Rest of the Story: Market Facilitation Program Details

August 28, 2018 08:59 AM
Jerry Gulke offers insightful, if not colorful, thoughts and analysis on the recent announcement made by Secretary Perdue and the debacle the ag industry has been thrust into given the current eco-political atmosphere.

U.S. Secretary of Agriculture Sonny Perdue announced details regarding actions the U.S. Department of Agriculture (USDA) will take to assist farmers in response to trade damage from unjustified retaliation by foreign nations.   It is as if the retaliation came as a surprise that I found interesting.  To think that China wasn’t going to retaliate was naïve on the part of those involved with the decision-making on U.S. tariffs. 


Further, as mentioned in this column weeks if not months ago was the naïve belief that China could not get along without the U.S. for their import needs of soybeans.  It is obvious that there was not a plan made beforehand on the ramifications of Chinese retaliation on soybeans and the direct impact it would make financially on that crop and indirectly on other crops to come. It seems that the Secretary of Ag ignored various suggestions from the ag-community regarding the handling of the situation. If you had any doubt about where Ag set with trade negotiators,  re-listen to my interview with Larry Kudlow from 10 yrs. ago and his opinion of farmers!   


The Secretary of Ag had an opportunity to do something material to include the basis deterioration that soybean producers are suffering all the way from Northern Plains to the Gulf to the point where there are “no-bids” threatened for new crop beans in some areas, thanks to the absence of business out of the PNW, the decision was not to do so.   Lack of market perception perhaps?


With rail freight likely to crash with no-biz the PNW, it appears the market will pit farmer between farmer of who will sell their production the cheapest to get it to the Gulf for export or possibly to other Asian buyers out of a thin PNW market.  A basis of from minus $1.50 to minus $2.00 in N Plains to -$1.17 cash and minus $0.90 cents further out in the Midwest was likely not in the planning of the MFP.   Had there been the slightest perception of such a debacle, I can’t help but think better minds would have prevailed to consider piecemealing the tariff deals starting with the immediate $70 billion offer by China to buy more ethanol, natural gas, soybeans and ddgs that was flatly rejected by Trump, rather looking for a $200 billion deal.  Perhaps, in the end, the end will justify the means? Of interest were the following comments from Secretary Purdue that:


“It is important to note all of this could go away tomorrow, if China and the other nations simply correct their behavior". But in the meantime, the programs we are announcing today buys time for the President to strike long-lasting trade deals to benefit our entire economy.  


Besides the zero eligibility based on Adjusted Gross Income basis, an even more ridiculous limitation is in place;  MFP payments are capped per person or legal entity at a combined $125,000 for dairy production or hogs. Payment for dairy production is based off the historical production reported for the Margin Protection Program for Dairy (MPP-Dairy). For existing dairy operations, the production history is established using the highest annual milk production marketed during the full calendar years of 2011, 2012, and 2013. Dairy operations are also required to have been in operation on June 1, 2018, to be eligible for payments. Payment for hog operations will be based off the total number of head of live hogs owned on August 1, 2018.  MFP payments are also capped per person or legal entity at a combined $125,000 for corn, cotton, sorghum, soybeans and wheat. 


I can smell re-organization all over again!


Furthermore, the initial MFP payment will be calculated by multiplying 50 percent of the producers total 2018 actual production by the applicable MFP rate. IF the CCC announces a second MFP payment period, the remaining 50 percent of the producers total 2018 actual production will be subject to the second MFP payment rate.  


Still on the books by USDA, major research firms and think tanks are millions of tonnes of soybeans or soybean equivalents (soy meal), creating a false sense of optimism by producers.  Furthermore, the comment Tuesday by Secretary Perdue that “it's important to note all of this could go away tomorrow if China and the other nations simply correct their behavior." Could it be that ironic that they are drinking the same Kool-Aid mentioned before in previous columns? 


I certainly hope that I am wrong in the longer term,  but so far my assessment weeks/months ago that a debacle of a magnitude not seen in decades is in the making,  I guess we should never say never as who knows what luck in the backroom bargaining?  But if there was ever a group (agriculture) that have paid more than their fair share of a burden that Purdue says is “patriotic”, this one takes the prize.


Market signals and fundamental research resulted in the opportunities to hedge of price risk for 2018 and 2019, it doesn’t negate the fact that 20 years of opening up trade in the soybean market is apparently going down the tubes, subject to weather of course.   You were forewarned of the building of stocks of soybeans in the U.S. nearing perhaps 750—900 mil-bu and it is a problem that won’t go away quickly, even with an immediate tariff resolution.  If this has all come as a surprise to policymakers, it is a scary thought indeed.  One has to wonder where were the bankers, machinery manufactures and our farmer organization leaders?   It was not that difficult to ascertain---just not politically correct perhaps, and few were out-front having the best interest of Ag producers in mind. 


Note the weekly chart below of the Brazilian Real Currency.  It is at three-year lows.   Currency relationships come in especially when there is a surplus of grains and market penetration or gains are influenced by who can/will sell soybeans the cheapest.  A quick fix to the soybean tariff situation would cut soybean price out from under the Brazilian grower making Brazilian prices cheaper not necessarily U.S. prices higher to explosive like some media analysts would want you to believe.  Should China not need to source soybeans out of the U.S. during Sept/Oct/Nov/Dec/Jan in a measurable way that some believe they will have made it to the next S American harvest.




I took some time to read some popular national newsletters,  global financial outlooks,  as well some basic brokerage firms looking to make commissions by trading or selling puts, and if my cursory overview is anything representative of where Ag is today,  there have been billions left on the proverbial marketing table.   If you assumed from reading this column that there was a necessity to be significantly, if not totally protected from the price collapse, then all this was not in vain.  If not, and you believed otherwise,  then you have an appreciation for the worth of flexibility in marketing and thinking and received an expensive education. 


Questions on being a daily recipient of our comments and insights with a 30-day money back offer, contact or phone 480-285-4745 or 707-365-0601 as the times they are changing and time is of the essence.     


Jerry Gulke


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Spell Check

windsor, IL
8/28/2018 08:48 PM

  how access the Kudlow interview?

Menlo Park, CA
8/28/2018 11:04 PM

  Here's the kicker, grain elevators and processors are immediately increased the negative basis on Soybeans by 35 to 60 cents as soon as the payment announcement was made. Guess they figure they should get some of the payment as well and hey, they aren't subject to the $125,000 limitation. Boy, are we lucky the idiot in DC is thinking.

worthington, MN
8/29/2018 09:01 AM

  Under the column: we recommend; Why is everything in duplicate,has been for a long time,please correct this typo,it is irritating to read!!


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