Support programs have both roses and thorns

Pork producers are, almost to a person, proud that they have never seen much direct government support and they know that such payments distort decisions that the market would incentivize

Steve Meyer

August 6, 2018

8 Min Read
Support programs have both roses and thorns

When President Trump said he would not leave farmers to bear the brunt of his escalations of the trade wars, everyone wondered just what he would do. When Secretary of Agriculture Sonny Perdue announced that the compensation programs would take the form of trade promotion, product purchases and direct payments, most said, “OK, but just how are you going to do it?” There haven’t been many answers yet.

So, let’s consider what the three courses of action might entail for the pork industry and how they will impact producers and markets.

Increased trade promotion
Trade promotion has historically been about the only form of government support for the pork industry. Outside of a direct payment program for very small producers in 1999 and some environmental program support through Environmental Quality Incentives Program, the pork industry has never benefitted from direct government support. Trade promotion — or Market Access Program — funds have been about it.

That is not to say that MAP funding has not been important because I think it has. Producer and processor funds have been used to leverage MAP funding for many years and they are one of the factors in the industry’s impressive export record since the mid-1990s. Trade agreements, of course, are the bedrock on which exports are built since they are the mechanism that get us access to markets that historically have been either completely blocked or essentially closed off by very high tariffs. But once in the door, you have to do something to promote your product, and MAP funds have been an important part of the promotion puzzle managed over the years by the U.S. Meat Export Federation on behalf of U.S. pork producers.

The trouble is that trade promotion is a long-term activity. Further, we have been doing substantial work in our largest and fastest-growing markets already. Exactly where do you use a “shot in the arm” of funding? Does throwing more money at these markets or at some heretofore unproven market in the short run have much of a payoff?

Product purchase
The federal government is always involved in pork markets to some degree with Agricultural Marketing Service purchases for school lunch programs, public feeding programs and federal agencies such as the Department of Defense and federal prisons. They have stepped up those purchases on a number of occasions when large hog supplies have pushed prices lower or, as was the case in 2010, when an unforeseen issue (H1N1 influenza in this case) caused pork demand to flag and pressure hog prices and producer returns.

The whole idea is to remove product from commercial pork channels in order to push prices higher and offset the negative impact of the trade war. It will work if the government-purchased product doesn’t pre-empt other government pork purchases or if the product goes to some entity or person who was not going to purchase pork. Chicken, turkey and beef producers won’t be too happy, but it will help pork markets.

The challenges are timing and magnitude. Federal purchases have historically been very slow to enact and small relative to the massive domestic pork market. With $12 billion in total support on the table, pork’s share of this round may be large enough to be felt, but will it happen quickly enough to alleviate the impacts of the trade war?

And just what will the government buy? Mexico takes a lot of U.S. hams and variety meats while China takes mainly hams, shoulders and variety meats. I don’t think there is much of a domestic outlet for variety meats so those are a non-starter. Hams and shoulders can be used in many ways, but anything to increase ham prices here will also increase the ham price in Mexico and thus reduce Mexican purchases, at least partially offsetting any gains. Ditto for shoulders to China.

The goal is to increase the value of the pig enough to offset the impact of the trade war. Increasing the value of the carcass doesn’t guarantee that outcome but it is the only way to impact producers if hog prices are the pressure point being addressed.

If increasing hog prices is the goal, it doesn’t matter what cut price you push higher. And regardless of what cut the feds buy, U.S. consumers will have to pay more for the chosen item than they otherwise would have. Tariffs always hurt consumers in the tariff-imposing country. Efforts to alleviate the negative impacts of retaliation do the same thing.

By this argument, any cut will do so but what about the oft-maligned and seemingly always beleaguered pork loin? It is cheap relative to other cuts. It would offer the best lean-fat ratio possible to the diet engineers at the school lunch program. Boneless loins would cost more but have virtually no waste and be useful in a wide variety of forms. Finally, including loins would get some people to try a cut that they may have never bought. Loins demand needs all the help it can get.

Direct payments
Long anathema to pork producers, this option is being mentioned by the administration. It is the most efficient way to impact pork producer incomes. Money is money. No slippage due to higher packer margins. No price multipliers. No concerns about where the government-purchased product ends up.

But pork producers are, almost to a person, proud that they have never seen much direct government support and they know that such payments distort decisions that the market would incentivize.

Then there are the administrative issues of direct payments. USDA’s Farm Service Agency has plenty of experience dealing with crop producers, but virtually none dealing with pork producers. Adding direct payments for hogs would increase the FSA’s workload significantly right at a time when grain harvest is underway. I doubt seriously that the agency has the resources to handle its normal duties plus a one-time subsidy for pork producers, especially on a tight timeline.

No one knows just what limitations the USDA would put on direct payments to pork producers. Congress said in the 2014 farm bill that any entity with an average adjusted gross income of $900,000 is ineligible for payments and that no entity could receive more the $125,000 of federal payments.

If those limitations were applied to pork producers, the largest producers — who produce a large proportion of the pork that we eat — would be ineligible for any payments.

The top 40 U.S. producers in a published list held 3.8 million of last December’s 6.179 million breeding animals. That is 61.4% of the total breeding herd and almost certainly a higher percentage of the nation’s total output given the higher productivity levels of most of these producers. If they are allowed to receive payments at all, the $125,000 limitation would mean that the 40th largest producer in the listing would receive about $0.24 per pig. All of the firms ranked 39th and higher would receive less per pig.

Small producers would clearly fare better, but if the goal is to maintain the industry that feeds so much food to U.S. citizens, would it make sense to virtually eliminate support for the producers who produce the majority of that food? The trade war inflicts its losses without regard to how many hogs a farm produces.

I appreciate the president and Secretary of Agriculture being concerned about the economic damage being inflicted on American agriculture. Agriculture in general and the pork industry, in particular, have long been shining stars in the U.S.’ battle to maintain some semblance of balance in its international trade. No one in agriculture asked to be on the front line of the trade war and some compensation for the losses being incurred is reasonable.

But like so many things, the devil is in the details. It will be interesting to see which devils federal officials wish to wrestle with this time.

African swine fever in China
That was the headline that grabbed attention on Friday — and well it should. The confirmed case is in northeast China, thousands of miles from the nearest case in the ongoing outbreak in Eastern Europe. A little surfing tells me that there are a lot more wild pigs in China than I had thought. And the historic approach of Chinese animal health issues on disease issues has been to deny, deny, deny until you can’t deny any more. This announcement doesn’t feel that way because no one seems to have heard of any problem before last week. African swine fever may be so scary that even Chinese officials have deemed it proper to talk about the first case instead of trying to make it go away by ignoring it as they have done with diseases in the past.

China exports very little pork so this is a non-issue on the immediate trade front. The question is whether ASF can be stopped before it gets to more pig-dense areas. China still has millions of pigs in backyard or small-holding herds. Should this disease get into those, it could devastate China’s ability to produce its own pork. We won’t know the situation beyond this initial case for several weeks, but it certainly bears our close attention.

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Steve Meyer Livestock Division

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