Real World Economics: How farm payouts violate basic principles

Edward Lotterman The Trump administration seems to be preparing large payments to farmers particularly those growing soybeans similar to the ones offered in - 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 numerous farmers impatient because the cash has not yet flowed shows how moribund sound policymaking has become in our nation That greater part 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 business policies are economically inefficient In other words the human and natural support our society has will meet fewer necessities 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 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 necessities 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 perpetually have voted for him by overwhelming majorities These enjoy special status in our cultural mythologies Scant citizens will raise objections Ultimately regardless of the scope of payments made U S agriculture is on the road to the the bulk wrenching financial shakeout in over years The dynamics of the farm financial sector over the past 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 insufficient economic principles First farmers want regime 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 -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 complication 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 particular 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 business sector At the margin a few 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 particular will show up as lower meat and egg prices here Third as British economist David Ricardo noted years ago when an activity becomes more profitable producers bid up the price of the bulk fixed source 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 sphere 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 Iowa land prices rose from an acre to an acre by They then fell by in the first five years of the s farm dilemma Soybeans had averaged a bushel with little variation in the decade ending in But then a global commodity supercycle driven by demand from China lifted them to a bushel six years later In response Iowa land prices more than doubled from an acre to They then sagged a bit and were essentially flat through not falling at all with Trump s first bargain war with China Then a record billion in ag subsidies in fiscal year propelled land prices higher And Russia s invasion of Ukraine in February lit the fuse on a rocket Combining the two factors land prices increased another in three years A fourth consideration is that farmers are casualties of a prisoner s dilemma in land markets Because of advances in tool especially in machinery weed control and precision farming apparatus 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 key Yet desirable tracts may only come up for sale once in or 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 function costs they may weather any eventual shake out If they are less well-established they are at menace 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 plenty of U S soybeans get sold to China is of little importance What matters is how several 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 in the current era is more complex because Trump is battling with every crucial 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 Bulk 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 majority of of the U S crop will move eventually at chosen price The old but true adage that farmers live poor but die rich raises questions of justice Because of stepwise increases in land prices various established farmers have enormous equity in land An all-tillable square mile of land in southern Minnesota counties can easily be worth million Moreover the amount of that held free or debt would surprise countless urbanites The per-acre payouts in the peak year of the first Trump payments averaged an acre summing to 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 physiological coverage for equally hard-working people in the poorest and as we continue to cut taxes on the super rich This is not right Related Articles Real World Economics 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