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From berries to cheese, farm sector reaping millions through Depression-era program

Cranberries
Daniel Acker | Bloomberg | Getty Images
Cranberries

Many American farmers pride themselves on being self-reliant. But this year, they're getting more federal money from a Depression-era food purchasing program that's designed to combat a supply glut and low prices.

Uncle Sam has already spent around $313 million in the year ending in September on Section 32 of the Agriculture Act of 1935, which allows the secretary of agriculture to purchase domestically produced food to balance out supply and demand. That surpasses last year's total of $306.3 million. It's also the largest amount spent on the program since the throes of the recession in fiscal 2009, when $319.5 million was shelled out.

"It's not typical but we're having some issues in a lot of the commodity markets," said Mykel Taylor, a professor in farm management at Kansas State University. "Everybody is cycling down from big record incomes and now they're sitting on big supplies."

Yet not everyone is convinced that the program provides a lasting boost on spot and wholesale prices — or on farmers' wallets.

Daniel Sumner, a professor of agricultural and resource economics at the University of California at Davis, said he's "quite skeptical" about whether the program has a substantial benefit on the agricultural industries. Instead, he views Section 32 as a means for drumming up publicity for the USDA.

"It may be some sort of very temporary little price blip," he said.

"This is essentially window dressing."

Political pressure

Section 32 is usually limited to commodities like fruits, vegetables, meats, dairy, poultry and eggs. Often, the USDA makes the surplus purchases after getting a letter requesting aid from a member of Congress or a trade group. Not every request is granted, and sometimes the USDA doles out less funding than is originally sought.

That's what happened earlier this week, when the department said it would tap into a contingency fund to buy cheese, berries, eggs and meats.

Last month, about 60 members of Congress wrote a letter to USDA Secretary Tom Vilsack requesting the agency "make an immediate market injection and offer financial assistance" to help the U.S. dairy industry. The letter pointed out that milk prices were down 40 percent since 2014 and the nation's cheese stocks were at higher-than-normal levels.

The American Farm Bureau Federation and others wrote similar letters on behalf of the dairy industry, requesting as much as $150 million in purchases. When the USDA responded late Tuesday, it said it would purchase 11 million pounds of cheese valued at $20 million.

"Agricultural incomes are at a low point right now, and for the USDA to try to step in and try to do something is not necessarily out of the norm," said John Newton, the farm bureau's director of market intelligence. "They have these funds available to them every fiscal year to do something if they so choose to."

Section 32 money is a permanent appropriation equal to 30 percent of the previous calendar year's customs receipts from duties on both agricultural and nonagricultural products.

The program's purchases serve two purposes, according to a spokesperson at the USDA. They remove surplus food from the markets, which helps stabilize markets. They also provide "wholesome, quality foods" to those who need it most. That's because the purchased foods are distributed to schools, food banks and other community charities.

Yet experts say it's unclear if the government purchases provide more than a short-term boost in spot and wholesale prices. Sometimes the market reacts just the opposite, by taking profits on the news.

That was the case this week, when the USDA announced its cheese purchase. Traders had already anticipated government's intervention, after news of the request letters went public. So the day after the USDA's announcement hit, spot cheese prices on the CME fell to their lowest level in several months.

"Once the government program is announced, the wind gets sucked out of that," said Robert Chesler, vice president of the dairy group at FCStone, a commodity risk management company.

Craig Cox, senior vice president of agriculture and natural resources for the Environmental Working Group, called the program "the tip of iceberg" in decadeslong efforts to boost farm income by trying to raise prices artificially or guaranteeing income.

"None of this investment has resulted in lasting change and in most cases [has] actually exacerbated the problem by encouraging overproduction and at the same time producing widespread environmental degradation," he told CNBC in a statement.

It isn't just dairy

Dairy has been in a protracted bear market on a global basis for more than a year. Milk production domestically was up last month while the average retail price for a gallon of milk fell almost 11 percent in July.

As for eggs, the USDA recently authorized for Section 32 purchases of $11.7 million of shell egg and egg products for surplus removal. The egg industry, which lobbied for help, is struggling after the avian influenza outbreak last year that killed an estimated 40 million birds and resulted in a brief spike in egg prices.

Egg supplies have recovered this year, though demand remains weak. Some analysts are concerned the market may be slower to return to equilibrium despite the upcoming fall season, which historically has meant more demand.

Egg farmers and processors are experiencing "some of the lowest prices in years," United Egg Producers President and CEO Chad Gregory said in a release. "We are also pleased USDA will purchase both shell eggs and processed egg products."

Fred Tanneau | AFP | Getty Images

One of the biggest beneficiaries of the government's largesse is berry farmers. The cranberry industry received almost one-third of the USDA's total spending last year on Section 32. In that industry, foreign production has contributed to the oversupply. After receiving $98.6 million in purchases last year, another $27.5 million worth of cranberry concentrate buys was announced this summer.

The USDA's surplus purchases "had a substantial positive impact on cranberry growers who are facing hard times," said Michelle Hogan, executive director of the Cranberry Marketing Committee, in an emailed statement. "The most recent purchase resulted in the equivalent of 300,000 barrels of fruit being removed from inventory and helps (to) continue the industry's momentum in bringing supply and demand back in balance."

In January, Maine's delegation to Congress urged the USDA to buy surplus blueberries from growers in the state. Through a series of purchases the government has allotted nearly $13 million for Maine's blueberry growers. The USDA this week authorized separate Section 32 purchases of another variety of blueberries, representing what is likely to be another $15 million for growers.

"We had an oversupply situation which affected prices," said Nancy McBrady, executive director of the Wild Blueberry Commission of Maine. "We're trying to do everything to drive demand and even out that paradigm so that we can meet demand with the amount we have."