| October 13, 2005: As
I look at the issues that cannot be avoided as we prepare to
lay the groundwork for a discussion of the shape of the 2007
Farm Bill, several things come to mind. The first is the federal
deficit and the second is the pressure that is being put on
WTO negotiators to eliminate agricultural subsidies. These two
factors have the potential to significantly affect the nature
of the 2007 Farm Bill discussion.
While these two issues may seem to be unrelated, one domestic
and the other international, they in fact stem from a common
cause. If crop prices in the 1997-2004 period were at the
same level that they were in early 1996, we wouldn’t
be talking about either one. However, because of low market
prices for the eight major US crops, spending on the farm
program zoomed to over $20 billion a year and recently has
settled back into the mid-teens. Much of the time over the
last nine years, crop prices have been well below the cost
of production. When these crops are sold into export markets
at low prices, farmers and governments around the world accuse
us of dumping our excess production on international markets
at a price that is below the full cost of production. As a
result we have seen a growing chorus of those who, as a part
of WTO negotiations, are calling for the elimination of all
subsidies in the US and other developed countries.
The issue that has to be addressed, then, is the part that
recent US farm policy may have played in bringing about these
low prices. I would argue that the low prices are the consequence
of basing farm policy on an incorrect set of assumptions about
the nature of the agricultural sector, particularly crop agriculture.
Going into the 1996 Farm Bill, it was assumed that (1) the
agricultural sector behaves more like other economic sectors
than it did when farm programs were first adopted in the 1930s;
(2) exports are the key to a prosperous US agricultural sector,
after all 95 percent of the consumers of food live outside
the US; and (3) government farm programs are the problem,
not the solution, and if the government would get out of the
way and allow markets to work, US agriculture would be on
the road to a market-driven prosperity. Let us look at these
one at a time.
In other economic sectors, low prices stimulate two responses—consumers
increase their purchases while manufacturers reduce production
quickly returning the industry to profitability. Low food
prices, however, do not stimulate consumers to increase their
food intake from three meals to five meals a day. Similarly,
it is not in the best interest of individual crop farmers
to measurably reduce their acreage or use of inputs in the
face of lower prices. Any income they receive above the variable
cost of production can be put toward the fixed costs.
US farmers have enjoyed an export driven prosperity three
times in the last century—WWI, WWII, and the mid-to-late
1970s—and none of them were triggered by US farm policy
instruments. These periods of surging exports lasted a total
of no more than 14 years out of the last hundred. Most countries
view their domestic food production in the same way that US
residents view the military, it is a matter of national security.
Most nations that have an adequate amount of arable land would
prefer to grow their own food rather than become dependent
on imports. The level of US exports of crops like corn are
more a function of production variations in other nations
than it is a function of price.
Under government farm programs in effect prior to the adoption
of the 1996 Farm Bill, the non-recourse loan rate set an effective
floor on program crop prices by taking production out of the
commercial market and placing it into government storage.
With the extension of Loan Deficiency Payments (LDP) to crops
like corn, soybeans, and wheat, prices could fall below the
loan rate, farmers could collect the difference between the
posted county price and the loan rate while still retaining
possession of the crop that could then be sold at prices well
below the cost of production. A comparison of corn prices
before and after the implementation of the FAIR Act shows
that for the same year-ending stocks-to-use ratio, prices
in the post 1996 period were 34 cents a bushel lower than
they were when government policy put a floor on corn prices.
Before the adoption of the FAIR Act, government policy worked
in a manner so as to ensure that farmers received the bulk
of their income from the marketplace and at the same time
maintained lower government costs. With a floor on crop prices,
other nations had little reason to accuse the US of dumping.
If a variation of the pre-1996 farm programs were in effect
today, crop prices would be higher, government farm program
costs would be significantly lower, farmers would receive
more of their income from the marketplace, the volume of our
crop exports would be virtually the same as it is today, the
value of our crop exports would be higher, and farmers around
the world would be receiving higher prices for their crops
making the accusations of dumping moot.
For all of their weaknesses, farm policies in effect prior
to 1996 had fewer negative side effects than the policies
in effect today. We would contend that the reason for this
is that the earlier policies took into account the unique
economic characteristics of crop agriculture and were designed
to work both in periods of stable to declining exports and
increasing exports.
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