APCA So Why Do We Have Farm Policy? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center ABA National Agricultural Bankers Conference Miwaukee, Wisconsin October 29, 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 1933 Historic policy of plenty—all market interventions—never had a free market –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? Supply and demand characteristics of aggregate agriculture cause chronic price and income problems –On average supply grows faster than demand (Yes, even “after the lovin” of the ethanol craze) –Agriculture cannot right itself when capsized by low prices. Self-correction does not readily occur. Why? Well because: You won’t eat more meals each day Farmers won’t quit growing so much –(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? 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? 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 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?)

APCA Long-Term Considerations International supply response—yield –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—acreage –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 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 the US, Canada and other countries –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 Agribusiness will benefit but not necessarily major-crop farmers in the US or Canada –With increased/complete access achieved, international commodity markets may greatly/significantly increase trade –But access—while necessary—may not be sufficient to generate the expected benefits to grain producers in the US and Canada

APCA Policy Directions Do 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 Revenue Insurance/Risk Management Accounts (RMA)/Farm Savings Accounts Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons” Continue with current program with slight modifications

APCA Status of 2007 Farm Bill House –Rebalance loan rates and target prices; try a revenue insurance program; payment limits changed; three entity role elminated Senate –Average Crop Revenue Program Option (saves $3-$3.5 Bil.) No direct payments; $15 per acre instead Eliminates loan deficiency payments; AND replaces non-recourse with recourse loans Uses state yield estimates and actual prices –Increased funding for: specialty crops ($1B), nutrition ($4B), conservation ($4B), renewable energy ($1.3B) –Essentially assumes prices will be fine, yields variation is the real problem Conference Committee –Compromises and changes

APCA In Times of Exploding Demand –Any farm program will work –NO program at all will work But times of exploding demand always come to an end And crop agriculture is no better at adjusting to low prices now than decades ago

APCA Thank You

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