How farm payouts violate basic principles – Twin Cities

The Trump administration seems to be preparing large payments to farmers, particularly those growing soybeans, similar to the ones offered in 2018-2020 during his first administration.

That such payments could come from the money collected from President Donald Trump’s tariff seems ironic at best, considering that the tariffs are the reason the payments are needed in the first place.

But looking deeper, that such payments are seen as an entitlement by many farmers, impatient because the cash has not yet flowed, shows how moribund sound policymaking has become in our nation. That most of the general population will raise no objections further ratifies that dismal conclusion.

Consider several problems with such bailouts.

One is that payments to a narrow group of those affected by unwise trade policies are economically inefficient. In other words, the human and natural resources our society has will meet fewer needs and wants of Americans than if we were more sensible.

A second is that such payments are unjust. As noted, they benefit a small fraction of 1% of the households in our nation. This disregards their income or net worth. On balance, they will transfer money from poorer households to wealthier ones. The “opportunity cost” of these outlays again means more pressing needs of more people will be ignored.

Third, notwithstanding the above, it is inevitable that such payments will be made. There is not a chance in Hades that Trump will renege on often-implied promises to a set of people who always have voted for him by overwhelming majorities. These enjoy special status in our cultural mythologies. Few citizens will raise objections.

Finally, regardless of the scope of payments made, U.S. agriculture is on the road to the most wrenching financial shakeout in over 40 years. The dynamics of the farm economy over the past 20 years are such that we soon will see the highest rates of farm bankruptcy filings in this century. This has to do with land values, as explained below, and Trump’s payments will have little effect on this.

To understand all this, one must understand a few economic principles:

First, farmers want government cash because the current and prospective prices for soybeans and corn “do not cover the cost of production.” However, a month into intro university microeconomics courses, 19-year-old students learn that it is meaningless to talk about “production costs” if you do not distinguish between variable and fixed costs.

For farmers, variable costs include things like seeds, fertilizer, diesel fuel, herbicides and hired labor. Such costs change with the level of output. When output is zero, they are zero.

Fixed costs are ones like mortgage interest, interest and principal on machinery and facilities, general business insurance and other “overhead.” They have to be paid unless you restructure or liquidate the business. Right now commodity prices more than cover variable production costs. The problem is they won’t pay all mortgages.

Second, micro students later learn that imposing a tax on a product, whether collected from producer or consumer, affects not only both, but also employees and suppliers of inputs. The same is true for subsidies like the one Trump is proposing. Make payments to producers to bail them out of a bad situation and some of the benefits will end up benefiting product buyers and suppliers of inputs such as fertilizer.

If the product in question is exported, a substantial part of payments may be diffused into the global economy. At the margin, some fraction of the new tranche of “Trump payments” will flow to tofu eaters in Japan, chicken farmers in Belgium, John Deere factory workers in Mexico, shipowners like Maersk and herbicide manufacturers like Monsanto. These fractions may be small, but they are real. And yes, some will show up as lower meat and egg prices here.

Third, as British economist David Ricardo noted 204 years ago, when an activity becomes more profitable, producers bid up the price of the most fixed resource. Tariffs on imported wheat didn’t necessarily raise disposable incomes of English farmers in Ricardo’s day, but it did raise rents that tenants had to pay and the market price of land itself.

U.S. farmland prices substantiate Ricardo’s insights with a vengeance. Following President Richard Nixon’s devaluation of the dollar in 1972, Iowa land prices rose from $480 an acre to $2,066 an acre by 1980. They then fell by 60% in the first five years of the 1980s farm crisis.

Soybeans had averaged $5.73 a bushel with little variation in the decade ending in 2007. But then a “global commodity supercycle,” driven by demand from China, lifted them to $14.40 a bushel six years later. In response, Iowa land prices more than doubled, from $3,908 an acre to $8,716. They then sagged a bit and were essentially flat through 2020, not falling at all with Trump’s first trade war with China. Then, a record $50 billion in ag subsidies in fiscal year 2021 propelled land prices higher. And Russia’s invasion of Ukraine in February 2022 lit the fuse on a rocket. Combining the two factors, land prices increased another 57% in three years.

A fourth consideration is that farmers are victims of a “prisoner’s dilemma” in land markets. Because of advances in technology, especially in machinery, weed control, and “precision farming” technology, optimal farm sizes have crept upwards. To stay in business and remain competitive in variable production costs, farmers have had to acquire more land as the number of farms has shrunk. Proximity to a central farmstead and contiguity with existing fields is important. Yet desirable tracts may only come up for sale once in 30 or 40 years.

Just as one arrested bank robber feels pressure to sing in return for a light sentence if they fear accomplices might do so first, a land-short farmer faces similar pressure. If favorable land comes up for sale just as an episodic feeding frenzy prevails, the land-short farmer feels they must plunge in themselves regardless. If they have substantial acreages already paid for or with low mortgage service costs, they may weather any eventual shake out. If they are less well-established, they are at risk of bankruptcy for years if not decades.

Fifth, field crops like corn, sorghum, soybeans, wheat, barley and, to a slightly lesser extent, cotton, are “fungible commodities,” very closely alike. Minor differences like protein content of wheat cause minor differences in price. They are so nearly identical that a soybean processing plant producing soy oil and meal does not care if a particular load came from the U.S., Brazil or Argentina. The upshot is that how many U.S. soybeans get sold to China is of little importance. What matters is how many get sold to the world as a whole. The same is true for wheat, corn or other U.S. exports.

Prices and exports of soybeans in the first Trump war with China fell from three prior years but not below levels in the decade before that. U.S. prices fell slightly compared with Brazil’s but in general, smaller exports to China were mostly offset by sales to countries displaced from Brazil by Chinese buying.

The situation today is more complex because Trump is battling with every important country in the world. Yet there still are markets for U.S. beans.

Our situation is similar to Russia’s oil sector. Russian oil exports are not insignificant in world oil markets. Eliminate them entirely and prices will rise everywhere. The U.S. and Europe are pressuring all other countries to observe an embargo over the war in Ukraine. Yet countries with no dog in that fight are loath to make their industries and households pay more for fuel when it is available cheaply from Russia.

Similarly, myriad countries may vow they will boycott U.S. exports, but as China buys soy from Brazil and world prices rise, other nations less conflicted with us see cheaper beans from the U.S. Most will get sold. There is a kicker in that grains and oilseeds are perishable and storage is short. We don’t have space to store the entire soy crop while waiting for third-party nations to recognize we are a bargain outlet. This is especially acute in North Dakota and soybeans are less suitable for temporary storage on the ground than corn. But most of the U.S. crop will move eventually at some price.

The old but true adage that “farmers live poor but die rich,” raises questions of justice. Because of stepwise increases in land prices, many established farmers have enormous equity in land. An all-tillable square mile of land in southern Minnesota counties can easily be worth $10 million. Moreover, the amount of that held free or debt would surprise many urbanites.

The per-acre payouts in the peak year of the first Trump payments averaged $165 an acre summing to $105,000 a square mile. Thus a family, however hard working and modest in lifestyle, that falls in the richest one half of one percent of U.S. households, could get a large payment as we cut medical coverage for equally hard-working people in the poorest 30% and as we continue to cut taxes on the super rich. This is not right.