Farm subsidies and the government shutdown (Part 2 of 2)
Government to take out direct payments
If there’s one thing Congress pretty much agrees on, it’s the removal of direct payments. As we saw earlier, these are cash subsidies distributed to farmers and farmland owners (who don’t have to be farmers), with an amount that depends on historical crop production on the given plot of land. Essentially, it lowers the cost of production for farmers and increases production through higher plantation acreage, fertilizer applications, et cetera.
The impact of no direct payment
If direct payment is removed, economic theory suggests production will fall as farmers cut back on production. Lower production could negatively impact fertilizer demand and push up crop prices. On the other hand, a record-high farm income may not drive farmers to cut production by much as they try to profit from current favorable economics.
Regardless of whether this will negatively affect consumers, cutting back on subsidies will improve the government’s budget and capital allocation. For fertilizer manufacturers, the elimination of direct payment may not have a substantial impact on performance since crop demand itself is fairly inelastic. Farmers who try to maintain their profits could cut back fertilizer use, but a small change in production will likely only drive fertilizer use by a small amount in the worst-case scenario over the long run.
The importance of the USDA and the government shutdown
One area of subsidy that’s uncommonly known to the public is the numerous surveys and reports that the USDA (US Department of Agriculture) produces. The department spends about $3.0 billion every year on agriculture research, statistical information services, and economic studies, according to CATO.
In a recent article published on the Houston Chronicle‘s website, a Kansas farmer “unexpectedly found himself struggling to make critical marketing decisions” without having access to the vital agriculture reports that are usually published regularly. Farmers typically lock in prices for their investment using futures contracts, an agreement to sell a commodity at a specific price at a certain date in the future. But without reports from the USDA, farmers can’t make well-informed decisions, which includes how to price crops, the commodities to grow, and when to sell them.
The impact of the government shutdown
While there are a number of farmers that may worry about government subsidies, most farmers will say the reports provided by the USDA are much more valuable. This inaction could also bring fertilizer purchases to a halt—but likely only temporarily. Once this government shutdown is over, everything will be back to normal.
In the very near term, though, worries over the US government defaulting, as long as the government shutdown persists, could negatively impact movements in fertilizer stocks and ETFs such as Potash Corp. (POT), Agrium Inc. (AGU), CF Industries Holdings Inc. (CF), Mosaic Co. (MOS) and the Market Vectors Agribusiness ETF (MOO) before the earnings season for several agriculture companies kicks in in late October.
Browse this series on Market Realist:
- Politics & Government
- government shutdown