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Guest Columns

Perspective:
Dairy Markets

What’s $12 billion amongst friends?

Dave Kurzawski

Dave Kurzawski is a senior broker with INTL FCStone, Chicago, a global financial services firm offering customized plans and tools to help clients protect margins and manage volatility. He contributes this column exclusively for Cheese Market News®.

Late last month, the Trump administration announced $12 billion of additional expenditures to support U.S. farmers hit by retaliatory tariffs that China and Mexico have placed on U.S. products. The U.S. government’s budget is simply beyond human comprehension. I’m not making a political statement; the numbers are just so big that they don’t relate to anything I experience in my daily life. We’re still missing a lot of details on how these programs will work, but our initial question was most likely no different from yours: How quickly can the administration come up with $12 billion?
It turns out, pretty darn quick.

The administration is relying on the existing authorities of the Commodity Credit Corp. (CCC) to finance this and the CCC is authorized to borrow up to $30 billion. The CCC borrows that money directly from the U.S. Treasury, which will issue government bills or bonds to raise the cash. The Treasury is expected to issue a little less than $1 trillion in NET new issuance for the current fiscal year. Total issuance of debt (new debt + rolling over old debt) will be something like $9 trillion. Just amazing.

So, the government is issuing about $83 billion in new debt per month. If the CCC added $4 billion to that in each of the next three months before the mid-term election, it would only account for 4.8 percent of total new debt issuance by the U.S. government.

Now that it looks as though the government can make good on the financing, what is this program?

The U.S. government has announced three programs that it plans to use to support U.S. farmers:

1. Market Facilitation Program, authorized under The Commodity Credit Corporation (CCC) Charter Act will provide payments incrementally to producers of soybeans, sorghum, corn, wheat, cotton, dairy and hogs.

2. Food Purchase and Distribution Program to purchase unexpected surplus of affected commodities such as fruits, nuts, rice, legumes, beef, pork and milk for distribution to food banks and other nutrition programs.

3. Trade Promotion Program administered by the Foreign Agriculture Service in conjunction with the private sector to assist in developing new export markets.

Let’s start with the easy stuff. The Food Purchase and Distribution Program might have the most direct impact on dairy prices. The government could start putting out tenders to buy cheese, butter, bottled milk and maybe instant nonfat dry milk. Processors would submit the prices and quantities that they are willing to offer and the CCC would decide how much to buy. The products would then either be given (or sold at reduced prices) to schools and food banks. This will slightly reduce commercial sales of cheese/butter, so it isn’t a one-for-one gain for dairy.

The Trade Promotion Program is a little fuzzier. The CCC has historically had a couple different programs around trade. They guarantee payment on product shipped overseas in certain circumstances, and they help to fund generic promotion of U.S. commodities (think the U.S. Dairy Export Council). Increasing funding for those programs doesn’t seem like it would have a big impact on commodity prices short term. Historically the CCC has also paid export subsidies (at least for dairy) to keep U.S. product moving overseas. However, the direct export subsidy program was terminated with the 2014 Farm Bill and probably requires congressional approval to bring it back. From where we stand, it looks like the “Trade Promotion Program” is limited to just funding export payment guarantees and generic promotion of commodities and won’t have much of a short-term impact.

And then there is the Market Facilitation Program, which we can’t find any reference to as an existing program on the CCC or USDA websites. The press release from USDA says it will “provide payments incrementally to producers of soybeans, sorghum, corn, wheat, cotton, dairy, and hogs.” So far there is no explanation on how this program will work, who will be eligible or how much the payments will be.

Assuming this is a direct payment to farmers it would likely be slightly bearish to market prices longer term.

Theoretically, payments would potentially keep some dairy farmers in business who otherwise would have exited the industry, and it will help to fund expansion at other farms. But if the administration’s goal is to save votes, the payouts under this program may be limited by the size of farm to limit the cost but win over the support of many small producers.

We say those direct payments is only slightly bearish long term because once you look at the numbers and make some assumptions, $12 billion doesn’t go as far as you’d think. There are roughly 2 million farms in the United States. If all $12 billion was spread evenly, each farm would only receive roughly $6,000 — probably not enough to save a farm on the brink of going under.

Direct purchases of U.S. dairy products for donation, on the other hand, is more bullish. Of course, the magnitude of impact depends on how much the government buys and when. It could also be bullish if crop prices rise more than milk prices in response to these programs, as it would shrink profit margins and the incentive to expand milk production longer term. So far there is no mention of re-instating government support prices for dairy, which were also done away with in the 2014 Farm Bill.

INTL FCStone came into this year predicting a very strong year for dairy product demand. Tariffs and trade disagreements mid-year knocked us off course and now the U.S. dairy markets are in flux waiting and wishing for some beneficial outcome. We don’t think this aid package is the best solution, but we do see a light at the end of the tunnel. In fact, dairy prices look poised to firm in the coming weeks based on good underlying demand in the face of waning milk production. No politician can change that set of circumstances. Not this year at least — and not by throwing taxpayer dollars at the matter.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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