1. APCA Farm Policy: Where Do We Go From Here? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center 2006 AgOutlook Conference LSU AgCenter Lod Cook Conference Center, Baton Rouge, LA January 27, 2006

2. 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!

3. 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

4. APCA Historical Policy Components 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

5. APCA Why Chronic Problems In Ag? Technology 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

6. APCA Why Chronic Problems In Ag? In agriculture lower prices do not solve the problem Little self-correction on the demand side –People will pay almost anything when food is short –Low prices do not induce people to eat more Little self-correction on the supply side –Farmers tend to produce on all their acreage –Few alternate uses for most cropland –Farmers do not scrimp on the use of yield- determining inputs

7. 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 –Agriculture cannot right itself when capsized by low prices –(Always year-to-year random variability)

8. 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

9. APCA Exports Have Not Delivered 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

10. 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

11. APCA U.S. Total Ag Exports Have Grown Slower Than Total Ag Imports Ag Exports Ag Imports Billion Dollars

12. 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

13. 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%

14. 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

15. 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

16. 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

17. 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 creation 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

18. APCA Worldwide Excess Capacity Will Be The Long-run Problem Dramatic yield increases in other countries –Cargill, Monsanto, John Deere, etc., etc., etc. Acreage once in production will be brought back in –Russia, Ukraine and others New Acreage –Brazil –China

19. 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 creation 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

20. APCA What Agribusinesses Want Volume (paid flat per bushel rate; sell 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)

21. 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 creation 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

22. APCA The US Can’t Go On Like This… The current farm programs are too expensive –Budget boogie man 100s of billion of dollars of annual deficits—several trillion dollars over 10 years Cuts in Farm Programs almost certain GAO report and budget considerations are making payment limits vulnerable WTO ruling may put LDPs and Counter- Cyclical Payments in jeopardy –Removes ability to compensate for low prices even less than in 1996 FB

23. APCA Government Payments as a Percent of Net Farm Income

24. APCA

25. APCA

26. APCA

27. APCA

28. APCA The WTO Effect? Are we okay with WTO negotiations that vastly reduce our ability to set domestic farm policy in this and other countries? –What is good for General Motors (multinationals)… syndrome –The whole WTO process shows a complete lack of understanding of the unique characteristics of food and agriculture –It is a clear case of not understanding that, as important as economics is, it can be trumped by food security and other social objectives in the case of food and agriculture

29. APCA Farmers’ Role in the Policy Debate One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin. –And, given the realities of agriculture discussed so far, they hold little promise for the future.

30. APCA Farmers’ Role in the Policy Debate One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Farm groups advocating unfettered free markets, predicting prosperity-generating export growth, or claiming that a level playing field is the magic bullet, etc., ain’t workin. –And, given the realities of agriculture discussed so far, they hold little promise for the future.

31. 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 creation 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 and premises

32. APCA Some Policy Options Continue the Exports/Trade Liberalization Will Save Us Course Eliminate or Drastically Cut Payments Switch to Green Payments based on Conservation/Environmental/ Rural Development Considerations Insurance/Farm Savings Accounts Policy to Address Crop Agriculture’s Long-Standing Problem

33. APCA Policy-Option Premise Check Export Markets/Global Trade –Mechanism: eliminate all price floors use the bully-pulpit to generate high- export expectations extend trade liberalization –Apparent Premises: 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

34. APCA Policy-Option Premise Check Eliminate or drastically reduce payments (With no replacement of other programs) –Mechanism: Cut all payments –Apparent Premises: Commodity programs address no problem Payments have created low world prices –Implications Output will decline markedly when payments are reduced resulting in increased prices Actually, land prices would go down and rural communities would further decapitalize Note that the prices of coffee, bananas, or cacao declined sharply when markets were set free—there had been no payments in the “before” situation but there had been supply control

35. APCA Intensify Free Markets in Developed Countries IFPRI IMPACT Percent In 2020, worldwide Corn price increases by less than 3% over baseline Wheat price increases by less than 1% over baseline Rice price increases by less than 2% over baseline

36. 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: 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

37. 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: 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

38. 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

39. APCA From My Perspective… The 2007 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 –In most recent years we have not had adequate supplies to meet the needs of consumers in the case of a production shortfall of 30% or more

40. APCA From My Perspective… The 2007 Farm Bill needs to include provisions for: –Supply Management to manage acreage utilization in the same way that other industries manage their capacity –Stocks program to ensure orderly marketing process –Both these provide a means of dealing with supply and demand inelasticity

41. APCA From My Perspective… The 2007 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

42. APCA From My Perspective… Merge Ag and Energy Policy –Biofuels recycle atmospheric, not fossil, carbon –Look at crops not in food equation & NOT internationally traded –Switchgrass (as an illustrative example only) Perennial Reduced inputs Multi-year setaside Burned in boilers for electricity Converted to ethanol Less costly than present ag programs

43. APCA From My Perspective… Long term solutions to chronic price and income problems need to include: –International supply management to manage supply on a global scale –At the present US supply management can benefit farmers everywhere in the world –As countries like Brazil and other developing export competitors continue to increase their capacity they will need to be a part of an effective supply management program

44. APCA What Was That Again? Crop exports did not deliver—will not deliver For crop agriculture, timely free- market self- correction is a fantasy Excess capacity is crop agriculture’s future peppered with periods of production-shortfalls Carrying water for agribusinesses typically works against farmers’ best interests Current farm programs are not sustainable

45. APCA Thank You

46. APCA To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edu requesting to be added to APAC’s Policy Pennings listserv Weekly Policy Column