A new study in the journal Food Policy says U.S. soybean producers received a $5 billion windfall in 2018-19 when the U.S. Department of Agriculture overestimated damage caused by Chinese trade-war tariffs.

“Overall, farmers received several times more in compensation than they lost,” Aaron Smith, a professor of agriculture and economics at University of California, Davis, wrote in a blog post. 

Smith was one of three authors of the study, which compared the nearly $8.5 billion in trade aid payments to soybean producers with actual losses, which the study said were about $3.1 billion. 

Iowa farmers typically produce 12% to 14% of all U.S. soybeans, which means this state’s share of the $5.4 billion overpayment amounted to roughly $650 million to $750 million.

The study said that while U.S. producers saw a 74% decline in soybean exports to China, those losses were partially offset by gains in other export markets and other factors that the USDA failed to consider when it computed trade aid payments. 

Here’s some background. 

China is the world’s largest soybean importer, fueled in large part by the country’s large hog herd. Soybean growers in the United States and Brazil provide the bulk of those imports. 

In 2018, President Donald Trump launched a trade war that caused China to impose a 25% tariff on U.S. agricultural products, of which soybeans were the largest component. 

During the trade war, U.S. soybean prices declined 18%. Separately, officials estimated that between 4 and 12 percentage points of the decline occurred because of the Chinese tariffs. The other 6 to 14 percentage points of price decline was driven by market conditions, which included good harvests in both the United States and Brazil and reduced demand in China, resulting from an outbreak of swine fever that reduced China’s hog inventories.

In addition to Smith, the other authors of the Food Policy study were Michael Adjemian, a UC Davis graduate and former USDA economist now teaching at the University of Georgia, and Wendi He, a UC Davis research assistant.

Their study said the USDA began creating a compensation system for soybean farmers “before the full impact of the trade war was known.”

The agency “followed a standard approach,” the study said, basically dividing the expected “direct trade loss” by total production to arrive at a per-bushel price loss. 

The USDA put the 2018 price loss at $1.65 per bushel of soybeans. The agency later calculated a similar loss for 2019 of $2.05 per bushel of soybeans. 

The Food Policy study noted that the Chinese tariff disrupted the U.S. soybean market in 2018, sending a disproportionate share of that year’s harvest into storage. It also had a significant impact on planting decisions in 2019, when 15% fewer acres were planted to soybeans, the biggest one-year drop since 1980.

“The federal government moved quickly to pay farmers billions of dollars as compensation for their losses,” Smith wrote in his blog. 

But, he added, “We estimated that losses to farmers were much smaller than the compensation payments they received.”

The researchers said they arrived at that conclusion because the USDA did not look at the whole picture. 

They said the government agency did not take into account what happened after Brazilian growers replaced U.S. soybeans in the Chinese market. 

The shift of Brazilian soybeans to China left gaps in markets previously served by Brazil, and U.S. growers were able to move into many of those markets in what amounted to a worldwide game of musical chairs.

Brazil, of course, benefited from the reshuffling more than U.S. growers did. But when the USDA moved quickly to backfill the U.S. growers’ losses, the agency overpaid. 
 
The USDA’s overpayments allowed U.S. farmers, like the Brazilians, to come out better than they would have if there had been no soybean tariff.

Meanwhile, worldwide adjustments and weather patterns continue to benefit Iowa growers. Soybean prices this year are near record levels, and as the harvest begins, predictions are for near-record production.