Farm Policy: USDA’s 2018 Trade Aid Package
Released: 2019-02-08T00:00:00

Introduction

In early 2018, the Trump Administration—citing concerns over national security and unfair trade practices—imposed increased tariffs on certain imported products in general and on U.S. imports from China in particular. Several of the affected foreign trading partners responded to the U.S. tariffs with their own retaliatory tariffs targeting various U.S. products, especially agricultural commodities.

On July 24, 2018, Secretary of Agriculture Sonny Perdue announced that the U.S. Department of Agriculture (USDA) would be taking several temporary actions to assist farmers in response to trade damage from what the Administration has characterized as "unjustified retaliation." Specifically, USDA would authorize up to $12 billion in financial assistance—referred to as the "trade aid" package—for certain agricultural commodities under Section 5 of the Commodity Credit Corporation (CCC) Charter Act (15 U.S.C. 714c). The Secretary said that most of the funding would go to agricultural commodities most directly affected by the trade retaliation—corn, cotton, soybeans, sorghum, wheat, hogs, and dairy (sweet cherries and almonds were added to this list in September)—but that some funding would also be used for the purchase, distribution, and trade promotion of a variety of affected commodities.

The trade-aid package includes a Market Facilitation Program (MFP) of direct payments to affected producers, a Food Purchase and Distribution Program, and an Agricultural Trade Promotion (ATP) program. Payments under the MFP program would be made in two rounds: a first round announced on August 27, 2018, initially valued at $4.7 billion; and an equivalent-valued second round announced on December 17, 2018. Secretary Perdue stated that there would not be further trade-related financial assistance beyond this $12 billion package as producers would be able to adjust their production activities in 2019 to reflect market conditions related to the trade dispute.

This report provides background on the trade dispute that triggered the trade-aid package as well as the authority used by USDA to respond to the trade dispute with financial assistance. Then the report describes the three components of the trade-aid package with details on their implementation.

Tariffs as the Origin of the Trade Aid Package

In March 2018, the Trump Administration began applying a 25% tariff to U.S. steel imports and 10% tariff to U.S. aluminum imports from certain countries, citing national security concerns. In April, in response to alleged unfair trade practices by the Chinese government, the Administration placed additional tariffs on a number of Chinese products that are exported to the United States. China, Canada, Mexico, the European Union, and Turkey subsequently enacted retaliatory tariffs on U.S. food and agricultural products, in addition to other goods, in response to the U.S. actions. The retaliatory tariffs from those countries now apply to more than 800 U.S. food and agricultural products across meats, grains, dairy products, specialty and horticultural crops, seafood, and alcoholic beverages. The export value for the targeted products to the retaliating countries totaled about $26.9 billion in 2017—about 18% of total U.S. agricultural exports.

China, which is subject to the largest set of U.S. tariff increases—including both the U.S. steel and aluminum tariffs and the U.S. tariffs in response to unfair trade practices—also has the most expansive list of retaliatory tariffs. All told, China, which was the second-leading export market by value for U.S. food and agriculture products in 2017, has levied retaliatory tariffs on about 800 U.S. food and agricultural products that were worth about $20.6 billion in exports to that country in 2017. Among China's retaliatory tariffs is a 25% tariff on soybeans, its top agricultural product import by value from the United States. China imported about $12 billion worth of U.S. soybeans in 2017, accounting for 57% of the value of all U.S. soybean exports that year. With the higher tariffs in place, China is now purchasing more soybeans from Brazil and elsewhere to meet its demand. China has also targeted other key U.S. products, including sorghum, wheat, pork and pork offal, dairy products, fruits and nuts, seafood, and whiskey.

Among other countries, Canada—the leading export market for U.S. agriculture and food products in 2017—has imposed retaliatory tariffs of 10% on about 20 food and agricultural products, mostly processed foods. U.S. exports of those products to Canada in 2017 were valued at $2.6 billion. Mexico, the third-leading export market for U.S. agriculture and food products by value in 2017, has imposed tariffs ranging from 15% to 25% on cheese, pork, and some prepared foods. U.S. exports of those products to Mexico were valued at about $2.5 billion in 2017. The European Union has levied tariffs on a small number of U.S. prepared foods, corn, and rice, which were worth about $1 billion in 2017. Turkey has imposed retaliatory tariffs on U.S. nuts, rice, and some prepared foods, imports of which amounted to some $250 million in 2017.

U.S. agriculture and food products have been targeted with increased tariffs by foreign nations for several reasons. First, the United States exports a large amount of agriculture and food products, so many countries have the choice of retaliating against those goods. Second, agricultural commodities are easily substituted from among potential suppliers, so curbing imports from one country would not necessarily limit an importing country's access to the commodity. For example, China has turned primarily to Brazil for more of its soybean imports. Third, given the geographic nature of the production of some agriculture and food products, countries can target certain goods in order to negatively and disproportionately affect the constituents of specific U.S. lawmakers. For example, all of the retaliating countries have imposed retaliatory tariffs on whiskey, some specifically on Bourbon whiskey, which is largely produced in Kentucky, rather than on all distilled beverages or alcohol more generally.

Trade Aid Package Authority

The primary authority for the trade aid package is the Secretary of Agriculture's discretion to use the general powers of the CCC. The CCC is a wholly government-owned entity that exists solely to finance authorized programs that support U.S. agriculture. It is federally chartered by the CCC Charter Act of 1948 (P.L. 80-806; 15 U.S.C. 714 et seq. ), as amended. Most CCC-funded programs are classified as mandatory spending programs and therefore do not require annual discretionary appropriations in order to operate. The CCC instead borrows from the U.S. Treasury to finance its programs consistent with its permanent, indefinite authority to borrow up to $30 billion. Congress replenishes the CCC borrowing authority by appropriating funding to cover the CCC's net realized losses.

Typically, Congress passes laws, such as omnibus farm bills, that specifically direct USDA on how to administer CCC activities and in what amounts to fund them. The underlying authorization for the CCC, however, also provides the Secretary with general powers to take certain actions in support of U.S. agriculture at the discretion of the Secretary. This discretionary use has historically been somewhat intermittent and limited in its scale, but it is the basis of the MFP and ATP announced by the Administration.

USDA also has discretionary authority to purchase U.S. agricultural commodities under a provision known as Section 32. The name refers to its authorization in Section 32 of the act of August 24, 1935 (P.L. 74-320; 7 U.S.C. 612c), as amended. Most of Section 32's mandatory funding is transferred to the USDA's child nutrition account, but the Secretary has broad discretion in how to spend the remaining unallocated funding—some of which is used to purchase agricultural commodities. The premise is that removing products from normal marketing channels helps to reduce supply and thereby increase prices and farm income. Purchased commodities are diverted to domestic food assistance programs as discussed below (see " Food Purchase and Distribution Program ").

The Administration's trade aid announcement does not specify whether the CCC or Section 32 authority is being used to make the purchases under the announced Food Purchase and Distribution Program. However, the scale of the $1.2 billion program indicates that the CCC is most likely the source since the typical annual amount of funding available in Section 32 for purchases is rarely more than half of this amount. Whether from the CCC or Section 32, the Administration's purchases appear to use distribution channels similar to those under Section 32.

Trade Aid Package Implementation

On August 27, 2018, Secretary Perdue announced the first round of trade assistance. As part of the August 27 announcement, Secretary Perdue provided details on each of the three trade aid package components, including an initial tranche of $6.1 billion in designated outlays out of a potential $12 billion in total program spending. The MFP was to provide initial estimated direct payments of $4.7 billion to qualifying agricultural producers. A Food Purchase and Distribution Program is to undertake $1.2 billion in government purchases of excess food supplies. The ATP program, funded with an additional $200 million, is to help finance foreign market development for affected agricultural products. On December 17, 2018, Secretary Perdue revised the first round of MFP outlays upward slightly to $4.8 billion, and announced an equivalent $4.8 billion in potential second-round outlays.

Market Facilitation Program

The MFP provides direct financial assistance to producers of commodities that are significantly impacted by actions of foreign governments resulting in the loss of traditional exports. USDA initially determined that qualifying commodities include corn, upland cotton, extra-long-staple cotton, sorghum, soybeans, wheat, dairy, and hogs. On September 21, 2018, USDA announced that fresh sweet cherries and shelled almonds are also eligible for MFP payments.

USDA's Farm Service Agency (FSA) is to administer the MFP by providing payments in two potential tranches. However, producers need only sign up once for the MFP to be eligible for first and second payments. Under the sign-up period, producers can submit MFP applications beginning on the following dates: September 4, 2018, for producers of soybeans, sorghum, corn, wheat, cotton, dairy, and hogs; and September 24, 2018, for producers of shelled almonds and fresh sweet cherries. Eligible producers should apply after their harvest is complete. Initially, producers were given a deadline of January 15, 2019, to complete an application. However, USDA extended the deadline to February 14 due to a partial shutdown of the federal government. The current deadline for producers to certify their 2018 production is May 1, 2019.

USDA used 2017 production data to estimate that approximately $9.6 billion would be distributed in MFP payments for corn, cotton, sorghum, soybeans, wheat, dairy, hogs, fresh sweet cherries, and shelled almonds, with over three-fourths ($7.3 billion) of MFP payments provided to soybean producers ( Table 1 ).

Who Qualifies for a Payment?

U.S. producers of corn, cotton, sorghum, soybeans, wheat, dairy, hogs, fresh sweet cherries, and shelled almonds are eligible for MFP payments at this time. Eligible applicants must

have an ownership interest in the commodity and be actively engaged; have an average adjusted gross income for tax years 2014, 2015, and 2016 of less than $900,000 per year; comply with the provisions of the "Highly Erodible Land and Wetland Conservation" regulations, often called the conservation compliance provisions.

USDA Determination of MFP Per-Unit Payment Rates

USDA determined MFP payments based on its estimated "direct trade damage"—that is, the difference in expected trade value for each affected commodity with and without the retaliatory tariffs ( Table A-3 ). The estimated "trade damage" for each affected commodity was then divided by the crop's production in 2017 to derive a per-unit payment rate. Indirect effects—such as any decline in market prices and resultant "lost value" for many of the affected commodities—are not included in the payment calculation (see Appendix B ).

USDA's trade-aid package is thus linking MFP commodity payments only to the trade loss associated with each identified MFP commodity. Neither final trade effect, with or without retaliatory tariffs, is observable because much of the affected agricultural production had yet to be harvested and sold at the time the payment rates were calculated, and markets had yet to fully adjust to whatever new trade patterns would emerge from the trade dispute. As a result, USDA estimated both export values (with and without retaliatory tariffs) using a global trade model that took into account the availability of substitute supplies from export competitors, and the availability of demand for U.S. agricultural exports from alternate importers.

How Will Farm-Level MFP Payments Be Determined?

MFP payments are tied directly to a producer's actual level of production of eligible commodities in 2018. A producer's total potential MFP payment for an eligible commodity equals the announced payment rate per unit (see column two of Table 1 ) times the harvested (and certified) production during 2018 or in the case of hogs, the inventory during the period of July 15 to August 15, 2018. During the first payment period (announced by USDA on September 27), MFP payments were set equal to the announced MFP payment rate times 50% of a producer's harvested (and certified) production. The second payment rate (announced on December 17) applied to the remaining 50% of the producer's production.

The MFP is separate from and in addition to the current safety net support provided by the Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) support programs or crop insurance coverage where revenue insurance protects against low prices, low yields, or a combination of both. Furthermore, by coupling the payments directly to production, those regions of the country where drought or other yield-reducing factors have negatively impacted production during 2018 may receive less aid through MFP than other regions.

According to USDA, as of February 7, 2019, $6.4 billion in payments have been made to farmers. FSA offices closed on December 28, 2018, due to a lack of funding under the government shutdown. Producers who have not yet applied for payments or certified their 2018 production must wait for FSA offices to reopen before receiving MFP payments. However, USDA has said that producers that have already applied and certified their 2018 production will continue to receive MFP payments during the government shutdown.

MFP Payment Limit

USDA announced that MFP payments are capped on a per-person or per-legal-entity basis under three separate payment limits: a combined $125,000 for eligible crops (corn, cotton, sorghum, soybeans, and wheat), a combined $125,000 for livestock (dairy production and hogs), and a combined $125,000 for eligible specialty crops (fresh sweet cherries and shelled almonds). Furthermore, MFP payments do not count against other 2014 farm bill payment limitations. There are no criteria in place to calculate whether losses covered under revenue support programs (e.g., ARC and PLC) of the 2014 farm bill might be duplicated by MFP. As a result, the same program acres that are eligible for ARC or PLC payments may be eligible for MFP payments.

WTO Compliance of Trade Retaliation Assistance Payments

Due to its potential price tag ($12 billion) and the coupled nature of the MFP payments, there is considerable interest from policymakers and market observers about whether these payments will be fully compliant with World Trade Organization (WTO) commitments. It would appear that, if the United States restricts MFP payments to $12 billion or less, and its other amber box payments adhere to the recent annual average of $4.9 billion since 2010, then total U.S. amber box payments would be below its $19.1 billion limit on trade-distorting farm subsidies at the WTO. However, several economists have suggested there is considerable uncertainty in how much the eventual MFP payments will be. For example, Darci Vetter, former chief U.S. agricultural negotiator at the Office of the U.S. Trade Representative, said that current low agricultural commodity prices cause her to worry that billions of dollars in "additional payments will put us over our [amber box] $19 billion cap," exposing the United States to a potential legal challenge. Joe Glauber, a former USDA chief economist, stated, "I would be very hesitant to say categorically, 'No, we're not going to hit our $19.1 [billion ceiling].'"

Industry Response to MFP Payment Allocation

While soybean growers and most farm-advocacy groups have generally been supportive of the payments, some commodity groups—most notably associations representing corn, wheat, and milk—contend that the MFP payments are insufficient to fully compensate their industries (see Table A-4 and Appendix B for a comparison of "trade loss" and "market loss"). The National Corn Growers Association claims that recent trade disputes have lowered corn prices by $0.44/bu. for a loss of $6.3 billion on the projected 2018 harvest. Similarly, the National Association of Wheat Growers estimates that a $0.75/bu. price decrease will result in nearly $2.5 billion in lost value, while the National Milk Producers Federation calculates that milk prices are now estimated to be $1.10/cwt. lower than just prior to the trade retaliation, causing over $1.2 billion in losses based on milk futures prices.

Many specialty crop groups similarly contend that their interests are not being fully compensated for tariff-related export losses by the USDA trade aid programs. For example, a recent study suggests that, in California alone, specialty crops may suffer trade-related losses of over $3.3 billion this year.

Food Purchase and Distribution Program

The Administration is allocating about $1.2 billion of its trade aid package to purchasing various agricultural commodities and distributing them through domestic nutrition assistance programs. USDA typically purchases agricultural commodities for domestic distribution in two ways: (1) "entitlement purchases" for the mandated, preplanned needs of a feeding program; and (2) "contingency purchases" (also called "bonus buys") that are usually triggered as a surplus removal mechanism to raise market prices of a commodity without displacing normal demand.

The new $1.2 billion of purchases is under the second category of contingency purchases. Contingency purchases are statutorily authorized under the Secretary's discretion to support agriculture by making purchases under the CCC or Section 32 as discussed above. These are mandatory funds and do not need to be appropriated.

When USDA purchases commodities, especially for distribution to nutrition assistance programs, the Agricultural Marketing Service (AMS) announces its purchasing intentions with product specifications. Vendors who are approved to sell to USDA may submit offers. The purchased products would be distributed through regular USDA nutrition assistance channels that provide in-kind assistance, such as food banks participating in the Emergency Food Assistance Program, the Commodity Supplemental Food Program, child nutrition programs such as the National School Lunch Program, and the Food Distribution Program on Indian Reservations. However, not all of these programs have the authority to accept contingency/bonus purchases.

The Administration's August 27 announcement listed 29 commodities targeted for purchases totaling $1.2 billion ( Table A-1 ). It also mentions two additional commodities (sweet cherries and almonds) that total $175 million, with program details to be determined ( Table A-2 ). The announced purchase values were set for each affected commodity using the same gross trade damage formula that was used to calculate the MFP per-unit payment rate described earlier.

The largest purchases that were announced include pork ($559 million), apples ($93 million), dairy ($85 million), and pistachios ($85 million). USDA said that the breadth of commodities and scale of purchases was based on economic analyses of the effect of tariffs. Purchasing orders and distribution activities are to be adjusted based on the demand by the recipient food assistance programs geographically. As of December 17, 2018, USDA had procured some portion of 16 of the 29 commodities included in the program, totaling more than 4,500 truckloads of food. USDA's AMS will continue purchasing commodities for delivery throughout 2019.

In FY2017, the AMS purchased $2.2 billion of commodities for distribution for domestic nutrition assistance. Of this total, $735 million was from Section 32 ($270 million in contingency purchases that are most similar to those under the trade aid package and $465 million in entitlement purchases), and $1.5 billion was entitlement purchases from the USDA's Food and Nutrition Service budget. No purchases were made with CCC funds. Thus, the new program of contingency purchases is several times larger than a typical annual amount and a relatively large increase in the amount distributed through nutrition programs.

Agricultural Trade Promotion Program

The third and smallest element of the trade aid package is the ATP program. The Administration is allocating $200 million of the trade aid package to boost trade promotion efforts of USDA's Foreign Agricultural Service (FAS). The program is to operate in a manner similar to FAS's Market Access Program (MAP) and Foreign Market Development Program (FMDP). These funds are to provide cost-share assistance to eligible U.S. agricultural organizations to promote U.S. food and agricultural goods overseas and develop new markets to help offset the adverse effects of the retaliatory tariffs. The money—which would nearly double the amounts made available annually for the MAP and FMDP trade promotion programs for one year—can be used for such activities as consumer advertising, public relations, point-of-sale demonstrations, participation in trade fairs and exhibits, market research, and technical assistance. Further, ATP money is not limited to certain commodities and is to be available to all sectors of agriculture.

While the $200 million for ATP is considerably less than the other programs in the trade aid package, it is a notable increase for USDA's trade promotion programs, which are authorized at $234 million annually. Though all sectors of agriculture can apply for ATP funding through eligible U.S. organizations, it is unclear whether USDA intends to give preference to certain commodities—such as those that are not eligible for other programs under the trade aid package or those most impacted by the tariffs.

The application period for ATP closed in November 2018 with more than $600 million in requested activities from more than 70 organizations. On January 31, 2019, USDA's FAS announced the full $200 million in ATP funding awards.

Conclusion

The broad discretionary authority granted to the Secretary under the CCC Charter Act to implement the trade aid package also allows the Secretary to determine how the aid is to be calculated and distributed. Using this authority is not without precedent, but the scope and scale of its use for the trade aid package has increased congressional and public interest. USDA has declared this trade aid package to be a temporary, one-time response to foreign tariffs imposed on selected U.S. commodities.

Most farm commodity and advocacy groups have been supportive of the trade aid package even as they have called for solutions that restore export activity.

However, some stakeholders have begun to question the equity of the distribution of MFP payments due to difficulties in isolating specific market effects and the initial lack of transparency around the formulas for determining MFP payment rates. Now that the formulas are public, several commodity groups question the rationale for determining MFP payments based on "trade damage" rather than the broader "market loss" measure.

Some trade economists and market watchers have suggested that the potential effects of the trade aid package and the imposition of tariffs and retaliatory tariffs could be longer lasting because they have created uncertainty about U.S. trade policy behavior and have called into question U.S. reliability as a trading partner. Further, the use of CCC authority to mitigate tariff-related losses may establish a precedent for future situations.

Appendix A. Food Purchases in the Trade Aid Package

Appendix B. Trade Loss versus Opportunity Cost

USDA has elected to base MFP payments strictly on estimated trade loss. In contrast, several commodity groups have calculated the "lost market value" and view it as a better measure of the economic damage from the retaliatory tariffs (see " Industry Response to MFP Payment Allocation "). These two "loss" measures are described here.

Trade Loss

Trade loss is the value of lost export sales due to a change in foreign demand ( Table A-3 ). With respect to retaliatory tariffs, it is the difference in U.S. agricultural exports with and without the tariffs. It also appears in USDA export forecasts. For example, in May 2018, USDA forecast U.S. agricultural export sales to China for FY2018 of $21.6 billion; by August 2018, USDA had revised its forecast down to $19 billion and initially projected agricultural export sales to China in FY2019 of only $12 billion. Thus, from May to August the U.S. agricultural export outlook to China had declined by $2 billion, while the FY2019 forecast had fallen by as much as $9 billion.

Lost Market Value (or the Opportunity Cost of Missed Sales)

Lost market value describes the opportunity cost of missed sales associated with a drop in market prices. For example, if soybean prices were $10.00 per bushel in March and $8.00 per bushel in October, the opportunity cost of not selling in March (whether from on-farm stocks or by forward contracting the crop in the field) but instead waiting to sell after harvest in October would be $2.00 per bushel. All physical quantities of a commodity available on the farm—including commodities in storage as well as in the field—are potentially subject to a missed sales opportunity. Furthermore, until the producer actually sells the commodity, the realized market value and true opportunity cost remain unknown.

What Is the Correct Cost?

If a trade dispute contributes to a drop in the market price of a commodity, then the associated "lost market value" would affect all quantities of the affected commodity, whether exported or used domestically. This appears to be the type of "loss" being measured by most U.S. commodity groups. However, the retaliatory tariffs are only one of a number of factors that influence market prices. In particular, the outlook for record U.S. soybean and near-record corn harvests in 2018 has likely had an important effect on pressuring market prices lower during the May to September period. This production effect should be excluded from any estimate of trade-based market loss.

Changes in USDA's monthly price forecasts from May to September may provide an upper-bound estimate of the trade impacts ( Table A-4 ), since this period coincides with the escalating trade conflicts when the retaliatory tariffs were applied. However, they include the production effect and thus likely overstate any trade impact. According to USDA, during the May-September period, farm prices for MFP commodities declined 18% for soybeans, 8% for sorghum, and 8% for corn but rose 2% for wheat and 15% for cotton. At first glance, these price changes seem out of sync with the MFP payment rates. Sorghum could receive a payment rate that is nearly three times as large as its estimated price decline from May to September. In contrast, corn—which has experienced a price decline identical to sorghum—could receive a payment rate that amounts to 3% of the price decline that corn prices experienced over this same period.

However, given the number of factors influencing market prices over this period, it may not be possible to establish with confidence what market prices would have been in the absence of the retaliatory tariffs. Any viable estimate would have to be generated from a global economic model featuring all major agricultural commodities that compete for land and other inputs in production; may substitute for each other in alternative uses; and captures the interactions of all relevant market factors such as policy, technology, and expected prices, production, and demand. For example, wheat and cotton are to receive per-unit MFP payment rates while experiencing an increase in farm prices during the May-September period. However, 2018 has been a year of poor international wheat harvests, and it could be that wheat prices might have moved to much higher levels in the absence of retaliatory tariffs.