APCA The Evolution of US Agricultural Policy Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Kentucky Agricultural Leadership Program Lexington, Kentucky December 14, 2010

APCA Lost Our Policy Bearings We seem to not have a clue why we have commodity programs –Don’t know the problem –Let alone the objective Many say: Agriculture has the power to “milk” the government, so it does! Thus, the consensus among many is: –Do away with them; they are a waste –Move the money to some other ag use We seem to be willing to believe anything

APCA We Seem Willing to Believe that: Staple crops are not sufficiently important to have emergency reserves (oil is sufficiently important) Less than full use of farm productive capacity is inefficient (SOP not to use full capacity in other sectors—typically about 80% of capacity) Farmers can extract billions of dollars for commodity programs—so they do Hence, commodity programs are a waste –do away with them or –pay out the money on some other basis

APCA What is Ag’s Problem!! Why does Ag get into seemingly endless price and income problems? Econ 101 says markets correct on their own In times of low prices or increased inventories: –Consumers buy more –Producers produce less –Viola! Self-correction.

APCA So What’s Not Considered ? FOOD IS DIFFERENT—domestically… –A biological necessity People will pay almost anything to get what they need When prices drop, they don’t buy more People do not eat four meals a day in response to lower prices May change their mix of foods Add services (Lean Cuisine, eat out, etc.) –Aggregate domestic demand (quantity demanded) changes very little due to lower prices Little self-correction from domestic demand

APCA So What’s Not Considered ? FOOD IS DIFFERENT—internationally… –Food is a national security issue—just like military security is to the US. So … Countries want to domestically produce as much of their food staples as possible Political considerations –Need to feed the population –Need to provide a living for millions in agriculture –Need an orderly exit of workers out of agriculture –Exports change much less than expected in response to lower prices Little self-correction from export demand

APCA So What’s Not Considered ? FOOD IS DIFFERENT—in supply too –Constrained by biological processes— unlike most manufactured goods Limited to annual production periods Constrained by natural forces –Weather—temperature, rainfall, hail, length of day –Pests As a result, a precisely controlled production environment is not available to crop agriculture –These realities often overwhelm other influences on crop yields Little self-correction in supply within season

APCA So What’s Not Considered ? FOOD IS DIFFERENT—in supply too –Even when prices are low across seasons… Farmers continue to plant all their acres Farmers don’t and “can’t afford to” materially reduce their use of fertilizer, seed, and other “high-yield” inputs Who farms the land may change But the essential resource—land—remains in production in the short-to-medium run –With continued low prices, farmers continue to produce—depleting equity if required Little self-correction in aggregate supply from one year to next

APCA Putting It All Together Now… Technology typically expands output faster than population and exports expand demand –Which results in periodic/chronic downward pressure on prices But in agriculture, the lower prices are not solved in a timely fashion –Little self-correction on the demand side –Little self-correction on the supply side Contrary to Econ 101, crop agriculture does not quickly “right-itself” when it capsizes So THAT’s ag’s problem and reason for commodity policy

APCA What Was That Again? You must recite the following before you are allowed dinner tonight Supply and demand characteristics of aggregate agriculture cause chronic price and income problems –On average supply grows faster than demand (Partly due to public policy) –Agriculture cannot right itself when capsized by low prices because… –(Always year-to-year random variability, too)

APCA Historically—there have been Two Major Components of Farm/Commodity Policy Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means Policy to Manage Plenty: Mechanisms to manage productive capacity or in other ways compensate farmers for consumers’ accrued benefits of productivity gains

APCA U.S. Ag Policy Did Not Start in 1932 Historic policy of plenty –Land distribution mechanisms – 1620 onward –Canals, railroads, farm-to-market roads –Land Grant Colleges – 1862, 1890, 1994 –Experiment Stations – 1887 –Cooperative Extension Service – 1914 –Federal Farm Credit Act – 1916 –Plus legal and other institutional structures This policy of plenty often resulted in production outstripping demand

APCA Historically—there have been Two Major Components of Farm/Commodity Policy Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means Policy to Manage Plenty: Mechanisms to manage productive capacity or in other ways compensate farmers for consumers’ accrued benefits of productivity gains

APCA We have dropped the “Managing Plenty” Part In the past farm policies for grains included: –Floor Prices (Non-recourse loans) –Annual supply management tools (e.g., set-aside) –Price stabilization and reserves (e.g., CCC and Farmer- Owned Grain Reserves) Over the years and especially since 1996 –All three were eliminated –Replaced with payment programs: Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) Partially funded insurance schemes In 2008 added another revenue based insurance scheme (ACRE)

APCA Current U.S. Policy Can Cause Economic Crisis When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

APCA Government Payments as a Percent of Net Farm Income

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APCA Kentucky Net Farm Income and Government Payments Million Dollars KY Net Farm Income Less Government Payments Kentucky Net Farm Income Government Payments were 8.6% of Kentucky Net Farm Income in 1990s; 26.4% in 2000s

APCA Current U.S. Policy Can Cause Economic Crisis When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

APCA Current U.S. Policy Can Cause Economic Crisis When demand outstrips supply: –Short-Run Prices explode Livestock producers go bankrupt Food prices increase at alarming rates Countries hoard rather than export Additional millions become undernourished/starve in developing countries –Long-Run High prices bring big resources into ag production worldwide Prices crash again

APCA What is the Back Story: Why the Shift in US Policy One element: The 1970s Syndrome Between early and late 1970s loan rates were increased substantially and then… Conventional wisdom: high loan rates putting a price umbrella over world prices 1985 Legislation –Lowered loan rates (Why?) –Introduced marketing loans (rice & cotton) What is a marketing loan? What important shift was represented by this?

APCA 1970s Syndrome Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 US Population US Exports *Adjusted for grain exported in meat US Domestic Demand Soviet Union policy change Oil money flowed to banks Banks lent money to less developed countries Those countries bought food Result: Grain import demand exploded US had capacity to capture most of the demand.

APCA What is the Back Story on the Shift in US Policy Background: 1970s Syndrome Between early and late 1970s loan rates were increased substantially and then… Conventional wisdom: high loan rates putting a price umbrella over world prices 1985 Legislation –Lowered loan rates (Why?) –Introduced marketing loans (rice & cotton) What is a marketing loan? What important shift was represented by this?

APCA Exports Plummeted Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 US Population US Exports US Domestic Demand

APCA What is the Back Story: Why the Shift in US Policy Background: 1970s Syndrome Between early and late 1970s loan rates were increased substantially and then… Conventional wisdom: high loan rates putting a price umbrella over world prices 1985 Legislation –Lowered loan rates –Introduced marketing loans (Rice and Cotton –Export Enhancement Program

APCA What is the Back Story: Why the Shift in US Policy Debate preceding 1996 legislation when: –Crop prices and exports were “high” –Expected both to remain “high” in future Increasing per capita incomes worldwide especially in China and Asia in general Freer international trade Convinced US is low-cost producer Superior infrastructure –Export-driven prosperity was expected was the conventional wisdom In no small part due to China moving from a corn exporter to an importer of corn

APCA China Net Corn Trade China Net Corn Trade What We Expected During Debate of 1996 FB: 1996 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu FAPRI Projections

APCA Commodity Policies 1985 to Present (cont.) The 1996 legislation: –Eliminated the acreage diversion programs –Expanded the marketing loan to all crops –Eliminated the target price and target price- based deficiency payment program –Instituted “decoupled” payments –Instituted planting flexibility But China did not follow the script…

APCA China Net Corn Trade China Net Corn Trade What We Got: 1996 FAPRI Projections of Net Corn Trade Actual Net Corn Trade Corn Exports Corn Imports Mil. Bu.

APCA Some Policy Options Continue the Exports/Trade Liberalization Will Save Us Course – Or All We Really Need is Market Access Switch to Green Payments based on Conservation/Environmental/ Rural Development Considerations Insurance/Farm Savings Accounts Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons”

APCA Policy-Option Premise Check Export Markets/Global Trade/Market Access –Mechanisms (and What We Have Done): eliminate all price floors use the bully-pulpit to generate high- export expectations extend trade liberalization –Apparent Premises (faulty in my view): Export markets are very price responsive Competing exporters will reduce production in the face of low prices Importing countries prefer to import rather than produce it themselves US agriculture will be a major beneficiary of trade liberalization

APCA 15 Crop Exports for US and Developing Competitors Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel Thousand Metric Tons US Developing Competitors

APCA Policy-Option Premise Check Insurance/Farm Saving Accounts –Mechanism: Government subsidies to commercial insurers or provides tax breaks for farmer savings accounts –Apparent Premises (faulty in my view): Low prices are a random event and seldom occur in a string of years Growth in supply and demand are equal –Possible Implications: Income protection ratchets down Land prices would go down Supplemental payments from Congress would skyrocket

APCA Policy-Option Premise Check Conservation/Environmental/Rural Development –Mechanism: Shift commodity payments to various kinds of conservation, environmental or rural development activities –Apparent Premises (faulty in my view): Commodity programs address no problem Better to have a broader group of farmers receive the money to achieve important (read real) objectives Farmers believe environmental degradation is a central concern and/or all that matters are WTO rules Payments in one form are as good as another –Implications Does not address the long-standing market characteristics of aggregate crop agriculture Could win a Farm Bill battle but loose the credibility war

APCA From My Perspective… Farm Bill needs to address: –Unique characteristics of crop agriculture that result in chronic price/ income problems –Variation in production due to weather and disease –Trade issues like dumping –Environmental and conservation issues –Rural development beyond agriculture

APCA From My Perspective… Need ag policy for all seasons including: –Buffer stocks to provide a reserve supply of grains and seeds in the case of a severe production shortfall and to ensure orderly marketing –Inventory Management to manage acreage utilization in the same way that other industries manage their capacity –Both these provide a means of dealing with supply and demand inelasticity

APCA The Economic and Political Setting for the 2012 Farm Bill Tight Budget –Spending capped at 2008 FB level Less if order comes down from on high (reconciliation) More only if find something else to cut (pay as you go) –Craig Jagger, House Ag Com. Econ. Says: 37 programs have no baseline budget after 2012— a $9 to $10 billion additional cost to bring back in –Wetland and Grassland Reserve Programs –SURE “permanent?” disaster program (ends after 2011) –McGovern-Dole International “School-Lunch” program –Lose about $4.5 billion in “timing shifts”

APCA The Economic and Political Setting for the 2012 Farm Bill Economic Conditions (Shades of 1996) –High prices and high incomes (But it’s different this time!) Farm Bill Preferences –Keep commodity programs as in the 2008 FB –Some want to redirect “Direct Payments” –Heritage Foundation and others want to: Replace subsidies with farmer savings accounts Eliminate funding for Foreign Agriculture Service Merge and reduce funding for four of USDA’s research and outreach agencies –Some say only need global “market access”

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