Lori Walsh: On Tuesday, the US Department of Agriculture announced details of direct assistance to farmers and ranchers through the Coronavirus Food Assistance Program. The CFAP will provide up to $16 billion in direct payments to deliver relief to American farmers and ranchers impacted by the pandemic. Joining us now to answer questions about eligibility and how to receive assistance, and how this impacts South Dakota, we welcome Kevin McNew. He's chief economist for the Farmer's Business Network. Kevin, welcome back. Thanks for being here. We appreciate your time.
Kevin McNew: Hi Lori. Thanks for having me back.
Lori Walsh: All right. This is a new program. Tell us a little bit about the problem that really needs to be addressed right now. Why a new program now at this particular time?
Kevin McNew: Yeah, I mean, just like the broader US economy is struggling with the effects of coronavirus so too is the farm economy. We find ourselves in kind of the downturn of an economy shut down, especially as it relates to corn and in South Dakota where corn is becoming king, and we have a great deal of ethanol plants. The hardships from coronavirus are just widespread. Ethanol production has just catapulted lower. Plants have had to idle and shut down substantially as a result of drivers not moving and cars not consuming gas. And so the impact has been widespread across the corn market in particular, as a result of this coronavirus. So farmers that have been holding grain and hoping for better prices find themselves in pretty dire situations here.
Lori Walsh: All right. So let's talk about who is eligible for some of these direct payments.
Kevin McNew: Yeah, I think probably the most important take home message is it really depends on if you had farm inventories of crops or livestock at a certain point in time. And for grains, it's really starting ... The USDA program starts looking at your inventories that were not sold or priced yet as of January 15. So kind of predating the coronavirus pandemic. And they're looking at that point in time to say, "Did you have unsold or unprocessed inventories?" And then looking at how much the price declined for specific crops between that time period and about mid-April when kind of the deepest trough of the financial impacts were felt.
And so the rates vary, corn has around a 32 cents a bushel payment rate on crop that you had in storage or unpriced at that time. Soybeans is a little bit different, wheat's a little bit different. And so it really is going to be different for each farmer. A farmer who maybe took all his crop in the fall and sold it off the combine to local co-op or to an ethanol plant, he's probably not going to get any payments because he didn't have anything in inventory.
Lori Walsh: So it's a nuanced ... And some of the criticism from the last direct payments during the trade war was that some of those payments were going to large farms, and so many of them didn't get to the place that they needed to be. Do we think that this is an effort to really make a nuanced approach, to make sure things are specific to the need or how hard is that to even do?
Kevin McNew: Yeah, you're exactly right. I mean, it's exceptionally hard to do because you know, farming is a scale business. It's family farms are large farms for the most part. And just because they're large farms doesn't mean they're more or less impacted, it just means that they need more payments. So, I understand kind of the outside observers saying that's a critique of foreign policy, but the reality is a lot of our family farms are what we would consider pretty large farms already, and the impacts are important. And so when USDA goes to design these policies, they sort of have to level the playing field by making payments based on per bushel, per unit of output or something like that, which in some sense gives the larger farmers who produce more output, a bigger paycheck, but again, they also have more investment in that crop on a dollar basis.
So, I can't be critical of USDA around this because it is a challenge. One thing I would say for those who are concerned about large farms getting payments, there are usually, and in this case, there are cap rates. There are rates at which they can't go above certain payment levels, certain payment thresholds. So, that sort of prevents kind of massive payments to bigger farms.
Lori Walsh: Tell us a little bit about when this all kicks off, because we've had concerns with the Payroll Protection Program and money running out and people going through SBA. And so when a new program launches, people want to know if it's really set to function administratively well, and when does it begin? How do people apply?
Kevin McNew: Right. So, that's going to be going to be interesting. It's a quick rollout. The paperwork can be submitted May 26th. That's the start date of the program. It does have applications going all the way to August. So it's not like it's a hard deadline, but it can start in five days. So farmers can get those applications in. My understanding of the payments, well, you'll get 80% of the payment right away. And then they're still suggesting they'll hold back 20%, depending on funding and financing. So that's a little bit ambiguous right now as to what that means, but it seems like there can be a fairly quick cash infusion of at least 80% of that payment fairly quickly.
Lori Walsh: You mentioned early in our conversation, ethanol, and I'm wondering ... cars sitting idle because people aren't going as many places, things are starting to turn in the direction of movement again. Oh, what do you think about the impact on the ethanol industry of state economies across the country starting to reopen and sort of testing things out. What's ahead?
Kevin McNew: Yeah, it's interesting. I mean, this has been just an unparalleled moment in time of not only the US economy, but specifically consumers and their driving habits. And we have new data that we watch around cell phone. Cell phones is kind of a metric of how much consumers are moving and of course we're tracking gasoline consumption and things like that. But what we've seen is, as you suggest, a kind of returning to normal, I don't want to say we're back to normal. We still have a ways to go, but the metrics are getting better. We're seeing, I think at the lows, we probably saw gasoline consumption off about 40% from normal. And that was at the deepest part of this trough. And now we're probably somewhere around 20% off from normal. So it's getting better slowly, moving towards that.
I don't anticipate that we get back to normal quickly. I think it's a slow and kind of methodical approach. And obviously, expectations are bound around what normal will look like in say three months or six months, but we're moving in the right direction. As for ethanol plants, I think what's encouraging, and of course they fared a big brunt of this storm. We're actually seeing their levels of profitability start to rise. And they're actually at better levels now than they were even heading into the coronavirus, which is somewhat surprising. But what's been going on is the price of corn has dropped so rapidly and ethanol is kind of ... it dropped rapidly as well, but it's kind of recovered a little bit.
And then ethanol plants also produce the by-product called DDGS, which is an important value proposition. And that has been a premium as of late because of the cutdown in ethanol production, which meant lower DDGS supplies. So on balance ethanol plants are actually doing better now than they were heading into the coronavirus, and so we're starting to see them start to open up. We're starting to see more production coming back. Again, not where we were before but there's some light at the end of the tunnel, hopefully.
Lori Walsh: Yeah. And we just have a minute or so left Kevin, but I do want to ask you, when we went into this one of the reasons this was so tough on South Dakota farmers, the pandemic and changes in the supply chain was because we were coming off of flooding and coming off of a trade war with China. And I'm wondering about that global picture now, because this has been such a global story. What's ahead for our relations with China and getting US products abroad again?
Kevin McNew: Yeah. Exceptionally challenging situation there. I mean, we spoke a month or so ago just after the trade war had been inked, or the trade war deal had been inked. And we were reasonably optimistic that China would be buying and in fairness to China, they were given kind of an economic pass, if you will. They were allowed to basically buy as the market dictated, and it was not our time in the season to be big sellers of that commodity. So our time usually is in late summer into our winter. That's usually when we're big sellers of commodities to China, and they had been picking up as of late, their economy is also trying to recover from COVID. And we're seeing their stockpiles starting to rebuild, their animal herds starting to rebuild. So everything's trying to move in the right direction.
So, I'm cautiously optimistic about what the next year will bring in terms of China trade. But what concerns me is the political risk. There's obviously a lot of finger pointing going on about the COVID and was there a cover up and this kind of stuff. So I'm hopeful that we don't enter into another economic warfare situation with China because we desperately need that catalyst to move our agricultural products.
Lori Walsh: Farmers or ranchers need some good news for a while. Kevin McNew is chief economist for the Farmer's Business Network, and a frequent guests on In The Moment. Kevin, thank you very much. We appreciate your time and insight as always.
Kevin McNew: Thank you, Lori.