Trump is giving farmers a $6 billion bailout so they can weather his trade war

Key Points
  • The U.S. Department of Agriculture said Monday that initial aid in its emergency plan to help farmers impacted by retaliatory tariffs will consist of about $4.7 billion in payments.
  • The federal government also said it plans to purchase up to $1.2 billion in certain "commodities unfairly targeted by unjustified retaliation."
  • A third part of the aid will consist of up to $200 million in spending to help develop foreign markets for agricultural products.
Soybean farmer Raymond Schexnayder Jr. overlooks his farm outside Baton Rouge, in Erwinville, Louisiana, July 9, 2018. 
Aleksandra Michalska | Reuters

With some U.S. farm products getting slammed by retaliatory tariffs, the Trump administration is prepared to start its emergency plan for agriculture right after Labor Day in a "three-pronged approach" that will initially include about $6 billion in aid.

The U.S. Department of Agriculture said in its announcement that it is authorized to provide up to $12 billion in aid to the agricultural industry. On Monday, though, the department said initial aid will consist of about $4.7 billion in payments to agricultural producers of seven commodities, as well as federal government purchases of up to $1.2 billion in certain "commodities unfairly targeted by unjustified retaliation."

A third part of the aid will consist of up to $200 million in spending to help develop foreign markets for agricultural products.

Indiana rep. says farmers happy about Mexico trade agreement, but need deal with Canada and China
Indiana rep. says farmers happy about Mexico trade agreement, but need deal with Canada and China

Soybean farmers stand to get the biggest share of nearly $4.7 billion in payments in the Market Facilitation Program, which also will provide payments to producers of corn, cotton, dairy, hog, grain sorghum and wheat starting Sept. 4. The USDA first unveiled the trade mitigation package on July 24 but at the time provided few details.

"We always knew that agriculture would be the tip of the spear if other nations decided to retaliate," said USDA Secretary Sonny Perdue in a conference call with reporters Monday. "We also knew the economic pressure was already there for farmers, even without these unfair trade tariffs."

Soybeans have been hard hit by Chinese tariffs and stand to get up to $3.6 billion in assistance under the Market Facilitation Program. Another $290 million will go to pork, about $277 million for cotton and $156 million for grain sorghum, as well as $127 million for dairy, $119 million for wheat and $96 million for corn.

According to Perdue, farmer payments the government will make under its relief plan "will be bifurcated so that we can monitor and factor in events," such as trade breakthroughs like the U.S. announced Monday with Mexico. "An announcement about further payments will be made in the coming months, if warranted," he added.

Some of the aid from the Trump plan is coming through the authority of the Commodity Credit Corp., a federal agency dating back to the Great Depression. The Market Facilitation Program, which was established under the CCC, will determine the payment rate to farmers of a commodity covered by looking at "the severity of the trade disruption and the period of adjustment to new trade patterns, based on each producer's actual production," the USDA said.

The market aid payments will be administered by the USDA's Farm Service Agency and are limited to farmers having an average adjusted gross income of less than $900,000 for the tax years 2014 through 2016. Payments also will be capped per person or legal enterprise at a combined $125,000.

The government's program to purchase up to $1.2 billion in certain commodities impacted by trade retaliation will be administered by the USDA's Agricultural Marketing Service. USDA officials said they plan to spread purchases out over several months in response to orders placed by states for their various nutritional and feeding programs.

The USDA plans to make purchases of commodities over four different phases in the coming months, which allow for changes in growing conditions, product availability and market conditions, among other things. The government said the purchase program will include a variety of agricultural commodities, from pork and dairy to fresh fruit and nuts.

The government plans to purchase up to nearly $85 million in dairy products in the food purchase program and up to nearly $560 million in pork products. There's also plans to buy nearly $93 million in apples, about $55.6 million in oranges, as well as more than $100 million in various nuts.

Farmers don't want this $12 billion bailout, they want long-term solutions, says ND trade director
Farmers don't want this $12 billion bailout, they want long-term solutions, says ND trade director

The Foreign Agricultural Service's trade promotion arm will be in charge of administering up to $200 million available to develop foreign markets for U.S. agricultural products. Perdue said the trade promotion money "will help our U.S. agricultural exporters identify and access new markets to help mitigate the adverse effects of other countries' restrictions."

Farmers have become collateral damage in President Donald Trump's trade war against China. The U.S. has imposed several rounds of tariffs on China, which has responded with its own list of tariffs that include not only agriculture but U.S. autos and consumer products. The president also has been threatening additional trade action against China, which could produce even more retaliation by Beijing.

The administration's duties on steel and aluminum imports also have resulted in U.S. agricultural and food products getting hit with new duties from certain allies, including Mexico, Canada and the European Union.

It comes as U.S. farm income has fallen about 50 percent since 2013 and is forecast to decline 6.7 percent this year, or the lowest level in nominal terms since 2006, according to USDA estimates.

"The additional burden of tariffs on the goods we sell to China, Canada, Mexico and the European Union has been more than many farmers can bear," American Farm Bureau Federation President Zippy Duvall said in a statement. "Today's aid announcement gives us some breathing room, but it will keep many of us going only a few months more. The real solution to this trade war is to take a tough stance at the negotiating table and quickly find a resolution with our trading partners."

Nearly $20 billion in U.S. agricultural exports went to China last year, with the more than $12 billion coming from soybeans. Cotton represented another $1 billion in exports to China while pork and dairy products each accounted for $600 million or more in trade.

Trade war looms over the midterms

Economics could play a role when American farmers go to vote in November's midterm elections.

Top soybean-producing states include Illinois, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Indiana, Missouri, and Ohio — many that Trump won in the 2016 presidential election.

Soybeans for delivery in November on the Chicago Board of Trade closed at $8.4475 a bushel on Friday, down about 17 percent from where they were trading before China first announced the 25 percent duty on beans in early April. That means farmers are getting lower prices for the commodity, and at recent levels some are barely hanging on and holding back on investments such as improvements to their farms.

"At this point you are flirting with at or below cost of production," said Sarah Delbecq, a sixth-generation farmer who grows soybeans. "At some point you're not making money and losing [the] cushion that you've built up."

Delbecq added that she doesn't see the administration's emergency aid plan as making farmers whole again.

"I don't think the dollar and the number of people and the number of commodities impacted will be enough," she said. "It's also just a one-time thing, and if this continues to go on and on it's going to continue to have impacts that there won't be an aid package to help address. So the aid package is actually not the ideal solution, and it's not a solution."

Trade turmoil: Tariff troubles worry agri-business
Trade turmoil: Tariff troubles worry agri-business

China buys roughly half of the U.S. soybean exports, and roughly 1 in 3 rows of soybeans grown on the nation's farms goes to the world's second-largest economy, according to the American Soybean Association. The Chinese imposed the 25 percent tariff on U.S. soybeans effective July 6 in response to the Trump administration's move against China for alleged intellectual property theft.

"China is a concern," said Phil Ramsey, who grows soybeans, corn and wheat in Indiana. "They take one-third of our soybeans, so that's a big market. We've worked to get that market share and we'd hate to lose that market share to South America."

The escalating trade war has meant China has looked to South America for more beans in recent months and even canceled some orders it had on the books. However, that could change in the next several months as supplies from Brazil begin to dwindle and U.S. farmers harvest beans from September to November.

Ramsey, though, still is supportive of the president despite the farm belt taking a hit in the trade war.

"The American people elected President Trump to lead us," said Ramsey. "He has a lifetime of business and negotiation, and everybody has their own style [of] negotiations. So I have to trust that he is doing the best things for the country."

Problems with pork

U.S. pork is another leading commodity that was hit with hefty tariffs and is produced in many heartland states.

China is a large buyer of U.S. pork and targeted the commodity in its trade retaliation. Beijing started imposing a second round of tariffs on U.S. pork effective July 6, meaning U.S. pork going into China is now subject to an import tax that exceeds 70 percent.

October lean hog futures on the Chicago Mercantile Exchange settled at 51.775 cents per pound on Friday, but that's down nearly 30 percent from where they were trading at just before a second round of tariffs on U.S. pork went into effect in early July. But lean hog futures shot up nearly 5 percent Monday on news that the U.S. and Mexico reached a new trade deal that will replace the current North American Free Trade Agreement

Mexico is the largest volume market for U.S. pork products and second in dollar value to Japan as well as a major destination for American dairy products, including cheeses. Mexico imposed a 10 percent tariff on chilled and frozen pork muscle cuts effective June 5, and that import tax doubled to 20 percent July 5. U.S. cheese products also were targeted with Mexican tariffs, all in response to the Trump administration slapping duties on steel and aluminum imports.

However, the new bilateral trade deal with Mexico will likely lead to the removal or reduction in Mexico's hefty tariffs on U.S. agricultural products, such as pork and cheese. Trump said Monday that he hoped to reach a new trade deal with Canada too, although he also threatened that the U.S. could impose tariffs on Canadian automotive imports.

"If they'd like to negotiate fairly we'll do that," he said of Canada. "You know they have tariffs of almost 300 percent on some of our dairy products. We can't have that — we're not going to stand for that. I think with Canada, frankly, the easiest thing to do is to tariff their cars coming in."

— CNBC's Stephanie Dhue contributed to this report.

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