1. APCA The Setting for 2012 FB Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center 2010 NASDA Annual Meeting Dover, Delaware September 19, 2010

2. APCA Lost Our Policy Bearings We have forgotten why we have commodity programs –Don’t know the problem –Let alone the objective Many say: Agriculture has the power to “milk” the government, so it does! Thus, the consensus among many is: –Do away with them; they are a waste –Move the money to some other ag use

3. APCA Why Commodity Policy? Agriculture does not behave like our Econ 101 teachers said it would –Inherent variability – weather and pests are not problem in non-farm/non-food industries –The total food/agricultural market lacks quick response to even sharp declines in prices

4. APCA It’s Lack of Price Responsiveness, Stu… Lower prices cause markets to automatically correct, right? Right! –Consumers buy more –Producers produce less –Prices recover—problem solved! But in agriculture, lower prices do not cause the same degree of reaction –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 –With little correction prices do not recover

5. APCA Once Upon a Time… There were farm policies that provided –Floor Prices –Supply management tools –Price stabilization and reserves Over the years and especially since 1996 –All three were eliminated –Replaced with payment programs: Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) Partially government-funded insurance schemes The 2008 FB added another revenue based insurance scheme (ACRE)

6. APCA Current U.S. Policy Can Cause Economic Crises (can and has) When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

7. APCA Current U.S. Policy Can Cause Economic Crises (can and has, cont.) When demand outstrips supply: –Short-Run Crop prices explode Livestock/dairy producers go bankrupt Food prices increase at alarming rates Countries hoard rather than export Additional millions become undernourished/starve in developing countries –Long-Run High prices bring big resources into ag production worldwide Prices crash again

8. APCA Challenging Setting for 2012 FB Debate Tight Budget –Spending capped at 2008 FB level or less –Craig Jagger, House Ag Com. Econ. Says: 38 programs have no baseline budget after 2011—a $9 billion additional cost for 5 years Lose about $4.5 billion in “timing shifts” Farm bill inertia (many groups want minor changes) “High” price and farm income expectations (it different this time, you’ll see) –Shades of 1996 price conditions

9. APCA Are the Reasons for the “High” prices “Short-Term” or “Long-Term?” Price levels due to two sets of events –Ethanol and accompanying conniptions in 2007 and 2008 –Current-year drastic yield shortfalls in the former Soviet Union and US Will such disruptions conveniently continue for 5 or more years? –Maybe, if recent weather/climate is the norm –NO, if history is any guide Production expands greatly and prices crash

10. APCA Policy for All Seasons Need Grain/Oilseed/Food Reserves –In either of the two scenarios we must be prepared for extreme weather shocks Keep productive capacity well ahead of demand (again in either case, more so if climate change) Provide means to hold arable land in rotating fallow during periods of overproduction (if history rules) –Easy to underestimate supply response 100s of millions of acres still available on several continents Multinationals delivers yield boosting inputs to all

11. APCA Parting Comments Direct payments never made sense Using insurance as a safety net for prices is a flawed concept Re-separate the safety nets for yield (which is random, not really but kind of) and for price –Let FSA provide a single safety net for yields –Re-establish a comprehensive price stabilization program for major crops Major crop exports –Shockingly unimpressive for 25 years –Not likely to change (despite same blue-sky rhetoric)

12. APCA 8 Crop 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

13. APCA Thank You

14. 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