Wet Planting and Trade Wars

By | Bank Iowa July 3, 2019

Wet Planting and Trade Wars

 

The trade dispute between the U.S. and China is an ever-evolving story. U.S. row crop farmers find themselves smack-dab in the middle of a disagreement between the world’s two largest economies. The market implications as the trade war continues — especially for soybean farmers — have been complicated by one of the slowest spring planting seasons in the last three decades.

The situation has gotten a lot of headlines and has a lot of moving parts; normally, a wet spring is bullish for corn and soybean prices, and there have definitely been rallies since spring planting started in Iowa. But the trade war has at many points put a damper on prices, deflating the kind of rally many farmers have been hoping for. They want to make up for the years-long bear run in grains that has sent prices well below the breakeven point. As farmers struggled to get their 2019 crops in the ground, market prices rebounded — though far from completely out of the shadow of the potential for more trade-related bearish pressure.

Complicating the issue is the Market Facilitation Program (MFP) the federal government plans to implement to offset some of the price erosion caused by the trade conflict. A previous round of payments to farmers comprising how much was lost because of the trade issue amounted to $1.65 per bushel for soybeans and $0.01 per bushel for corn — figures with which many corn farmers took serious issue earlier this spring. The deadline to certify acres for the second round of MFP payments — which Secretary of Agriculture Sonny Perdue said will amount to $14 billion of the $16.5 billion total allocated for the program — was May 31. Perdue said prices paid for each commodity would be based on projected trade losses at the county level.

MFP payments became a complicating factor for farmers based on the sluggish pace of spring planting. With more farmers filing Prevented Planting (PP) crop insurance claims with the USDA Risk Management Agency (RMA), there are questions surrounding how MFP payments will be distributed. Production this year will be shortened for those farmers with PP claims, and many say that means 2019 acreage won’t be entirely representative of “normal” production capacity.

Detractors of MFP say that by delaying the announcement of specific payments for each commodity, the government is essentially waiting to determine the size of the payments distributed based on market prices later this year. Supporters say stopping short of announcing specific commodity payments will prevent any undue shifts in acreage based solely on those amounts. (If the soybean payment is $2.00 per bushel, that might encourage more soybean acres in a time when demand is not the highest, some say.)

One major component of the May MFP announcement — a component that drew ire in places like western Iowa, which has spent the last few months battling flooding and its aftermath — is how it’s tied to RMA PP claims. If you’re filing a PP claim, you’re not eligible for MFP for those acres. In theory, that means MFP money will be matched with actual production, but it also made PP the only option for some farmers who weren’t able to get their crops planted this spring — the farmers many say will continue to face the greatest financial challenges through the 2019 crop year.

According to federal officials, the MFP is funded by the Commodity Credit Corporation (CCC). Founded in 1933 as a way for the federal government to help offset market disruptions and downturns for farmers, CCC became part of USDA in 1939. In 1948, USDA authorized the agency to manage the sale of commodities to domestic and global relief agencies, securing a critical outlet for aid that would yield the funding necessary to facilitate payments to farmers. CCC payments are normally made directly to farmers, though the 1996 farm bill authorized deficiency payments to be made to farmers when market prices dip below lending levels.

Proponents of MFP say the CCC-funded program will ensure farmers receive fair payments to offset tariff losses. Losses will ultimately be made up once trade with China normalizes under a new trade agreement. Opponents say they’d rather have trade restored than rely on government support, with some alluding to the “government cheese” situation in the early 1980s. In that case, the government took ownership of hundreds of thousands of pounds of cheese produced as a way to offset huge losses in the dairy marketplace.

Regardless of how you feel about the China trade and tariff situation, your bottom line as a farmer has been impacted by it in one way or another. And that’s likely to continue until the trade war ends and “normal” trade resumes between China and the U.S. Though already in a bearish pattern for years leading up to the tariff announcements earlier this year, the soybean market lost more value than it normally would have. Leading up to the spring weather rally, there were several days of double-digit gains preceded by several days of double-digit losses.

It’s a volatile marketplace right now, and it’s important to control what you can and work to manage your way through the trade tiff-influenced time, hopefully guiding your farm successfully to the light at the other end of the tunnel. The repeated and sometimes dramatic headlines about the tariff spat are hard to avoid; it’s difficult to keep from thinking about them and how they’re influencing your business.

And while it certainly is a factor, it’s not something you can control. What you can control is how you manage your farm and market presence, both on its own and in response to what’s happening with the trade situation. You know how to raise crops. You know your cost of production. You know how to protect your crops. And you know how to market grain. In a time when the Chinese trade war is having such an influence on the marketplace, the most important thing to do is to stay focused on these and other things you can control, with a close eye on your farm’s bottom line.

Regardless of how the China trade war unfolds later this summer and beyond, we recommend the following as you manage your 2019 crops:

  • Stick to your marketing guns. Don’t stray from long-term marketing strategies. You know the prices you need to sustain revenue. It’s difficult to avoid making changes to your strategy when the market reacts to something like a trade war. Don’t be quick to change your marketing plans. Issues like the trade dispute with China aren’t likely to have long-term market implications.
  • Be a smart crop input buyer. Things like fertilizer, fuel and chemical can add to overall production costs. Look for ways you can get more efficient with how you buy these crop inputs to free up some needed cash in the short term.
  • Communicate. In times when outside factors influence the marketplace, Make sure your farm’s entire “team” is on the same page. That includes your banker, grain broker and crop input providers — especially when it comes to making sales decisions. Make sure you communicate any plans to your lender before you pull the trigger.
  • Raise the best crops you can. Regardless of how the trade dispute shakes out, the best insurance against any downward price pressure is producing a strong crop. Having bushels in the bins at the end of the year is the best way to put yourself in a strong position, no matter what happens with the ongoing trade dispute.
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