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Bailouts Under MFP Exceed Farmers’ Losses

12/10/2019

According to a December 4th posting on Bloomberg the $28 million farm bailout program extending over 2018 and 2019 represents a gross overpayment.  At the outset it must be recognized that “China is not paying for the tariffs” as is claimed by the Administration.  The cost is effectively borne by importers and consumers.

 

The actual loss experienced by soybean farmers, most directly affected by the sharp drop in exports to China, represents 50 percent of the Market Facilitation Program (MFP) fund payments. Although actual quantification of losses varies according to the models used by various teams of agricultural economists, according to Dr. Joseph Glauber, the USDA former Chief Economist, “It is clear that the payment rates overstated the damage suffered by soybean growers”.  He added, “Based on what the studies show, the damages were about half that”. 

 

A team of agricultural economists at the University of Kentucky led by Dr. Yuqing Cheng calculated that the loss of exports to China represented 36 cents per bushel during 2018 compared to MFP compensation of $1.65 per bushel.  Dr. Pat Westoff, Director of the University of Missouri Food and Agriculture Quality Research Institute considers that the trade dispute caused U.S. soybeans to drop by 78 cents per bushel.  A team at the University of Georgia led by Dr. Michael Adjemian estimated that the loss was 52 cents per bushel based on export prices through the Port of New Orleans.

 

For the current year, the USDA estimates that the loss to soybean farmers was $2.05 per bushel.  The sharp escalation of the USDA figure was based on export sales extending over a ten-year period compared to 2018 that was considered to be the base year of the trade dispute.

 

Agricultural economists point to the flaw in USDA calculations that excluded the emergence of new markets.  Effectively the share of the market lost by the U.S. in China was supplied from Brazil.  This in turn created new markets for U.S. soybeans albeit at a lower price but still far below the MFP value.  It must also be remembered that the total soybean requirement by China was reduced by the loss of hog herds affected by African swine fever.  Dr. Pat Westoff stated, “USDA projections do not consider the impact of exports to other markets, considering only the negatives and not the positives.”

 

The question arises as to whether the more than liberal compensation extended to farms was due to political considerations or was the result of incompetence among agriculture economists affiliated to the USDA. It could be speculated that the forced relocation of the Economic Research Service from Washington D.C. to Kansas City, resulting in mass-resignation among experienced staff economists may have been a factor in assessing the discrepancy between actual loss and compensation. A further area of concern expressed by farmers and their associations relates to the fairness in distribution of MFP payments.  The Environmental Working Group has pointed to the disproportionate amount of compensation received by large-scale farmers.

 

In mitigation, Dr. Robert Johansson the Chief Economist for the USDA stated, “Compensation was based on gross trade losses rather than net losses. This approach was used to ensure uniformity across all commodities.  The gross-damages method was used as it is used by trade negotiators with respect to the World Trade Organization”.

 

Irrespective of how the quantum of compensation was determined consumers will ultimately pay the price for the trade dispute with China. With no prospect of a settlement of countervailing tariffs it seems certain that MFP will extend into 2020