2020 Outlook: Farm Policy
December 18, 2019
PAER-2019-14
Author: Roman Keeney, Associate Professor of Agricultural Economics
Farm policy was once again dominated by ongoing trade disputes. Beginning in 2018, increased tariffs and reduced demand for export agriculture have exacerbated financial conditions in the sector and prompted a series of ad hoc transfers to farm operations based on expected damage from the trade war. These payments were continued in 2019 at a total level of $16 billion, with the first half of those being distributed in the summer and an additional 25% tranche given in late November and early December. A third and final (25%) tranche of assistance payments are forthcoming in January 2020 if deemed necessary.
The importance of this additional aid to the farm economy has been apparent with all farm program payments (including trade damage assistance) reaching 40% of national net farm income ($33 bn/$88 bn). The increasing role of government transfers in farm income is consistent with a number of concerning indicators for farm financial health, including the much reported 24% increase in farm bankruptcies and real farm national debt approaching inflation adjusted levels of the early 1980s ahead of the last major farm crisis.
The second year of trade damage assistance to farmers featured a considerable expansion. More crops and livestock products now qualify farmers for assistance and program payments are calculated as a single county level rate. All planted acres (not exceeding 2018 plantings) by a farm for commodities that are covered in the program receive the stated rate as calculated by USDA.
Looking ahead to 2020, most policy proposals and debate will be filtered through the national election for president and congress. Completion of the newly negotiated North American trade pact is the nearest term agenda item, with the US Congress looking to gain commitments for environmental and labor standards before signing off on the new trade rules for the continent. De-escalation of the dispute with China to provide some additional demand certainty would be critical for reorienting farm fortunes to markets and the competitive advantages of US farm production.
The $16 bn in potential transfers to farms from trade assistance is on par with the combined payments for commodities and crop insurance anticipated at the passage of the 2018 farm bill. This effective doubling of support may help stave off short term financial and cash flow stress but does little to promote the kind of sustained growth that might flow from productivity and investment responding to market signals.
In regard to the 2018 farm bill, the need for ad hoc assistance in response to trade disputes indicates that the current suite of farm programs are not equipped to deal with the level of negative impacts currently in place. This provides some slight irony given that the shift to all payments being counter-cyclical was perceived to be a counter to consistent use of emergency assistance. The resort to emergency legislation might normally accompany calls to redo farm legislation, but the prospects of doing so in a presidential election cycle mean that reconsideration of the full farm bill will probably not begin until summer 2021. This means that the administration through the USDA would be well served to formalize the process for its market facilitation package in advance of 2020 planting to alleviate some of the uncertainty around the government component of farm earnings for the coming 2020 crop year.
The advantages of formalizing the market facilitation program are the same that exist for having five-year farm bills that outline the policy parameters farm operators must manage. This would allow farmers as well as their creditors, input sellers, and landowners to more accurately price in an important revenue source and increase the odds of the sector shifting to a more efficient track with less excess production and less dependency on government transfers through both scale and product mix adjustments. This could also lead to clearer eligibility rules including implication of payment limits and trying to bring emergency payments into alignment with broader farm economy objectives as expressed through the farm bill.
Historically, farm sector stressors have been met with additional payments to producers and the current trade disputes’ exacerbation of sector declines are no exception. Negotiating a final trade agreement with China is clearly the most important policy outcome on the horizon for US agriculture. However, the continued uncertainty surrounding those negotiations and the level of needed trade adjustment required argues strongly for USDA providing farm producers a clear set of guidelines in advance of planting to understand their protection from trade related losses. This would include not only the parameters that determine county level assistance but also an outline of national indicators that trigger differing levels of gross assistance.