1. APCA False Premises Encourage Misdirected Farm Policies Daryll E. Ray and Harwood Schaffer University of Tennessee Institute of Agriculture Agricultural Policy Analysis Center Organization for Competitive Markets 15 th Annual Food and Agriculture Conference Kansas City, Missouri August 9, 2013

2. APCA What Can We (Probably) Expect in the Next (2015??) Farm Bill? First and foremost: Revenue insurance will be the primary safety net (all or largely outside the “farm bill”) Direct payments will be gone Marketing loans will still be available Farmers may have to choose between: –Covering a portion of the insurance deductable (shallow loss insurance) –Or retaining the current target price program (perhaps with higher target prices)

3. APCA Why Such Strong Support for Revenue Insurance? Insurance engenders positive connotations Private sector is involved (bringing to mind lower costs) Follows the market (and that must be a good thing, right?? [Wrong]) Anyway, given the bright, prosperous future (that most seem to expect): –Evening out revenue bumps won’t be that big of a deal

4. APCA What is the Prosperous Future Argument? Extremely low prices won’t happen again –Never see sub-$3 corn prices –Ethanol and export demand will see to that 9.5 billion people in the world by 2050 –95 percent of which reside outside the U.S. 70% more food will be needed –Implicitly assumed that the U.S. producers will be THE major beneficiary Agribusiness is leading the parade

5. APCA But We Know Agribusinesses Benefit From… 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) Oh, Oh! – None of that seems to translate into prosperous future for production Ag

6. APCA Prosperous Future vs. Reality Reality 1: Ethanol demand –Represents most of recent increase in grain demand –Should not expect that rate of growth during the next five years

7. APCA Prosperous Future vs. Reality Reality 2: U.S. may benefit less than expected from the 70% increase in food needs by 2050 –Major growth areas will likely expand their own production (China, India, Africa…) Extreme political pressure to be self-sufficient Farm families make up 60% of population –Pushing farmers off farms only enlarges urban problems –Increasing production promotes economic development –99.5% of farmers are outside the US –Reducing post-harvest loss can quickly increase effective yield

8. APCA Prosperous Future vs. Reality Reality 2 (cont.): U.S. may benefit less… –U.S. export competitors will likely gobble up trade growth for grains and oil seeds For a third of a century, total US crop exports have been flat Trends in U.S. shares of exports have plummeted Export competitors have more head room than the U.S. to increase agricultural production –Open land available in S. America and other countries –Yields can be increased by closing technology gaps

9. APCA US and World Exports of Corn, Wheat, Grain Sorghum, Barley, Oats and Soybeans, 1980-2012 Million Metric Tons World Exports of 5 Grains and Soybeans US Exports of 5 Grains and Soybeans

10. APCA US and World Exports of 5 Grains and Soybeans, 1980-2012 - Percentage Percent US 5 Grains and Soybean Exports as % of World 58 % in 1980 22 % in 2012

11. APCA US and World Exports of Barley, Corn, Oats, Milled Rice, and Wheat, 1980-2012 - Percentage Percent US 5 Grains Exports as % of World 56 % 17 %

12. APCA US Exports of Soybeans, 1980-2012 Percent US Soybean Exports as % of World 80 % 36 %

13. APCA US Exports of Corn, 1980-2012 Percent US Corn Exports as % of World 76 % 18 % 62 % in 2006

14. APCA US Exports of Wheat, 1980-2012 Percent US Wheat Exports as % of World 45 % 19 %

15. APCA 15 Crop Exports for US and Developing Competitors Developing Competitors: Argentina, Brazil, China, India, Indonesia. Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, and Oilseed Complexes: Soybean, Peanut, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel Thousand Metric Tons US Exports Developing Competitors’ Exports

16. APCA Domestic vs. Export 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

17. APCA Prosperous Future vs. Reality Reality 2 (cont.): U.S. may benefit little… –U.S. export competitors will likely gobble up trade growth for grains and oil seeds For a third of a century, total US crop exports have been flat Trends in U.S. shares of exports have plummeted Export competitors have more head room than the U.S. to increase agricultural production –Open land available in S. America and other countries –Yields can be increased by closing technology gaps

18. APCA Prosperous Future vs. Reality Reality 3: There are no price floors –Yes, the price standard for corn increased from $1 per bushel to $2 following the 1970s Commodity Credit Corp supported crop prices and did so at a higher level reflecting inflation –Nothing now to stop a catastrophic drop in prices The CCC non-recourse loans cannot do it Loan deficiency and other payments cannot do it Revenue insurance cannot do it (stay tuned…) Future growth in ethanol and export demand would be helpful but doubtfully a floor –Corollary: Land prices could easily be the new “house of cards”

19. APCA Prosperous Future vs. Reality Reality 4 : Possible conclusion from all this… –Should not rule out worldwide excess capacity and multiple years of very low prices This happened after the price surge in the 1970s –Other countries responded to the high prices and fear of food insecurity by increasing production over time –U.S. export demand collapsed –The resulting U.S. excess agricultural capacity in the early 1980s turned out to be over 30 million acres –And became known as the Conservation Reserve Program What about this time? –Our export competitors are expanding production for export –Our import customers are ramping up domestic production –U.S and world output likely to outpace demand growth –Like the three price run-ups over the 100 years: prices drop

20. APCA Prosperous Future vs. Reality Reality 5: High-price periods are the worst times to do a farm bill… –Provisions are put into the farm bill that work during those high-price times Decoupled payments in 1996 FB—prices were high in 1996 when bill was passed High interest in revenue insurance this year— when prices are high “pure profits” could be virtually guaranteed –But are completely inadequate/inept when prices go well below the cost of production for multiple years

21. APCA Prosperous Future vs. Reality Reality 6: Let’s get serious about insurance! –It is designed to protect against random incidents A relatively predictable proportion of houses in “home insurance pools” will burn down –It is not well-suited for incidents that affect the entire pool of insurance clients All houses do not burn down at once (if that is a possibility—like during wartime—those events are excluded from coverage) –Insurance is primarily for “individual” incidents not incidents that affect everybody

22. APCA Prosperous Future vs. Reality Reality 6 (cont.): What about ag then? –Makes sense to insure against incidents that affect production of individual farmers or subgroups of farmers Like yield and prevented planting problems –especially hail, wind, floods, etc. –Rates could/would differ, including by region –Not indicated for incidents that affect all farmers (that is, incidents that are systemic) Like severe price drops, especially for multiple years Ditto price-caused drops in revenue

23. APCA Prosperous Future vs. Reality Reality 7: Revenue insurance tends to be an upside-down safety net –When prices are high, revenue insurance provides protection Depending on circumstances, could guarantee profits well above all production costs Courtesy of U.S. taxpayers –When prices remain very “low,” revenue insurance does not provide a meaningful safety net “Guarantees” a proportion of low prices, even when prices are well below production costs Attractively painted “revenue-insurance bandwagon” seems structurally unsound

24. APCA Modifications, then?? (If) the proverbial train (bandwagon) has left the station, what can be done? –Keep, but modify Protect taxpayers by limiting revenue insurance to cover no more than a portion of production costs Better protect farmers by requiring that revenue insurance cover at least variable production costs Reduce administrative costs –For example, fixed agent fee per policy (or let FSA do it!) –Start over—let insurance do what it does best Limit taxpayer subsidized insurance to yield shortfalls or prevented planting (Could provide it free so no need for emergency disaster payments) Use other programs for price and income protection But the first step is properly identify the source of agriculture’s price and income problems

25. APCA My Question to US Farmers Is: What Are You Going to Do About It? 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.

26. APCA My Question to US Farmers Is: What Are You Going to Do About It? Must be a mindset change –Producers and farm and commodity organizations must refuse to carry water –Must design policies based on “the realities” not hope or wishful thinking –Must be willing to energetically embrace other groups that genuinely share identical or complementary objectives –Work as hard to become independent as we have “worked” to become subservient in the past

27. APCA My Question to US Farmers Is: What Are You Going to Do About It? Did I mention that there must be a mindset change? Everything should be on the table. Take nothing for granted. –Previous programs: DNA testing (seeing what happens when most of them are eliminated) have exonerated most of the “failed programs of the past” –In all cases, do not contradict or ignore any of “the realities” when developing policy

28. APCA What IS the Problem? Technology/Ac expands output faster than population and exports expand demand Yield variability Market failure: lower prices do not solve the problem in a timely fashion 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

29. APCA Farmer-Oriented Agricultural Policy I. Three components: –Farmer-Owned-Reserve to put a relatively-wide band around prices –Annual general cropland set-aside, allowing complete planting flexibility on remainder –Eliminate Direct Payments and the marketing loan General cropland set-aside and occasional use of CCC non- recourse loan would be used to help keep within the price band of FOR. II. Complement set-aside in I. with additional longer-term land withdrawal in CRP or perennial energy crops, thus reducing annual set-aside acreage requirements

30. APCA In the 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

31. APCASummary Conventional wisdom has seemed to be that we are in a “new price and income era” When we had a similar price run-up in the 1970s, worldwide production increases slammed U.S. agriculture This time there is no floor on crop prices Without modification, current revenue insurance proposals… –Provide a safety net when prices are “high” –But are not much help when prices are “low” So where does that leave us? –Déjà vu all over again? With status quo, will there be emergency payments like after the 1996 Farm Bill? An expanded Conservation Reserve? –Really need to rethink Ag policy The source of agriculture’s price and income problems And programs that actually get to the root of Ag’s problems

32. APCA Thank You

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