US farm bill failure clouds investors’ view

Last week, the bill failed to pass on the floor of the House of Representatives by a wide margin. We assess what's at stake for private investors.

Investors sometimes shy away from agriculture because they believe the sector requires them to navigate a complicated patchwork of government-led support programs and interventions. Accordingly, they usually pay close attention to the process by which the farm bill, which shapes so much of federal ag policy, is negotiated every four years. Yet this year debates are proving more intense than ever.

Farm bill horse-trading has always encompassed both matters directly relevant to farmers, such as crop insurance, seasonal guest-worker programs and support for agricultural research, and seemingly tangential issues, such as what to with the proceeds of cuts to public support for the poor and whether cockfighting should be permitted in Puerto Rico.

Still, as seems the case with so much of public life in 2018 America: this time is different.

“We just don’t have the same policy process in general, with this administration”
Bruce Sherrick, University of Illinois

The political crisis roiling the US has placed the farm-bill debate in a context in which genuine bipartisan cooperation is virtually unthinkable. As a result, investors, producers and market observers trying to plan around a clear picture of the government’s role in agriculture over the next four years are forced to peer through a thick cloud of uncertainty. Experts reckon a farm bill may not come through before 2019.

“We just don’t have the same policy process in general, with this administration,” Bruce Sherrick, a University of Illinois professor and director of the TIAA Center for Farmland Research, told Agri Investor. “It may actually be easier to get something done outside of the farm bill that historically would have been in a farm bill by extending the current one and treating [each issue] one at a time. An interest at a time is easier than a coalition is to build.”

Propping the crop

In recent weeks, Agri Investor canvassed fund managers, analysts and wider industry observers to gauge their expectations on the bill. We found that many indeed expect the existing bill to be eventually renewed; crop protection, immigration and the implications for rural voters emerged as recurring areas of interest.

Owner-operators are not the only ones to pay attention. “We don’t take subsidies from the government, but our tenants do, so we watch keenly what’s happening with the farm bill,” one fund manager told Agri Investor.

A second GP said that tracking debate on the farm bill is “critical” for any investment in what are sometimes referred to as the “program crops” – corn, cotton, soybeans and rice, all of which receive direct federal support. And while it is less important for permanent-crop enthusiasts – there is no overarching support program for the likes of fruit and nuts – there are instances in which fund managers take advantage of government help being offered for specific crops or regions.

“As fiduciaries, we look at managing our client’s assets and if there is a program that’s put forward to the marketplace, we would be remiss if we didn’t take advantage of it,” the manager explained. “If there is some kind of special program being offered, most managers would be inclined to take advantage of it.”

Sherrick added that crop insurance is by far the most important part of the farm bill for US agriculture. As a result, those provisions enjoy what he described as “broad and appropriate” support. While some observers attack crop-insurance spending as wasteful, it has already proved more efficient than footing the bill in ad-hoc efforts after individual disasters, he said. Studies have shown that losses from the 2012 drought would have been much larger without the scheme.

“In the end, the […] program has been really effective at helping farmers mitigate production risks and keep efficient agriculture moving forward,” said Sherrick.

Border lines 

He highlighted that the items of the national immigration debate that ultimately doomed an attempt to bring the House farm bill to the floor just days ago – those relating to law enforcement and asylum determinations, for example – are actually not that relevant to agriculture. That obscures other questions related to immigration of crucial importance to the sector, he argues.

“This administration has used the xenophobia behind the uninformed version of the immigration question to try to do different things. I don’t think the motivation was to improve or hurt agriculture; that’s absolutely collateral damage,” said Sherrick. “The question agriculture most cares about is: Can you get enough highly skilled labor and can you advance the living standards of those both using and doing the labor?”

“If there is some kind of special program being offered, most managers would be inclined to take advantage of it”
A US fund manager

The 2018 farm has been hampered by two familiar fault lines in US politics: one that separates those thinking the government should play a significant part in public life and the economy, and those who do not; and the other, which divides rural folk from urbanites.

Still, the snag hit by the negotiating process has some people wondering why farmers continue to support the current administration despite uncertainties brought on by its policies. Last month, Tom Vilsack eluded specific explanations, instead telling Agri Investor that it might be rooted in human beings’ natural disinclination to admit they have made a mistake.

Another market source Agri Investor spoke to seemed to agree. While rural support for the President has eroded over his time in office, the person said, a segment of that support is likely to remain regardless of policy outcomes, because the president sits in the conservative camp. “It’s sort of like: ‘I didn’t like that sermon, so am I going to not be a Christian?’ That kind of thing is the place I think the rural economy is with Trump.”