Washington Insider-- Monday

Economic Pressures Weigh on Small Businesses

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Democratic Senators Call For Change In CFAP 2

Senate Agriculture Committee ranking member Debbie Stabenow, D-Mich., and 14 Democratic Senate colleague are calling on USDA to reverse what they labeled an "arbitrary decision" that excludes lost meat sales by dairy farmers during the pandemic as eligible for COVID-19 aid payments under the Coronavirus Food Assistance Program 2 (CFAP 2).

The senators noted that losses from meat produced from breeding animals was included in CFAP 1 but not the CFAP 2 effort. “This change will affect the livestock industry and will be particularly harmful to dairy farmers who often operate at extremely tight margins,” the senators said. “The decision is even more troubling considering that USDA clearly has sufficient resources to cover these losses. Additionally, it is less complicated for both USDA and farmers to cover all livestock and avoid confusion about what animals are covered or excluded.”

It is not clear that the urgings from the lawmakers will result in a change in the CFAP 2 effort at this stage.

USDA To Seek More Input On Cell-Based Meat

USDA's Food Safety and Inspection Service (FSIS) plans to gather more information about cell-based meat and poultry products before it issues labeling regulations.

The agency on Thursday (October 22) told IHS Markit that it intends to publish an Advanced Notice of Proposed Rulemaking (ANPR) seeking public comments to inform future labeling rules for cell-based meat and poultry products.

“The ANPR will help ensure that a public process, allowing stakeholder comments, is used to develop labeling regulations,” according to FSIS.

The agency did not provide specifics on when it would release an ANPR but said the rulemaking will be listed in the fall Unified Regulatory and Deregulatory Agenda and then published in the Federal Register.


Washington Insider: Economic Pressures Weigh on Small Businesses

Bloomberg reported this week that economic pressures are building on many smaller businesses, and that they face greater economic threats than do larger firms.

The report looked at SeaWorld Entertainment Inc., a publicly traded corporation, that “easily borrowed almost $730 million in the recent capital markets.” During the same period, a smaller firm, GeckoParx, is “shutting its doors after burning through nearly all of its money,” Bloomberg said.

The gulf between big companies that have ready access to credit and just about everyone else got wider in the fallout of the COVID-19 crisis, as the Federal Reserve blew open capital markets and pledged to keep interest rates low as long as needed. However, bond markets are rarely an option for the likes of GeckoParx, with its 40,000 square feet of trampolines, ninja courses and arcades.

The divide over access to corporate credit — who can get it, and who can't — is likely to deepen, Bloomberg thinks. Small businesses employ almost half of the country's private-sector workforce and have contributed about two-thirds of net employment gains in recent years. They so far have proved more resilient than feared thanks in part to Paycheck Protection Program government-backed loans.

But that aid ended in August without reaching some of the tiniest and most vulnerable firms, especially those owned by minorities. Prospects for more stimulus before the Nov. 3 presidential election remain highly uncertain.

By one estimate, the number of U.S. small businesses has dropped by almost a quarter compared with January, Bloomberg says. That's fueling concerns that large companies, some enriched by the pandemic's impact, will move in to fill the void.

After using almost all the money they got through the PPP to keep their staff on payroll, Darlene and Mike Moore closed their southern-style restaurant in downtown Asheville, North Carolina, in mid-September, just under three years after opening. “We knew we weren't going to be able to sustain ourselves,” Darlene, 41 and a mother of two, said. “It became too much to endure.”

The PPP, part of an unprecedented stimulus package passed by Congress in March in response to the pandemic, was always meant as a short-term stopgap for firms with fewer than 500 employees. After a rocky start, the PPP reached hundreds of thousands of truly small companies by the time it closed to new applications on Aug. 8. But many more were left behind, rejected by lenders or daunted by burdensome and often confusing rules to get the loans converted into grants.

Even if lawmakers extend the expired PPP to allow recipients to get a second loan, it won't be enough to help those who never got one in the first place, said advocacy group Small Business Majority. By contrast, the Fed's action benefited all types of borrowers, as long as they were big enough to issue bonds.

One of the peculiarities of the COVID-19 crisis is the divide created between bigger and smaller firms, said Robert Bartlett, a professor of law and faculty co-director of the Berkeley Center for Law and Business. The Fed's effort to add liquidity to the system allowed both investment-grade and junk-rated companies to access financing, while smaller firms were left with tighter credit markets, he said.

The Fed announced its plan to directly purchase corporate bonds in late March, and expanded it to include some junk-rated debt in early April. The program included SeaWorld, which had been troubled before the pandemic forced it to temporarily close all of its 12 parks. About a month after the Fed's announcement the Orlando-based company had sold $227.5 million of bonds.

In July SeaWorld made another trip to the bond market, announcing its offer on the same day it disclosed a 96% drop in second-quarter preliminary revenue compared with a year earlier. The bond attracted so much demand that the deal was increased by $100 million to $500 million.

“The pandemic has unquestionably affected businesses of all sizes in the travel, tourism, hospitality and entertainment industries including SeaWorld,'' the company said in an emailed statement. “We have made difficult but necessary decisions to shore up our balance sheet using available resources to put the company in the best possible position to continue to contribute to our nation's recovery.”

Any concentration in market power could exacerbate disturbing trends in the U.S. economy that already emerged as a result of a decline in competition, according to an August paper by two Federal Reserve Board economists. They identified deepening inequality and financial instability as a result of larger firms controlling more of their markets.

A New York Fed study said that Black-owned firms have been almost twice as likely to shutter compared to all others. About 41% of Black- and Latino-owned business said they won't make it through the next few months without additional financial support, according to an SBA report.

Frank Knapp, 68, whose family owns a dog-boarding business in Columbia, South Carolina, got PPP relief money in a second round to help stay afloat. He worries small businesses that go away will simply be replaced by larger competitors. “The customers they were serving aren't doing without,” Knapp said. “They are going to get their service from a bigger business that survived.”

So, we will see. The effort to make the anti-virus programs truly equitable has been both controversial and difficult. It should be watched closely by producers as the economic season progresses, Washington Insider believes.

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