What are Trump and Perdue attempting to accomplish with their $12 bln tariff aid package? First and foremost, it is an attempt to hold the support of a key constituency during the fall election. They are hoping by handing out checks and making grand promises of what great things that will be gained for the ag sector when they win the trade wars, that farmers previously predisposed to vote for Trump will stay in the fold. It is a $12 bln use of taxpayer money to buy votes. Will it work? Hard to say.
There are a lot of farmers at the coffee shop who are ideologues who are willing to sacrifice Agriculture for what Trump has told them is the good of the country and long-term gain. Many do vote their pocket book. They thought that they did that last election and have been proven wrong. The ag economy is swirling like a turd in the toilet bowl getting flushed, and if the swirl is not stopped it will soon suck in landlords, farmland values, bankers, ag suppliers and the rural main street as the ag economy goes into a recession. That could create a blue wave in the fall election that would kick some GOP incumbents out of office. $12 bln is them putting their finger in the dike to keep the dam from collapsing at least until after the fall election.
I forecast that the ag economy was one big hit away from getting into real trouble and this trade war would appear to be enough to push it over the edge if left on the current course. Trump/Perdue are trying to cushion the fall. They are trying to avoid a full-out ag sector economic recession.
Little is known yet about how the Trump/Perdue tariff relief aid package will be administered. It is expected that $7-8 bln of the total $12 bln will be given as direct payments to farmers for corn/soybeans/dairy/cotton/hogs after September 1st. I will assume that those that sold new crop ahead at better prices will get the same check as those who didn’t, so it may be a windfall for some farmers. There are other industries, damaged by tariffs, who are angry that farmers are getting what they see as “special treatment,” but the farm sector is a regional political constituency and many other businesses are not. Donald made promises to farmers that he did not make to others.
My plan, recently outlined, had other objectives than those suggested so far in the current Trump/Perdue proposal. My objectives were to make farmers whole for tariff related market losses from the market rather than from “aid checks” while not benefiting Chinese buyers, by allowing them to buy U.S. soy at a discount. The current spread between Brazilian and U.S. soybean prices has the 25 percent tariff fully priced in so Chinese buyers could purchase U.S. soybeans and afford to pay the tariff although current Chinese rush margins are negative. They are not doing that yet, so are getting enough supply elsewhere while hardening their retaliation by avoiding U.S. supply. I think that they will eventually come to our market for some supply.
I think that if we wanted to be tough on China that the USDA should buy enough soybeans taking them off the market so that prices would recover. U.S. farmers would much rather get their income from the market rather than from government aid. China broke our soybean market and then gets to take advantage of the lower prices? Give me a break…that hurts us but how does that hurt them?
I would start with the CCC purchasing 300 mln bushels of soybean at an approximate cost near $2.7 bln. That should have a real impact on the market. If not enough to restore $10 soybeans, then buy another 100 mln bushel until it does. Farmers get checks for soybeans rather than government handouts. They will be happier selling soybeans on the market then standing in line at the FSA office doing paperwork again to get a check to take to the banker. There will be a cost for storage but someone is going to have to store them anyway. They will be the carryover stocks. Trump needs to make a deal with China eventually and part of that deal would be his selling these carryover stocks to China priced out over enough time to reduce their impact on the supply side of the market.
It is not inconceivable that this could cost the government “nothing”. With my proposal farmers get real money from the market, incomes are sustained and they are frankly, more likely to like Trump when it is over. I ran this by an old Cargill guy and he said that it would work so well that they would never do it. It made too much sense. They need to get smart here and so far, there is nothing smart about any of this.
This plan could get us through the crisis for corn/soybean growers. Otherwise farmers will shift 5 mln or more acres from soybeans to corn next year running away from the soybean carryover that is now relegated to being the global residual supply. These acres would overwhelm the corn market ruining that one too so we could have $2 cash corn to go with the $7 cash soybeans. South America will go balls to the walls growing soybeans.
Ending the trade war and normalizing tariffs is the best answer to the ag market problem. I don’t think that China will surrender. Trump is a manure spreader when it comes to claims over how great tariffs are and how easy trade wars are to win. If he presses it to the point where he wins, I think the ag sector will be refuge run over pushed to the side of the road.
If he thinks that farmers will not vote for him despite the checks, he will turn on us like he did Harley Davidson and he will blame his failure in trade talks on farmers and the ag sector not staying with him. If he can’t eat it, spend it or sleep with it he loses interest in it pretty fast. Farmers seem to think that they get a different deal. They won’t.
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.
Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page