US Ag Policy Is Back on the Menu… For Now

US ag policy returns to significance with the latest Market Facilitation Program (MFP). But despite indications of likely future payments, farming decisions and planning for 2020 need to be made as if there will be no future MFP.

Summary

- The current environment of low crop prices and trade tensions with key US agri commodity trading partners is raising the importance of US ag policy.

- The second year of Market Facilitation Program (MFP) payments is broadly distributed to reach the majority of row-crop producers, with some benefit also provided to the dairy and hog sectors.

- The first disbursement of 2019/20 MFP payments is pushing US grain farm incomes in a positive direction, yielding a lower likelihood of negative farm income for many row cropproducing farms. If the full MFP payment would be made, it would push income into a much healthier range, but will not make up for producers’ entire losses compared to a scenario without any trade issues.

- The prospect of a quick resolution to the US-China trade war is unlikely. It remains unknown if all three tranches of this second MFP will be paid and if there will be another MFP in 2020 (the Trump Administration has indicated it) – farming decisions and planning for 2020 need to be made as if there will be no MFP in the future.

Ad Hoc US Agriculture Policy Becoming the Norm

In the past decade, US agricultural policy has proven to be less relevant to producers’ income than to market prices. However, in the past year, trade policy and government policies to mitigate negative impact to farm income resulting from trade policies have become significant considerations for farmers and ranchers when it comes to making decisions and stabilizing farm income. In May 2019, the USDA announced the Market Facilitation Program (MFP), providing aid to farmers hurt by trade disruptions prompted by ‘unjustified foreign retaliatory tariffs’ on their products. President Trump authorized the USDA to provide up to USD 14.5bn in direct payments through the MFP for 2019. This, according to the US government, amounts to the estimated impact of retaliatory tariffs on – and non-tariff barriers to exports of – US agricultural goods.

The 2019/20 season is the second year in which farmers have been provided with an ad hoc safety net due to trade disruption. Last year, the program was criticized for heavily favoring some commodities over others, thereby potentially skewing planting decisions. This year’s per acre- and per county-based payments acknowledge some of those concerns

Supporting Producers Most Impacted by Trade War

Rabobank estimates that about 63% of the 2019/20 MFP payment will go to corn and soybean producers (see Figure 1). Even though China had been importing far more US soybeans than corn, these crops are usually grown in rotation, explaining why the USDA revised the program to favor both crops. 

The latest MFP payments will be made in up to three tranches, with the second and third tranches evaluated by the US government as market conditions and trade opportunities dictate. The first MFP payment will be comprised of whichever figure is higher: either 50% of a USDA-calculated county payment per acre or the full USD 15 per acre (the minimum amount allocated per county). The first payment will be made in mid- to late August. 

20191508_MFP_640_Graph1_2

We estimate total aid is about USD 8bn in this first payment, a bit more than half of the total USD 14.5bn approved for the program due to its front-loaded design. The payments are broadly distributed across the main US growing areas, with the exception of citrus in Florida and potatoes in the Pacific Northwest (see Figure 2).

20191508_MFP_640_Graph2

Corn Belt Farm Income Pushed Into Positive Range

Using crop-production cost estimates by Iowa State University, and applying Rabobank’s baseline model projections and Micro Farm Simulator, we simulate 2019/20 corn and soybean per-acre income for a northwest Iowa farm.1 Our farm income forecast without the MFP suggests the simulated farm has about a 34% chance of suffering negative income in the coming 2019/20 crop year. With this first payment of roughly half of the total, the farm income curve shifts to the right and results in a fairly low probability of negative income. If the entire MFP payment would be applied, it pushes most potential price and yield combinations into a range with fewer instances of negative income (see Figure 3).

20191508_MFP_640_Graph3

While the MFP does provide income support to ranchers and farmers, it does not address the underlying fundamentals of low commodity prices, large stocks, and ongoing trade disputes. In addition, the MFP does not address other sectors of agriculture financially hurt by the trade war, such as the transportation sector and grain merchandisers. However, with the August WASDE lowering corn and soybean prices, the impact of ag policy to farm income is more significant than witnessed during the past decade.

Conclusions

The Trump Administration has indicated there will be a third MFP in 2020/21 if needed. Although ag policy is back on the menu, there is no indication as to what form a third MFP would take and if it will even happen – so it remains difficult for farmers and the supply chain to plan and make decisions accordingly. As with the 2018 MFP and now the 2019 MFP, farmers need to treat these payments like a bonus. Although our base-case scenario sees a third MFP program next year if the US-China trade war continues, the specifications are unpredictable. Decisions and planning for 2020 need to be made as if there will be no MFP or any other aid program.

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  • Al Griffin

    Senior Data Analyst
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  • Erin FitzPatrick Nazetta

    Senior Analyst – Grains & Oilseeds
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  • Stephen Nicholson

    Senior Analyst - Grains & Oilseeds
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