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2012 Farm Bill and Other 2012 Farm Bill and Other IssuesIssues

Harwood SchafferUniversity of Tennessee

Agricultural Policy Analysis Center

Texas Farmers UnionDallas, Texas

January 29, 2011

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Texas AgricultureTexas Agriculture

2009

All Livestock63.9%

All Crops36.1%

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Government PaymentsGovernment Payments• Only for crops

• 1996 Farm Bill was designed to “wean farmers off of government payments”

• From 1990-1998, in Texas, Government Payments were 45.7% of net crop income

• From 1999-2009, in Texas, Government Payments were 61.7% of net crop income

• And that does not count the amount that goes to insurance companies

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Government PaymentsGovernment Payments

• Despite their goals in “Freedom to Farm,” we are more dependent on government payments for than we ever were!

• Only now the government program does not ensure us a minimum price that is close to our cost of production

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Crop PricesCrop Prices• The futures price of a pound of cotton in 2005

ranged from 46¢ to 56 ¢

• In 2010 the futures price of a pound of cotton ranged from 62 ¢ to $1.50

• They tell us that crop prices are on a new plateau since late 2006

• With $1+ cotton, how many acres do you think are going to be planted next year?

• Are we on a new plateau?

• Or is it just a butte with a steep downside?

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2012 Farm Bill2012 Farm Bill

• With high prices the baseline will be low• There are a large number of programs

that do not have a baseline because of budget tricks used in 1998

• Some tricks have also reduced the food stamp side of the agriculture budget

• The new budget rules put in place are draconian so a savings in one place cannot be used to fund something else

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2012 Farm bill2012 Farm bill

• We have a Republican controlled House of Representatives who do not believe government has a role in agriculture

• They are focused on deficit reduction to exclusion of everything else

• They see the Farm Bill as a good place to save money

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2012 Farm Bill2012 Farm Bill• Parallels to 1996

– It is dangerous to write a farm bill in a time of high commodity prices

– We have Republican dominated House with a weakened President who wants to be bipartisan

– We are living in a time of high deficits– Agribusiness voices are heard more clearly

in the halls of Congress that the voices of ordinary farmers

– We risk getting an Agribusiness Bill

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2012 Farm Bill2012 Farm Bill• In a time of high commodity prices a

poor farm bill, any farm bill or no farm bill at all will work just fine

• But let the prices slip and it is “Katie bar the door”

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The 1970s and TodayThe 1970s and Today• A spike in farm commodity prices

• A rapid increase in the cost of production

• The promise of ever growing exports

• The specter of world hunger

• By the late 1970s we saw tractorcades in Washington DC

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1980s and Today1980s and Today• Food and Water Watch told us that farm

foreclosures are becoming a serious problem

• As farm family members lose their jobs in this economy, the farm income is not enough to pay the bills

• It is even happening to large farmers• The USDA response: It is not as bad as

the 1980s so we don’t have to be worried about it.

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Patents of GMOsPatents of GMOs• Dozens are due to expire in the next five

or so years• What will happen to them?• Will generic RR1 seeds become

available?• One farm organization wants the

industry to set the rules• Isn’t that like hiring the fox to guard the

henhouse?

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Patents and GMOs Patents and GMOs • Will farmers be forced to switch to more

expensive second generation technology or will the be able to save seeds?

• Who maintains the trade registrations?• Do the competitors have access to the

data or is it proprietary?• One of the expectations is that patents

make their knowledge available in exchange for parent protection

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Global WarmingGlobal Warming• Roles for farmers in mitigating the

changes– Reduce practices that contribute to

greenhouse gases – switch to conservation tillage

– Engage in soil building which sequesters carbon in the soil in the form of organic matter

– Maintain soil cover– Reduce use of fossil fuels

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Global WarmingGlobal Warming• Be prepared for extreme events

– Look at recent events in Australia and Rio– What we called 100 year floods will happen

more often– Long droughts will happen more often– The average rainfall may change only a little– Your soil is your first protection against both

of these possibilities – build it

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Lost Our Policy BearingsLost 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

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Why Commodity Policy?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

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It’s Lack of Price Responsiveness, It’s Lack of Price Responsiveness, Stu… 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

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Once Upon a Time…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)

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has)(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

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has, cont.)(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

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Promises PromisesPromises PromisesYou say that supply catches up with

demand (and it doesn’t usually take long).Then you say that supply growth

tends to exceed demand growth.But, but, but…What about all that talk…About the coming population

explosion and Double-digit growth in per capita

incomes in Asia, India...

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It’s Easy to Underestimate It’s Easy to Underestimate Supply GrowthSupply Growth

• Let’ begin with the US:– Investment in yield enhancing technology

(300 bu./ac on best land in a few years?—national average a decade or two later??)

– Gradual conversion to cellulosic feedstocks for ethanol production

– Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production

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It’s Easy to UnderestimateIt’s Easy to UnderestimateSupply GrowthSupply Growth

• International supply growth—yield

– Development and adoption of drought/saline/disease resistant crops

– Globalization of agribusiness: Near universal access to the new technologies world-wide

• Narrowing of technology and yield differentials between the developed and developing world

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It’s Easy to Under EstimateIt’s Easy to Under EstimateSupply GrowthSupply Growth

• International supply growth—acreage – Long-run land potentially available 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. -- 10 percent of 3.1 bil. ac. of Savannah land)

• Supply growth has always caught and then surpassed demand growth (and it does not take long)

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The Need for Food ReservesThe Need for Food Reserves

• Supply-Driven Disruptions– Crop-related weather - sporadic– Natural disaster - occasional– Political instability – chronic

• Demand-Driven Disruptions– Unanticipated surge in demand– Usually only three or so per century

• Can occur in conjunction with supply disruptions

• Result– Severe price bubble

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Our Recent Experience (2008)Our Recent Experience (2008)

• Demand surge (ethanol)– Coupled with wheat shortfall in Australia and

Eastern Europe and other cereal shortfalls– Prices of storable agricultural commodities

tripled• Moderately increased food prices in global North• Added 250 million to the 800 million already

facing chronic hunger– Results

• Food riots in over 25 countries• Protection of national food supplies via tariffs,

taxes and embargoes

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This Wasn’t Supposed to HappenThis Wasn’t Supposed to Happen

• Commercials argued they would provide reserves– Government “interference” not needed

• Not to worry– Freer trade ensures availability from one country or

another• Neither assertion true

– Commercials have no incentive to hold stocks– Supply disruptions can affect more than one

supplier (country) in a given year• Countries view food as a national security

issue

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank YouThank You

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