trump tariff trade war strategy. Trump is very pro-business from the perspective of deregulation and tax cuts and he was hoping that would buy him some political capital in which to pursue his global trade reset. The deregulation is murky and it was a surprise to the ethanol industry that it included waivers for RFS RINs. If you don’t make money the tax cut is worthless.

Trump considers farmers, who voted for him heavily, to be a strong constituency which he needs to retain and cannot alienate and have a chance of future political success. China, EU, Mexico and all other trade combatants know that so are targeting U.S. farmers in the cross-hairs of their retaliation to Trump tariffs. Trump is asking farmers to be patient and patriotic and that he needs their help in resetting trade for the U.S. with the rest of the world. I think that “winning trade wars” will be very expensive and the ag sector’s neck is on the line for quite dubious benefits. If this were a ham and egg breakfast, others get to contribute eggs but the ag sector gives up a ham. . .a much more serious contribution.

Ag Secretary Sonny Perdue is reportedly at work in USDA to come up with plans as to how to compensate farmers for their ham contribution. Trump loyalists literally are putting their faith in Trump to protect them. There are three primary objectives of any ag sector compensation plan. First, they have to recover net farm income lost to tariffs and trade disruptions. Next, they have to maintain farmer political support so that they continue to vote for Trump republicans and Trump. It has to make farmers happy enough to keep them in line politically. Third, the compensation plan needs to help U.S. farmers but not subsidize China or other trade opponents in the trade war. Perdue has promised a reveal on Labor Day as to what this plan to accomplish those objectives will look like.

It has been well-reported that Perdue has $30 bln in borrowing capacity from the U.S. Treasury to fund tariff compensation efforts putting dollars behind Trump’s promise to have farmer’s backs. That authorization would allow USDA to issue loans to farmers or to buy commodities but some do not see writing checks for direct payments to farmers as being allowed under the authority. That is probably a grey area. Trump is transactional and has no interest in compensating farmers for trade losses if not pretty darn sure that he is buying their electoral loyalty. First off, giving aid to farmers is not the same thing as making them happy. Trump needs their votes. That means that whatever aid is offered that it is in a form and substantive enough to keep farmers in the fold. They need to be made to feel like they are contributing something positive to the Trump cause without being financially wounded. Trump has to make their hurt go away. Loans will not accomplish that. Farmers really do not want government checks. They do not like being considered welfare recipients with the EWG announcing publicly the size of their welfare payments. They want their money from the market.

If Trump gives farmers money to cover tariff losses then markets remain depressed which means losses compound and China and trade opponents can take advantage of the depressed prices to offset the cost of the tariffs for their end-users. Trump payments to farmers then keeps them producing and keeps markets depressed. Farmers do not like depressed markets. They do not make them happy. Farmers need to be happy in order to vote for Trump. Even if farmers got payments to compensate for tariff losses depressed markets will take the public relations mojo out of farmers. Trump needs to brag about how he compensated farmers, who he loves, and restored the markets so they do not undermine the narrative.

How do you accomplish this? One way that I believe would achieve all three Trump objectives would be for CCC to buy soybeans and other commodities, removing them from the market thus allowing prices to recover. He could start with 300 mln bushels of soybeans and make assurances that they will buy more until soybean prices top $10 bushel. That way farmers would get their income from the market and somebody would get paid to store soybeans indefinitely. There should be no timeframe set on holding this purchase. They can be rolled over for quality control. They would be like a strategic soybean reserve as they have in China. U.S. farmers would get paid from the market and Chinese buyers have to pay the higher price for the soybeans they need to buy instead of getting a bargain from a depressed market. This achieves my three objectives of recovering net farm income. . .make farmers happy, while not subsidizing Chinese buyers.

So let’s just say that the CCC ends up owning 300 mln bushels of soybeans. Restoring soybean trade will be one of the primary objectives of any trade deal with China. 300 mln bushels of soybeans could not be dropped on the market without negative market consequences. My idea would be to sell these soybeans to China as part of a comprehensive trade deal over a period of a few years in order to minimize the impact of this supply on the market. The final cost from this to the CCC could be quite small. This type of plan would work with non-perishable items but would be harder to pull off with fresh products like pork and lobster.

Something else that must be an objective of winning this trade war is the elimination of Phyto-non-science trade barriers. U.S. GMOs must no longer be barred from foreign markets. Farmers have to get something out of this trade war and should no longer have to put up with things like ractopamine meat bans. Ag Secretary Perdue says that they plan the reveal for Labor Day. They have between Labor Day and the fall election to convince farmers that they will get their ham back in one leg.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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