Are presidential politics behind these trade war farm subsidies?

Are presidential politics behind these trade war farm subsidies?
© Getty Images

While the Trump administration is not known for ploughing many fields, the president has clearly demonstrated that he believes in spreading a decent amount of agricultural subsidy seed on farming lands in rural constituencies. The purpose is to compensate soybean and other farmers for their losses as a result of the ongoing trade war with China. Expected to be between $15 billion and $16 billion this year, the agricultural trade disruption handouts, which are somewhat misleadingly described as market facilitation payments, will likely be more than 60 percent higher than the $9.6 billion in taxpayer subsidies the Trump administration sent to soybean and other farmers for trade policy related losses last year.

Most of these subsidy payments, which do nothing to facilitate market sales, flow to soybean farmers, as their commodity price has been the most damaged by the tariff war. In 2018, producers of soybeans received $1.65 per bushel. This year, it is expected that they will be given about $2.00 per bushel. By comparison, corn producers received $0.01 per bushel in 2018, and will likely only be given $0.04 per bushel this year.

Chinese agricultural importers were purchasing about 25 percent of the total United States soybean crop prior to the start of the trade conflict with China. This year, the number is close to zero, and American soybean producers have been scrambling to find other markets for their oilseed, which is mainly used for animal feed. Calculations and official estimates indicate that soybean prices today have declined by 20 percent with a drop of $2 per bushel, or $8.20 this year versus $10.20 last year. Spillover effects of lower prices have affected corn and wheat, also sold as animal feed, though those effects have been much smaller in both dollar and percent terms. Sales of pork to China have also been adversely affected.

ADVERTISEMENT

To put the trade war subsidies into context, current projections by the Congressional Budget Office now indicate that the annual payments for agricultural programs authorized through the farm bill last year could average $23 billion a year between now and 2023. Around $3 billion of those taxpayer monies will go to publicly funded research programs that do provide genuine benefits for American consumers, and then the rest is paid mainly to farmers and the crop insurance companies that administer the $8 billion a year federal agricultural insurance program.

The Trump administration trade war compensation payments to farmers bumped the total cost of farm subsidies to around $27 billion last year, which is a 57 percent increase at the stroke of a pen. If, as the agriculture secretary had just announced, farmers receive trade war compensation payments in the region of $15 billion to $16 billion this year, they will have almost doubled their subsidy incomes, which further increases the federal budget deficit and imposes additional financial burdens onto taxpayers.

Farmers have legitimate reasons to be upset about the potential long run negative impacts of the Trump administration trade conflict with China. Among those concerns is watching Brazil and other countries use the current international situation to obtain some access to the Chinese agricultural markets as they hope to establish longer term commercial relations with Chinese importers at the expense of American exporters.

To their credit, most of the major agricultural organizations have firmly stated that they want the Trump administration to end the tariffs being leveraged as the core policy instrument in the trade war with China. They would strongly prefer to rely on market sales for their revenues, instead of being given supplementary government subsidies. Many of these farm groups are also well aware that the trade war subsidies might not last.

Conceivably, policymakers will eventually remember that two major farm bill subsidy programs, which are federal crop insurance and price loss coverage and agricultural risk coverage initiatives, are explicitly designed to compensate farmers from unexpected shortfalls in revenues and lower market prices. At a time of budget shortfalls and belt tightening, it would be useful for policymakers to know the answer to the following questions.

If farmers already have subsidy programs to protect them from low market prices and revenues, why was the market facilitation program needed in the first place? Is its real purpose simply to shore up political support for the president among farm families to generate a bumper crop of votes in rural counties in the 2020 election and not to actually save family farms?

Vincent Smith is director of agricultural policy at the American Enterprise Institute. He is also professor of economics at Montana State University.