Trade Wars Aren’t Cool


President Trump’s trade war is sending U.S. agricultural markets into shock. Roger Johnson, farmer and president of the National Farmers Union, talks us through the situation on farms, the $12 billion bailout, and what it all means for the future of U.S. agriculture.

 

Episode Transcript

Hey, this is the Young Farmers Podcast. I’m Lindsey Lusher Shute.

Okay, let me tell you about this trade war. On March 8th, President Donald Trump put tariffs on steel and aluminum from all countries except Canada and Mexico. In response, on April 2nd, Chine put tariffs on 128 U.S. farm products. The very next day, April 3rd, the U.S. went after 1300 good from China, and the day after that, April 4th, China fought back with 106 new tariffs on the U.S. including soybeans, the country’s top agricultural export to China. Commodity producers already have a tough time getting good prices, and this trade war is making things even harder. Today, I am speaking with farmer and President of the National Farmers Union, Roger Johnson. This is actually part one of a two-part interview. He talks us through how these tariffs work, the farmer bailout everyone’s talking about and the impacts for the future of U.S. agriculture.

Krisan Christensen: Hey friends, my name is Krisan Christensen and I’m the one-woman operator, farmer, steward of Farm N’ Wild Wellspring, a modest 1-acre vegetable and cur flower farm in beautiful Boulder, Colorado. I’m also one of the leaders of the Flatiron’s Young Farmers Coalition here on the front range. And I’m a member of the National Young Farmers Coalition because I truly believe in and rely on the efforts of our national and local leadership to help keep the transitioning farmland in agriculture and work on policies that provide training as well as microloans for beginning farmers. As a first-generation farmer, I am forever grateful for the support NYFC provides through trainings, policy work and community building. And for just $35/year you too can join. In addition to being a part of a bright and just future for agriculture in the U.S. you also get discounts like 10% off Farm Tech, 30% off Chelsea Green Publishing and so much more. It’s completely worth it and I highly recommend it. To join, go to youngfarmers.org.

Trade Wars Aren’t Cool

Lindsey:  So just to get started, when did you start your tenure with the National Farmers Union?

Roger:  I started in 2009 so I’ve been here for about nine and a half years.

Lindsey:  And can you just in brief tell me sort of how, how you came to be president of National Farmers Union?

Roger:  Sure. Uh, I’ve been a farmer all my life. I bought the land the farm from my father who bought it from his father who homesteaded it back in the early 1900s. The farm is in North Dakota. It’s a diversified grain and livestock farm. The one piece that’s really important is that I grew up in Farmers Union. North Dakota is a very strong Farmers Union state and very active in the organization and I think that is why I was sought out to run for the position of president of National Farmers Union.

Lindsey:  And does Farmers Union distinguish itself from a mission perspective as well? I mean clearly owned by farmers and driven by farmers and informed by farmers. Beyond that, how do you think Farmers Union stands out? One thing that comes to mind is really standing with family scale agriculture and family farmers.

Roger: Yeah, it’s good that that stands out for you because that is very fundamental to who we are. We represent family farmers, predominantly from a policy standpoint, but we’ve for since the beginning, when we were organized over a hundred years ago, our forefathers sort of adopted the triangle as an emblem of the organization. The base of that triangle is education and the sides are legislation and cooperation.

Lindsey:  So one of the reasons I wanted to talk to you today is because you are working with farmers that are much more established than Young Farmers Coalition oftentimes and have larger commodity operations and in some cases that are selling to this international market. So many of our farmers, because they’re starting out, they’re not selling to an international market and we want them to have an understanding of what’s happening with trade and tariffs. So I guess to start with, to what extent are members of the National Farmers Union right now being impacted by this trade war and tariff situation?

Roger:  Well, let me start by talking economics just for a little bit. The last farm bill was passed and signed into law in 2014. Net farm income since 2014 to today is less than half of what it was back then. So in roughly in four or five years, net farm income has fallen in half. Now that’s across, that’s a national number that USDA puts out, so it includes CSAs and commodity farmers, but it’s overwhelmingly overweighted or weighted I should say by commodity production because that’s the biggest part of agriculture in this country. That statistic tells a lot about the economic stress that farmers, ranchers are going to right now.

Lindsey:  Before tariffs were put in place.

Roger:  Before tariffs even came into being and so we’ve got a new farm bill that’s in the process of, it’s been, there’s one version passed in the house, a different version in the Senate. They’re going to try to reconcile those and get them passed as a single bill in these next couple months and sent to the President. We’ve been arguing that in that farm bill, Congress needs to put more money in to shore up the safety net and to provide more of these kinds of services that beginning farmers and ranchers need. We’ve worked really hard to have a lot of different places in there where there are incentives for beginning farmers and ranchers. They’re all part of the overall farm bill and the overall farm bill has to respond to this overwhelmingly crushing economic situation that it’s facing a lot of these commodity producers. Now these commodity farmer/producers that as you say, rely on the international marketplace. They’re fundamentally an international market. They’re based on supply and demand. We have a surplus of production in this country and in fact, in much of the world, and so those burdensome stocks overhang the market, that drives prices very low, that ends up in net farm income being very low. When you add tariffs on top, now what initially began was the Administration was putting tariffs on imported steel and aluminum because of overcapacity problems, largely driven by China, but really coming from many countries around the world. A tariff is nothing more than a tax, in this case on exports that has to be paid by imports, you know. So whoever is buying these products, let’s say if it’s China buying soybeans from the US, the tariff is a tax that gets added to the soybeans. Now Trump put the tariff on steel and aluminum. China immediately retaliated and put tariffs on soybeans and whole bunch of other agricultural products because agricultural products is mostly what China buys from the US. So that’s a place where we were very vulnerable. The tariff on soybeans generally is 25%. So if you got $10 soybeans and you put a 25% tax on them, that’s about $2.50. Okay? So what that means is for the Chinese buyer of buying US soybeans, that buyer now has to pay the $10 plus $2.50. Well he or she isn’t going to do that, they can go to Brazil and buy the soybeans for $10. So in effect, what it does is it provides a penalty to US soybeans of $2.50 a bushel. I’m talking in round numbers. So what has really happened is we’ve seen the market for soybeans drop by about $2 a bushel in the US. And the market for other countries, soybeans that are selling into the world market, is about $2 higher than our market.

Lindsey:  Just to give some perspective, in 2014 what was, per bushel, what was sort of the high point for soybeans?

Roger:  Yes, soybeans were $13, $14 I think, at the high point. They were running at about $10 then the tariffs start, they’re probably around $8 or thereabouts right now. Of course, they fluctuate every day so.

Lindsey:  So are farmers selling at a loss at this point with the $8 dollars?

Roger:  Yes.

Lindsey:  What is, what is the cost, assumed sort of cost of production for soybeans?

Roger:  The cost of producing soybeans is probably somewhere around $8.50, $9, some places $10. It varies by area in the country. And incidentally, of the major commodities, soybeans were the crop that was making the farmers the most money, or alternatively put, losing them the least amount of money before this tariff war started. Corn, wheat were even worse off. In fact, if you looked at farm budgets across the country using sort of average, USDA numbers, both wheat producers and corn producers were expected this year to be losing money on every bushel that they sold. Now with the tariffs on soybeans, one could argue that the same thing is likely to happen with soybeans as well.

Lindsey:  Goodness. And so wheat and corn. The reason that farmers were expected to take a loss on those was because of increased production in places like Brazil and from other parts of the world selling into those same markets?

Roger:  Yes. Well, and its, and it is because there has just been very strong increases in production over time in this country and that technology has been adopted by other countries around the world and so agricultural production just keeps going higher and higher and higher, and I’m talking about production per acre, so our productivity keeps increasing and increasing. That produces more total product and population is growing at a rate that is slower than our production is increasing. Now there is this other dynamic where you’ve got an expanding middle class that’s coming up in some of these other countries that’s tending to consume more. So that sops up some of that production. But there’s a fundamental imbalance – we’re producing more than what we’re consuming. And that extra that we’re producing are burdensome stocks. This is an important point here, Lindsey, because there’s a dynamic that’s very different in commodity agriculture as opposed to CSA agriculture. In commodity agriculture, if there’s too much that’s produced, that land does not go out of production. That farmer’s going to keep producing it even if they’re producing it at a loss until eventually maybe that farmer goes out of business, but the land does not. Another farmer buys the land, rents the land, keeps producing, so the production machine keeps going. There’s an incentive for that land to always be producing even if it’s being produced at a loss. Because the fixed costs are so high.

Lindsey:  So just so I’m clear, so the fixed cost of a commodity agriculture is so high that there is an incentive to keep going regardless of whether there’s a loss with the assumption that things are gonna get better.

Roger:  Yes. Yeah. You’ve got a lot invested in land and machinery and if you’re producing at a loss, you’re losing less money than if you stopped producing because you can’t – to continue making the land payments, you have to continue making the machinery payments and now you’re not going to get any income at all, because you’re not producing. Even worse, the weeds you’re gonna grow, so now when you do decide to come back in production, you’ve got even more expense to bring the land back into production. So those dynamics are very powerful. It’s a fundamental supply-demand sort of paradox that agriculture faces, which is that when farmers are faced with low prices, they try to produce more bushels so that more bushels times that lower price, will give them a slightly larger income. And when farmers are faced with higher prices, they’re going to want to produce more bushels because now they’re going to take advantage of those higher prices, so the so their response is the same. And since these commodities are storable, they then tend to overhang the market for a long period of time until eventually something has to come back into balance. We used to have farm programs that had incentives for farmers to throttle back production when we had too much supply on hand. Now that we no longer have those provisions in the farm bill, really what you’re left with is hoping for a major supply disruption, meaning drought, floods, hail, tornadoes, hurricanes, what have you, that’s going to take a lot of production out.

Lindsey:  I think you’re the only farmer wishing for those conditions, but yeah, we had a terrible hail storm this year, so that’s all I can think about. But, yeah.

Roger:  Well, and so did we. I mean our farm is mostly been hailed out about a month ago and so it’s just one of those things. Across North Dakota they’ve got really, really good crops because when you have hailstorms you generally have a lot of rain and so.

Lindsey:  And when you have those hailstorms then you get an insurance payment, I guess at least. So there’s some, there’s some protection. I mean for a grower doing commodities, they are able to secure insurance. So if they have a loss, they are, they are compensated for that loss and I guess it helps to reduce supply. So you would assume that the price overall would maybe stabilize a bit more or potentially even go up.

Roger:  Yeah, the much larger supply reducing event is likely to be a widespread drought, they don’t have a meaningful impact in reducing the overall total supply because along with those hailstorms came rain that everybody else got so their supply is gonna go up. The point I was making here is you’re left with sort of wishing that somewhere on the globe there’s going to be a major, longer, bigger, deeper drought that’s going to wipe out a bunch of production. Now, none of us wish ill on anyone, but we’d prefer that it be somewhere other than where we are right?

Lindsey:  Right, of course. And something to just reduce the overall supply. There’s this whole discussion as you know, can we feed the world, there’s not enough food being produced. This conversation about oversupply does provide contrast to that argument there there’s not enough out there or am I wrong about that?

Roger:  No, you’re not wrong about that. In fact, there’s plenty of total supply to feed every hungry person on the planet. The problem that we have is that people are hungry not because there isn’t food, they’re hungry because they have no income to buy the food. And so you might say it’s a market failure at least for those hungry people. But we overproduce and the major producing countries, commodity producers, we significantly overproduce over time. And we’re left with trying to find other things that we can do with this crop that is so abundant here. And you know, we say, well, we’re here to feed the world, but in fact, unless you give it away, a lot of those folks who are hungry aren’t going to get it. I mean it costs money to give it away too so that’s why there’s always been different sort of programs to try and, you know, feed the hungry, that are included in the farm bill as well.

Lindsey:  So the $12 billion bailout got a lot of news. It got a lot of headlines. Can you explain what that is, where that money’s going to go, who it might help?

Roger:  Yeah. So we don’t know for sure where the money’s going to go. We know that USDA has standing authority through something called the CCC, the Commodity Credit Corporation, which is a government owned corporation that was established during the 30s. Anyway, the CCC has enormous authority that has been granted to the Secretary to buy commodities or even to do direct financial compensation for different things. And that’s what the Secretary is proposing to do. He’s announced it’ll be $12 billion that will be spent. Most of it will be spent in direct payments to compensate, presumably, soybean growers more than anyone else. And then probably corn, wheat producers. Most commodities I would expect would get some amount. The reason I say soybeans more than others is because this bailout as you term it, is designed to compensate for losses as a result of the tariffs. You kind of have to, when you hear $12 billion, it’s like, wow, that’s a big pile of money. How do you put that in context? Well, one way to put it in context is just those three commodity farmers – wheat, corn and soybean – across the country. If they were in a position to have sold in the first of June and they waited until the end of June to sell, they would have lost $13 billion. Now they didn’t all do that. For most of them, the crop hasn’t even been harvested so it’s a moving target because just like CSAs, you sell your products at different times of the year. These crops generally are harvested in the fall and then for many of them, they start their marketing the previous spring, so they’ll sell some on contract. And then after harvest, they, during harvest, they may sell some more of their crop and then they will store much of the crop and then sell it either later, at the end of the year or into next year. And so they try to spread their marketing out over what’s called the marketing year.

Lindsey:  So you have to manage your risk by trying to sell during different seasons where you expect different prices, but you have more certainty about what you’re going to produce?

Roger:  Exactly. Unless you do this, it’s really confusing.

Lindsey:  Right. I feel like I need it on paper. I need to live a season on a commodity operation farm to really get it.

Roger:  You do, yeah.

Lindsey:  So the Commodity Credit Corporation, the CCC, they’re, I guess they will work out a process to establish who has suffered a loss in some application. I guess you would make, like a crop insurance claim for instance, where you’d say, we sold this many bushels during this season and this is the price we got and this is? I don’t know.

Roger:  Yeah, that haven’t announced how they’re going to do it yet, but almost certainly it’ll work something like this. Most counties in the country have a USDA agency located there and farmers work with those county – usually it’s an FSA agency. So that FSA office is the office that’s going to issue these payments to the farmers. So once Washington decides how the money’s going to be distributed, they will basically, let’s say it’s a dollar a bushel on soybeans, is what they calculate they’re going to pay. Whatever the total soybean crop is, times a dollar, is what the payment would be. And then that payment gets allocated on the basis of what was produced. More typically they do it based on previous production because that’s already established, but I think it’s going to be based on current year production is the way they’ve announced that this year.

Lindsey:  And this Commodity Credit Corporation, the funding reserved there. That likely would have gone to these same growers anyways?

Roger:  No.

Lindsey:  No it wouldn’t? So what is that money normally used for?

Roger:  Yeah, so that, that’s a really good question. The CCC does not have money per se, to spend this $12 billion. What it has is $30 billion worth of borrowing authority granted from Congress. So the CCC will go and borrow, and in the grand scheme of things there’s a real irony here. Most of our trade deficit that President Trump is trying to deal with through these tariffs, most of that trade deficit is with China. We buy way more stuff from China than we sell to them. The whole economy now, not just agriculture. And that sends us dollars over to China. Okay? Because we’re buying more from them than we’re selling to them. So the CCC is going to borrow this money. But in fact, this money, a fair amount of this money is going to be borrowed from China because all those dollars that China gets, they turn around and invest in the US financial markets.

Lindsey:  Wow.

Roger:  Yeah. So the CC will borrow..

Lindsey:  This is not sounding like a smart move.

Roger:  Yeah. So the $12 billion will be borrowed by the CCC and paid over to farmers based on the formula yet to be determined. And then Congress will need to replenish that. They’ll need to pay that back. So this is borrowed money that’s being used to finance this one-time payment. Now, what Farmers Union has argued, for some time, well before this was announced, we have said it would make a whole lot more sense, instead of USDA borrowing the money and making this decision all on their own, for them to sit down with the members of Congress, the Agriculture Committees, put more money into the farm bill and spend it in that way. Because these tariffs are going to have a long-term impact on our price competitiveness in the world market. Countries that get in a trade war with us, we’ve spent enormous amount of time and energy and money establishing those markets. And those markets are likely going to be lost for a long, long time. They’re not going to come back because they’re going to view the US as an unreliable supplier. They’re going to turn to Brazil and buy these commodities from Brazil. Brazil is going to turn around and bring a whole bunch of new land into production, start producing even more. This surplus, this glut of production I was talking about, it’s a worldwide glut and we’re going to keep producing here, but we’re going to produce at lower and lower prices. So this has a long-term, very negative impact on farmers across this country.

Lindsey:  These types of crises have a big impact on farmland transition and just the stability of these family farm enterprises. I wonder, what kind of impact is this going to have in terms of farmland?

Roger:  Well, it probably will, over time it’s going to push farm land prices lower. Now that’s good for someone who just wants to get started farming because they can buy in cheaper, but it’s not going to be easy to buy in even cheaper, because lenders, when land values go down, lenders get real skittish and money gets really tight to buy land because the land. So that’s another one of the sort of, the characteristics of the agricultural economy is when land values are declining, credit tends to shrink, to get tighter and tighter, it’s harder and harder to buy it. When land values are increasing, credit tends to expand and so you tend to buy during increasing prices and sell during decreasing prices, which kind of is not the way you want to do it. But over time, these tariffs are likely to drive land prices lower because land prices are always the residual to profit on the farm. In other words, if farmers are making money, after they eat, after they repay their debts, after they cover all their farm operating expenses, the money that’s left over, that profit that’s left over, they’re going to attend to apply that to buying new capital assets – land, upgrading, machinery, equipment, etc. etc. When they’re losing money, they quit buying those things. And so the point here is that land values tend to follow profit. So as profit goes down, land values will, over time, they will come down. When profits increase, land values will increase in sort of parallel with increasing profits.

Lindsey:  And do you expect in this moment to see more bankruptcies and consolidation?

Roger:  Yes. We’ve already seen a significant increase in bankruptcies. There are a number of hotlines that are running around the country. We get a regular report from Nebraska for example, that there are the calls to the hotline from farmers that are in financial distress. There are record highs month after month after month. So there’s a lot of stress that’s out there already. As these market prices have come down that’s created more stress in this and they continue to come down. They’re now into the fifth year of declining prices. It looks like next year likely to be lower again. Uh, this year is going to be even lower than what was initially projected because of the impact that the tariffs. So yes, you’re going to see more bankruptcies. You’re going to see more financial stress as a consequence of these bankruptcies. You’ll see more land sales and you’ll see more consolidation. So, you know, it wasn’t that long ago when in North Dakota a thousand-acre farm was a big farm. You know, a thousand-acre farm is going to give you $10,000, $20,000, $30,000 of profit. And I mean that’s not really enough to live on anymore. So it wasn’t a that long ago. And today I’m looking at 5,000, 6,000, 7,000, 10,000 acre farms that are actually quite common. So this trend is just going to keep increasing and increasing and increasing as the farm economy struggles, and as I indicated is likely to struggle for a long time. History would tell us that you will 5-7, maybe 8 years of declining prices and revenues in agriculture followed by one or two years of up prices. And then you’ll go into a long decline again. Generally, you’re going to see a lot more down years than you are up years. And that’s because the up year happens because of some supply disruption in aberration – a shortage – and prices go high very, very fast in agriculture when there’s a supply disruption. Well, when they’re, when prices go very, very high, farmers produce, quickly respond to those higher prices. And so you’re going to see production increase pretty fast and that’s going to start building up surpluses again. And then you’re going to see the price start to slide as a result of that. And that takes a long time. It just continues to slide down. You know, in earlier years we had farm programs that were designed to sort of moderate supply when it got out of balance, these cycles were shorter. Today they’re likely to be longer. You’ll see a longer depressed price before something happens to move them high. And like I said earlier, with what happens here as a result of these tariffs, you’re likely going to bring major new production – land that’s not in grain production today, it’s pasture land, it’s range land, it’s forest land in Brazil that will be cleared. In a lot of eastern Europe now there’s vast areas of land that have not been producing. There will be economic incentives to bring that land into production, that will add more to the worldwide supply and that’s going to hold prices lower.

Lindsey:  Thank you so much for your time today. I have learned a lot and I know this is going to be really illuminating and helpful for our young farmer community to feel more educated on what is going on with these tariffs and to, I think, develop greater empathy and understanding for producers that are doing things very differently and are really under such threat and risk right now and stress. And we’ll be in touch, thanks so much.

Roger:  Alrighty, take care.

Concluding Remarks

Lindsey:  In my next conversation with Roger Johnson, we’ll talk about what’s needed to get out of this mess and stabilize the farm economy. Don’t forget to subscribe and share this podcast. Thanks to Andrew Jerome and Roger Johnson of the National Farmers Union and to the wonderful team at the National Young Farmers Coalition. To Hannah Beal for editing, to Radio Kingston for use of a beautiful podcast studio and thanks to you, for listening.

 

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