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DAVID KRUSE
July 6, 2018

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President Trump often professes his love for farmers and his belief that they love him. He has sent Ag Secretary Sonny Perdue to carry the message through the countryside of his support for farmers who will suffer injury in the tariff wars. He also praises farmers for their patriotism in seeing his trade policy through. The problem is that farmers have to pay their bills now and some can't wait until Trump finishes his grandiose trade war with the world to get a reimbursement check sometime in the intangible future.

One farmer asked me how much that bankers will credit farm balance sheets for listing themselves as "Patriots" as an asset. I don't think that the bank examiners will go along with that, so eventually when lower prices are factored into farm balance sheets even the farm bank's loan portfolio will not look as healthy as it once did. I have told bankers that despite the downturn in the ag economy that the ag sector was still financially viable but was one major hit away from being destabilized. I told them that it was fragile and could break if clobbered by an existential event. The trade war constitutes one of those hits.

If grain farmers used current values their balance sheets are alarmingly deteriorating. Some tout how crop insurance will be the safety net. I don't think so. Not all take high levels of revenue insurance, and crop insurance will not produce profits for farmers. The trade war will take net farm income to loss levels. Crop insurance revenue guarantees are based on crop prices and if soybean prices are significantly lower next year, crop insurance revenue coverage will decline right with it.

We could have a farm commodity cost/price squeeze. Are landlords ready to take lower cash rents because of Trump's trade war? This is a threat to farmland prices as well, upon which the asset side of the ag sector is based. It has been stable farmland values that have stabilized the farm economy. I think that livestock industries expanded together based on a business model that was predicated on export growth that may instead become a contraction. If livestock producers liquidate, that negatively impacts feed demand and becomes a swirl in the toilet bowl as it flushes.

Trump and his "farmer whisperer", Sonny Perdue, have promised to reimburse farmers for trade related revenue losses. "He will not allow U.S. Agriculture to bear the brunt of China's retaliatory tactics" was the specific boast meant for the ears of both U.S. farmers and Beijing.

Details on how they will go about calculating and reimbursing for those losses have been so-far very unspecific. I suspect that we will learn more just ahead of the fall election. Donald has become adept at being both the arsonist and the fireman. They cite-borrowing authority of $30 bln from the CCC that they can use to support farm income. I believe that will be woefully inadequate. By the time you add losses from trade suffered by dairy, cotton, soybeans, corn, beef, pork, poultry, nuts, alfalfa hay, apples and fruits to name a few, the losses in one year could blow by $30 bln.

This can be a multiyear loss event. The CCC is reportedly not authorized to make direct payments so they can give farmers loans. When you are going broke, who needs another loan? It will take Congress to fund real trade relief and authorize payments. I would not hold my breath that Congress can pass gas let alone legislation. While the Trump administration farts and fiddles around trying to decide what to do, current farm loans will go delinquent. Maybe the farmer does eventually get paid in arrears but not in real time when they need it and the payment will not be in full relative to the loss. If this Ag revenue aid were to have been done right, they should have had the program set up in advance as to how they would implement it.

How do you calculate the trade loss? How do you quantitate the destruction of the global ag supply chain that the U.S. is now the center of? The global food production and distribution supply chain will develop outside of ours isolating U.S. Agriculture wherever it can be marginalized. A lot of U.S. farmers think that "they" cannot get along without our food. Then watch them. Jimmy Carter's Russian Grain embargo was a lesson that no one in the Trump administration learned. KS wheat farmers are residual global wheat producers, the last place they go to buy wheat. We used to have allies that would trade with us and Trump has slapped most of those. Even Canada and Mexico are beginning to shift commercial development elsewhere. The loss of the U.S. Ag sector's role in the current global food supply chain could literally be invaluable.

What Trump is worried about most is his political farm state support. That is why he is praising farmers as patriots. 8 out of the top 10 soybean growing states voted for Trump last election but not by margins in many of them where-by he could lose the farm sector vote and still carry them. 95 percent of soybean growing counties voted for Trump. That is the only reason that U.S. soybean farmers have a good chance of getting a check. Chinese tariffs broke the soybean market so that they will be able to buy U.S. soybeans at prices that compensate for the tariff for Chinese buyers. They will modify their demand, adjust procurement means and sources and they will be fine.

Trump trade war payments to U.S. farmers will essentially subsidize the price of U.S. soybeans to China. I don't believe that anyone in the Trump administration has really thought this all through. The reality of what is happening is going to hit home soon. It is my job and yours to get through this mess. I am prepared and I think that we can help you. Call us.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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