I’m not a big fan of bailouts and government supports for businesses, and that includes farmers.
I think that the government should stay out of the finances of business and farming, except in extreme circumstances.
Unfortunately, farming tends to have weather disasters or market disasters happen unpredictably, much more unpredictably than in other industries, so it makes sense to me to have farm safety nets designed and partially underwritten by the federal government, at least as much as it backs, designs, runs and funds programs like EI and other safety net type supports for urban people (like me). It doesn’t make sense to allow an otherwise sound farm fail simply because something very Black Swanish hits. We all need insurance-type systems to stop the unforseen from running us over.
But that assumes that the farm is otherwise viable. If a farm is already failing, and a disaster just pushes it finally into collapse, it doesn’t really – in my mind at least – seem to justify a bunch of government intervention to keep it limping on a little longer. I’m saying this because, as I wrote about in my last post, a couple of major prairie hog barn companies have slid into financial catastrophe and it’s a sign of the dire situation caused in the Canadian prairie hog industry by the U.S. Midwest drought.
I don’t know if either Puratone or Big Sky deserve any public support. I don’t know anything about their inner workings. If they were already on the ropes before this drought disaster hit, then this is just the coup de grace rather than the cause of their problems. So I don’t have any opinion whatsoever on whether those companies deserve any particular support. Bankrputcy is often a great way to get good assets into stronger hands. I wouldn’t have supported a big government bailout for Nortel, and won’t for Research In Motion if things go really bad there, so why would a big farm corporation deserve a special bailout?
But it certainly doesn’t seem to me to be unreasonable for the hog industry and farmer champions like Manitoba’s Keystone Agricultural Producers to be calling for emergency government loans to carry hog farmers in general through a particularly dire temporary problem. I italicized “temporary” because everything I know about this situation and its economics is that it is almost certainly a short-term aberration caused by the Midwest drought. Farmers in the U.S. are selling off their breeding herds, crashing market prices now, and they are not buying weanling pigs while feedgrain prices are sky high, but next spring and summer there will be far fewer hogs heading to the slaughter plants so prices should be relatively high and profitability back. Anyone who survives until next summer should be walking into a very sweet spot. Not only will slaughter hogs likely be fetching a pretty penny, but if prices are high everyone with an open barn will be desperately seeking to fill it with weanlings.
But getting there is the challenge. And that’s why there’s a call for short term loans.
I don’t see much of a downside with it from a farmer or hog industry perspective. I don’t think there’s much moral hazard involved if the support provided is loans that have to be paid back. That will stop the unviable operations manipulating a system that is designed to cover a particular short term phenomenon.
From the government’s perspective, I don’t know how it looks. It’s busily cutting back all sorts of spending, so finding more money – even in the form of loans – might be difficult to do. But it would seem pretty crazy to me for a pro-business government to let a viable industry collapse just because of an unforseeable massive drought in the U.S..
Times like these challenge the assumptions of doctrinaire non-interventionists. That’s why I always consider myself a “wimpy Austrian” in terms of economics. I don’t believe in government intervention except when the system itself is breaking down, then governments need to take on the role of preventing unnecessary collateral damage and allowing society to fragment. That’s what governments did in 2008-09, and a lot of that made sense to me. (I’m no fan of QE2 or QE3 though.)
In agricultural terms, this Midwest drought-induced hog breakdown is similar, with the system breaking down and all sorts of signals and economics going way out of reasonable whack. One of those things is the hog industry, and stopping it getting sucked down in the vortex of a sinking Midwestern ship seems pretty reasonable to a wimpy Austrian like me.