APCA Agriculture and Agricultural Policy Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Congressional Staff Washington DC January 26, 2007

APCA High Alert Issues Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm income In a “New Era”—prices will never again be below…

APCA High Alert Issues Reason for farm/commodity programs –Econ 101 says the market self corrects –Response to price, response to price, response to price In a new era—prices will never again be below…

APCA 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 This policy of plenty often results in production outstripping demand

APCA Characteristics of Ag Sector Agriculture is different from other economic sectors. On the demand side: –With low food prices— People don’t eat more meals a day They may change mix of foods Aggregate intake remains relatively stable

APCA Characteristics of Ag Sector Agriculture is different from other economic sectors. On the supply side: –With low crop prices— Farmers continue to plant all their acres Farmers don’t and “can’t afford to” reduce their application of fertilizer and other major yield-determining inputs Who farms land may change Essential resource—land—remains in production in short- to medium-run

APCA Why Chronic Problems In Ag? Technology typically expands output faster than population and exports expand demand –Much of this technology has been paid for by US taxpayers The growth in supply now is being additionally fueled by –increased acreages in Brazil, etc. –technological advance worldwide

APCA Why Chronic Problems In Ag? Lower prices should automatically correct itself—Econ 101 says so –Consumers buy more –Producers produce less –Prices recover—problem solved! But in agriculture lower prices do not solve the problem –Little self-correction on the demand side People do consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

APCA High Alert Issues Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm family income In a new era—prices will never again be below…

APCA Exports, Exports, Exports For the last quarter century, exports have been heralded—and continue to be by some—as crop agriculture’s salvation –Exports is the production safety valve that can rebalance agricultural markets –Exports will grow at accelerating rates As Dr. Phil would say, “So, how has that been workin’ for ya?”

APCA What About Exports? Billion Dollars Bulk Exports Total Agricultural Exports

APCA What About Exports 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 *Adjusted for grain exported in meat

APCA US Exported Acres Percentage of US acres used to produce crops for export have declined from a high of 43 percent in 1980 and 1980 to 33 percent for 2006 % of US Acres Producing Crops for Export

APCA What About Exports? Why have exports not fulfilled our hopes? –Export demand is braked by issues of food security/food sovereignty –International crop production is impacted by: Increased acreage: Stage of development Yield advances: World-wide distribution of technology US role as the leading nation in the world –Politically, economically, technologically, and militarily –And in prices too: Others price off US prices

APCA Implications for the WTO Market access may not be sufficient –May benefit beef and Anjou pears –What about crops covered by the Farm Bill?

APCA What About Exports? 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 Exports Developing Competitors’ Exports

APCA High Alert Issues Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm family income In a new era—prices will never again be below…

APCA Farming-dependent counties, (Source USDA-ERS) Farming-Dependent Counties

APCA High Alert Issues Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm Income –Farm family income?? –Measures that reflect net income of farm program crops?? –What about usual financial measures?

APCA High Alert Issues Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm income In a new era—prices will never again be below…

APCA In Times of Exploding Demand –The current program will work –Environmental payments will work –Rural development payments will work –Any farm program will work –NO program at all will work But times of exploding demand always come to an end

APCA Feedstock for Energy* * Does not include forest harvest

APCA Worldwide Excess Capacity Will Again Be a Long-run Problem (Despite Ethanol) Dramatic yield increases in other countries (and in this country) –Cargill, Monsanto, John Deere, etc., etc., etc. Acreage once in production will be brought back in –Russia, Ukraine and others New Acreage –Brazil –China

APCA Evaluate Carefully Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm family income In a new era—prices will never again be below…

APCA Thank You

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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 for All Seasons Realistic about the way aggregate agricultural markets work Takes into account consumer behavior Takes into account producer behavior Recognizes limited ability of exports to rebalance aggregate agricultural markets Recognizes demand growth seldom outstrips supply growth for long