FOCUS ON AG
Written by Kent Thiesse
Farm Management Analyst and Senior Vice President, MinnStar Bank
April 20, 2020
COVID-19 CONCERNS FOR AGRICULTURE CONTINUE TO INCREASE
As the health concerns due to the coronavirus outbreak continue to increase, so do the economic concerns for families and businesses of all sizes across the United States. Rural communities and the agriculture industry have not been spared from the economic hardships that are being caused by ongoing COVID-19 crisis. The recent closing of meat processing plants and necessary dumping of milk have heightened the national awareness of the vulnerability of the U.S. food sector and the serious economic challenges being faced by farm operators. These disruptions in the U.S. food chain may also impact the supplies and prices at the retail level in the coming months for certain meat and dairy products, as well as for fresh produce.
The closing of the Smithfield pork processing plant in Sioux Falls, South Dakota, due to a rapid COVID-19 outbreak among plant employees heightened awareness of the serious situation in the meat processing industry. The Smithfield plant employs 3,700 people and processes nearly 19,000 market hogs per day, which represents 4-5 percent of the U.S. total. As of April 20, several other pork and beef processing plants across the U.S. had suspended production, with more plants that could potentially be forced to temporarily halt production due to positive coronavirus cases. In addition, some meat processing plants have been losing employees over concerns with the virus, which has forced them to cut their production output below capacity levels.
The closure of the Smithfield plant, as well as a Tyson Foods pork plant in Iowa and other potential closings of processing plants in the Upper Midwest, has put pork producers in Southern Minnesota, Western Iowa, and Eastern South Dakota in a dire situation. Producers have tens of thousands of hogs ready to be marketed and no processing plant that will take the hogs. Even if the hogs were contracted for delivery to a packing plant, it is null and void when that plant is forced to suspend operations due to COVID-19 or as a result of an inadequate labor supply. Now, some producers face grim prospect having to euthanize healthy hogs rather than having them enter the food chain at a time when the added pork will be needed in the U.S. food supply.
In addition to the loss pork processing capacity, pork producers are facing their worst financial situation in over two decades. A recent study by the National Pork Producers Council (NPPC) indicated that the impacts COVID-19 will cost U.S pork producers over $5 billion in 2020, which calculates out to a loss of $37 per head for every hog produced. The lean hog market price has declined from over $80 per hundredweight (cwt.) in early February to near $45 per cwt. by mid-April, which is well-below the cost of production for all hog producers. Now producers face the uncertain future of continuing to produce hogs at a loss, while wondering if they will be able to get the hogs processed when they are ready to be marketed.
Beef cattle producers in the U.S. have also faced substantial losses in the past couple of months. Fed cattle prices declined from near $120 per cwt. in late January to below $80 per cwt. in mid-April. A study by the National Cattleman’s Beef Association (NCBA) indicated that the coronavirus crisis will result in a loss of $13.6 billion to the U.S. cattle industry. This estimated loss in 2020 includes over $205 per head in the cattle feeding sector and over $110 per mature breeding animal in beef cow/calf operations. Due to cattle processing plants being closed or having reduced capacity due to COVID-19, the number of cattle processed in the U.S. for the week ended on April 11 was 16 percent lower than a year earlier, at a time when cattle numbers are up.
USDA has prepared a “COVID-19 Federal Rural Resource Guide”, which lists coronavirus resources available through USDA and other Federal government agencies. To access COVID-19 related information from USDA and other agencies, please go to the following website: www.usda.gov/coronavirus
Caronavirus Food Assistance Program Details
On April 17 USDA announced initial details of the Caronavirus Food Assistance Program (CFAP), which will authorize a total of $19 billion to partially help offset the financial impacts that U.S. farmers and ranchers have incurred as a result of the coronavirus pandemic. The aid package will include $16 billion in in direct payments to producers and $3 billion to purchase ag products. The funding for CFAP will be derived from the $9.5 billion agriculture emergency funds in the recently passed $2.2 trillion CARES Act and $6.5 billion that is currently available through Commodity Credit Corporation (CCC) funds.
Following is a breakdown of the $16 billion in direct assistance that has been allocated to producers:
- $9.6 billion for the livestock industry.
- $5.1 billion for cattle.
- $2.9 billion for dairy.
- $1.6 billion for hogs.
- $3.9 billion for row crop producers.
- $2.1 billion for specialty crop producers.
- $500 million for other crops.
The payments that producers receive will be determined using the following two calculations:
- An 85 percent compensation rate for commodity price losses that occurred for eligible commodities from January 1 through April 15, 2020.
- An additional 30 percent compensation rate of the expected price losses for eligible commodities from April 15 through the next two quarters will also be included.
Most likely producers will need to verify their level of production or inventory during that time frame to determine payment amounts. It should be noted that qualifying commodities must have experienced at least a 5 percent decrease in prices from January 1 to April 15 in order for producers to be eligible for CFAP payments.
The payment limit for the CFAP payments will be $125,000 per commodity, with an overall payment limit of $250,000 per individual or entity. Based on 85% of the NPPC 2020 loss estimate of $37 per hog, it would take less than 4,000 hogs to reach the $125,000 payment limit. Using 85 percent of the NCBA loss estimate of $205 per head for cattle feeding, it would take less than 725 head to reach the payment limit. These are relatively small livestock operations by today’s industry standards. The CFAP payment limit for livestock has drawn criticism from many livestock industry groups, as being far short of what is needed to stabilize the industry.
USDA has not yet announced specific details for the CFAP crop and livestock payments. USDA is expediting the rule making process for the direct payments, hoping to begin sign-up for the program by early May and to have payments out to producers by late May or early June. USDA has left open the possibility for additional direct aid to agriculture producers later this year, as more CCC funds become available. Many experts expect the economic hardships in the agriculture industry resulting from coronavirus to continue in the coming months.
Details on the $3 billion that is allocated for purchases of agricultural products:
The $3 billion will be used to purchase meat products, dairy products, and fresh produce to support producers and to provide those products to people in need. CFAP authorizes the purchase of $100 million per month each for purchases of specified meat products, dairy products, and fresh fruits and vegetables in the coming months. USDA will work with local and regional food distributors to deliver the food products to local food banks and other community organizations that provide food to those in need.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — firstname.lastname@example.org) Web Site — http://www.minnstarbank.com/