APCA Farm Policy’s Historical Roots and Modern Influences Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Kentucky Agricultural Leadership Program, Seminar 3 Louisville, Kentucky March 13, 2007

APCA Lost Our Policy Bearings Without a clue and highly impressionable –When it comes to farm policy, we seem not to have a clear idea about anything including: what the “problem” is or what objectives are to be achieved –So we are 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 to not use full capacity in other sectors—currently at 77% 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 for, Farm Programs? To address self-correction problems Not to enrich agribusinesses Not to provide cheap feed to livestock integrators Not to dump commodities on international markets Not to crash commodity prices in developing countries Not to be a mark for entrepreneurs to pull government money through loopholes

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 –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 not consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

APCA What Was That Again? Supply and demand characteristics of aggregate agriculture cause chronic price and income problems –On average supply grows faster than demand (We will discuss ethanol later) –Agriculture cannot right itself when capsized by low prices –(Always year-to-year random variability)

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 and to compensate farmers for consumers’ accrued benefits of productivity gains

APCA When Policy of Plenty is Too Much Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies: –Supply side –Demand side –Just pay money

APCA Traditional Farm Policy Elements From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements: –Base acreage –Acreage reduction / set-asides –Nonrecourse loans to support prices –Government storage of commodities –Domestic and foreign demand expansion –Target price for major crop commodities Deficiency payments for the difference between target price and market price

APCA Critical Changes in U.S. Policy Since 1985 there has been: –An export “mindset” –A movement away from “managing plenty” to supporting income with government payments This view culminated in the 1996 FAIR Act: –Elimination of supply control instrument: set aside program –Replaced “price floors” with government payments

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 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 China Net Corn Trade China Net Corn Trade What We Got: 1996 FAPRI Projections of Net Corn Trade PS&D Actual Net Corn Trade with 2004 Projection Corn Exports Corn Imports Mil. Bu.

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? Dollars per Bushel Corn Exports Corn Price Thousand Metric Tons

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 Implications for WTO WTO negotiations drastically limit the ability to set domestic farm policy in this and other countries –Seems as if it subscribes to the “What is good for General Motors (multinationals)…” syndrome –To me: The whole WTO process shows a complete lack of understanding of the unique characteristics of food and agriculture Food security and other social objectives often trump economic considerations in the case of food and agriculture

APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity will be a worldwide endeavor in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity will be a worldwide endeavor in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

APCA Acreage Response to Lower Prices? Index (1996=100) Four Crop Acreage Four Crop Price Adjusted for Coupled and Decoupled Payments Four Crop Price Adjusted for Coupled Payments Four Crop Price Between 1996 and 2000 Aggregate US corn, wheat, soybean, and cotton acreage changed little While “prices” (take your pick) dropped by 40, 30 or 22%

APCA Acreage Response to Lower Prices? Index (1996=100) Four Crop Acreage Four Crop Price Since 1996 “Freedom to Farm” Aggregate US corn, wheat, soybean, and cotton acreage changed little despite a wide fluctuation in price

APCA Canada: Farmland Planted Million Acres Wheat Barley Canola Other Grains Other Oilseeds Canada reduced subsidies in 1990s Eliminated grain transportation subsidies in 1995 Crop mix changed, total acreage remained flat

APCA Australia: Farmland Planted Million Acres Wheat Coarse Grains Oilseeds Australia dramatically reduced wool subsidies in 1991 Acreage shifted from pasture to crops All the while, prices declined

APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

APCA Worldwide Excess Capacity May 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 From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

APCA What Agribusinesses Want Volume (paid flat per bushel rate; sell lots of inputs) Low Prices (low cost of ingredients) Price instability (superior information systems provide profit opportunities) Reduced regulation of production and marketing practices (seller-to and buyer-from beware) More market power over competitors and their customers/suppliers (want everyone at a competitive disadvantage)

APCA Monsanto’s Control of Crop Genetics In 2004, Monsanto’s technology accounts for: –85% of all U.S. soybean acreage –45% of all U.S. corn acreage –76% of all U.S. cotton acreage 84% of all U.S. canola acreage was genetically modified Source: Center for Food Safety

APCA Control of U.S. Grains and Oilseeds Cargill, ADM, and Zen-Noh export 81% of U.S. corn ADM, Cargill, Bunge, and AGP control 80% of the U.S. soybean crush Horizon (Cargill and CHS), ConAgra, Cargill, and Cereal Food Processors control 63% of flour milling in the U.S. Source: Mary Hendrickson

APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current farm programs provide large share of income US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

APCA Government Payments as a Percent of Net Farm Income

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APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to be a worldwide creation in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current farm programs provide large share of income US policy alternatives and premises

APCA

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… The 2007/2008 Farm Bill needs to include provisions for: –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 From My Perspective… The 2007/2008 Farm Bill needs to include provisions for: –Bioenergy production to manage acreage utilization without heavy dependence on idling acreage –Keep the land in production so that we don’t pay farmers not to farm –Provide a needed energy source not unlike the horsepower of times past

APCA Setting for 2007 FB Commodity policy under “high” price expectations Demand euphoria but what about grain supply in the short-run and long-run? What is the greatest risk for agriculture in the short-run; in the long run Commodity policy implications

APCA Are High Prices the Future? The 2007 USDA Baseline projects: –Corn demand for ethanol 3.2 billion bushels for 2007—double 2005 (AFBF says 3.5) 3.7 billion bushes in 2008 (AFBF says 4.9) –Over 10 years, baseline prices range from $3.30 to $3.75 –Very low corn stock levels by historical standards

APCA Logical Implications Subsidies for program crops would: –Largely be replaced by market receipts –Cease to be a budgetary problem for the Federal Government Could even transition the direct (AMTA) payments like 1996 intentions –Cease to be a stumbling block in trade negotiations

APCA Short-Term Considerations US supply response –Arbitrage of crop acres in US to corn March Crop Intentions? 7 million additional acres, 10? 11? 12? –Means less soybeans, wheat, and cotton and more corn –Some land converted to cropland; more of such conversion in long-run

APCA Short-Term Considerations International supply response –Increased international production Mexican crop response: 4 million ac. Argentina, Brazil, Africa –All have indicated that $4.00 corn may alter planting response –Internationally there may be a decreased need for corn imports from the US. That is, US corn exports would decline

APCA Long-Term Considerations US supply response –Conversion of pasture and grassland— some in CRP?—to crop production –Investment in yield enhancing technology (300 bu./ac on best land?) –Conversion of land to cellulosic feedstocks, some of which will not be from current cropland

APCA Long-Term Considerations International supply response –Development and adoption of drought and saline resistant crops –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology and yield differentials between US and the rest of the world

APCA Long-Term Considerations International supply response –Long-run land potentially availability for major crops Savannah land in Brazil (250 mil. ac. -- USDA says 350) Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.) Land in former Soviet Union (100 mil. ac.) Arid land in China’s west (100 mil. ac. GMO wheat) Savannah land in Sub-Saharan Africa (300 mil. ac percent of 3.1 bil. ac. of Savannah land) –Easy to underestimate supply growth

APCA Greatest Short-Term Risk Weather event –2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%) –For full 10 year USDA baseline, the projected range is 4.5 and 5.7 Recent historic range has been 10% to 20% –In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year –A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices $6 or more per bushel

APCA Uncharted Territory Year ending commercial stocks-to-use ratio for US corn (actual), (2007 USDA Baseline) 1974 (7.4%)1983 (5.4%)1995 (4.6%)2009 (4.5%)

APCA Greatest Short-Term Risk Weather event –2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%) –For full 10 year USDA baseline, the projected range is 4.5 and 5.7 Recent historic range has been 10% to 20% –In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year –A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices $6 or more per bushel

APCA Short-Term Impact of $6 Corn Demanders –Outrage & economic pain by Livestock and ethanol producers Food processors and consumer groups –“Dependable supplier” issue returns Can the US really guarantee that export embargoes will never again be imposed? Suppliers – Switch more acres to corn US (road-ditch to road-ditch?) Brazil, Argentina, Mexico and elsewhere

APCA Greatest Long-Term Risk Acreage and yields greatly increase worldwide—just a question of how fast –With $6 per bushel corn Acreage shifts in the short-run Longer-run investments that increase acreage and yields –With $3 to $4 corn or somewhat lower Increases in acreage & yields but at slower rate Lower prices return –Recreate problems for farmers worldwide and for the US treasury

APCA On Knife’s Edge Short-term object lesson? –Need strategic reserves Like a properly managed Farmer-Owned-Reserve Reduce economic dislocation Long-term reality? –“New Era?” (fourth “New Era” in my lifetime) –Supply growth has always caught and then surpassed demand growth (and it does not take long ) This time, surge in productive capacity will be global Need a “Policy for All Seasons”

APCA Rate of Use 0%10%15%20%5%25% Oil Reserves Updated July Source: International Energy Annual 2003 (EIA), Tables 1.2 and 8.1-O&GJ. Canada’s reserves include tar sands. The United States uses more oil than the next five highest-consuming nations combined. 3% 7% 25 % 7% 3% U.S. Dependence on Foreign Oil

APCA U.S. Energy Consumption Biomass Consumption Million dry tons/year Forest products industry Wood residues Pulping liquors Urban wood & food & other process residues Fuelwood (residential/commercial & electric utilities Biofuels Bioproducts TOTAL

APCA Where Could It Be Grown? Logging & Residues Switchgrass Switchgrass (2014, at $50/dt) Ugarte, et al (forthcoming). Economic Implications to the Agricultural Sector of Increasing the Production of Biomass Feedstocks to Meet Biopower, Biofuels and Bioproduct Demands. Perlack, R.D., et al Biomass as Feedstock for a Bioenergy and Bioproducts Industry: Technical Feasibility of a Billion-Ton Annual Supply.

APCA Feedstock for Energy* * Does not include forest harvest

APCA What Was That Again? Crop exports did not deliver—will not deliver For crop agriculture, timely free- market self- correction is a fantasy Demand explosions do not last: Excess capacity is likely to again raise its ugly head Carrying water for agribusinesses typically works against farmers’ best interests Need a policy for all seasons

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 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 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 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 Worldwide Excess Capacity Will Again Be a Long-run Problem (Despite Ethanol) Supply growth has always caught and then surpassed demand growth (and it does not take long ) –This time, the surge in productive capacity will be global

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…

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