APCA Farm Policy’s Historical Roots and Modern Influences Daryll E. Ray University of Tennessee...

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Farm Policy’s Historical Roots and Farm Policy’s Historical Roots and Modern InfluencesModern Influences

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Kentucky Agricultural Leadership Program, Seminar 3 Louisville, Kentucky

March 13, 2007

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Lost Our Policy BearingsLost 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!

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We Seem Willing to Believe that: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

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What for, Farm Programs? What for, Farm Programs? • To address self-correction problems• Not to enrich agribusinesses• Not to provide cheap feed to livestock

integrators• Not to dump commodities on international

markets• Not to crash commodity prices in

developing countries• Not to be a mark for entrepreneurs to pull

government money through loopholes

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Ag Policy Did Not Start in 1932Ag Policy Did Not Start in 1932

• Historic policy of plenty– Land distribution mechanisms – 1620

onward– Canals, railroads, farm to market roads– Land Grant Colleges – 1862, 1890, 1994– Experiment Stations – 1887– Cooperative Extension Service – 1914– Federal Farm Credit Act – 1916

• This policy of plenty often results in production outstripping demand

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Characteristics of Ag SectorCharacteristics of Ag Sector

• Agriculture is different from other economic sectors.On the demand side:– With low food prices—

• People don’t eat more meals a day• They may change mix of foods • Aggregate intake remains relatively stable

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Characteristics of Ag SectorCharacteristics of Ag Sector

• Agriculture is different from other economic sectors.On the supply side:– With low crop prices—

• Farmers continue to plant all their acres• Farmers don’t and “can’t afford to” reduce

their application of fertilizer and other major yield-determining inputs

• Who farms land may change• Essential resource—land—remains in

production in short- to medium-run

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Why Chronic Problems In Ag? Why Chronic Problems In Ag?

• Technology typically 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

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Why Chronic Problems In Ag?Why Chronic Problems In Ag?

• Lower prices should automatically correct itself– Consumers buy more– Producers produce less– Prices recover—problem solved!

• But in agriculture lower prices do not solve the problem– 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

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What Was That Again?What Was That Again?

• Supply and demand characteristics of aggregate agriculture cause chronic price and income problems– On average supply grows faster than

demand (We will discuss ethanol later)

– Agriculture cannot right itself when capsized by low prices

– (Always year-to-year random variability)

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Historically—there have beenHistorically—there have beenTwo Two Major Components of Farm\Major Components of Farm\

Commodity PolicyCommodity Policy

• 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

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When Policy of PlentyWhen Policy of Plentyis Too Muchis Too Much

• Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies:– Supply side – Demand side– Just pay money

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Traditional Farm Policy Traditional Farm Policy ElementsElements

• From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements:

– Base acreage

– Acreage reduction / set-asides

– Nonrecourse loans to support prices

– Government storage of commodities

– Domestic and foreign demand expansion

– Target price for major crop commodities

• Deficiency payments for the difference between target price and market price

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Critical ChangesCritical Changesin U.S. Policyin U.S. Policy

• Since 1985 there has been:

– An export “mindset”

– A movement away from “managing plenty” to supporting income with government payments

• This view culminated in the 1996 FAIR Act:– Elimination of supply control instrument: set

aside program– Replaced “price floors” with government

payments

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Exports, Exports, ExportsExports, Exports, Exports

• For the last quarter century, exports have been heralded—and continue to be by some—as crop agriculture’s salvation

– Exports is the production safety valve that can rebalance agricultural markets

– Exports will grow at accelerating rates

• As Dr. Phil would say, “So, how has that been workin’ for ya?”

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China Net Corn TradeChina Net Corn TradeWhat We Expected During Debate of 1996 FB:

-750

-500

-250

0

250

500

750

1000

1994 1996 1998 2000 2002 2004 2006 2008

1996 FAPRI Projections of Net Corn Trade

Co

rn E

xp

ort

sC

orn

Im

po

rts

Mil. Bu.

1996 FAPRI Projections

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China Net Corn TradeChina Net Corn TradeWhat We Got:

-750

-500

-250

0

250

500

750

1000

1994 1996 1998 2000 2002 2004 2006 2008

1996 FAPRI Projections of Net Corn Trade

PS&D Actual Net Corn Trade with 2004 ProjectionCo

rn E

xp

ort

sC

orn

Im

po

rts

Mil. Bu.

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What About ExportsWhat About Exports

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops1979=1.0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

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US Exported AcresUS Exported Acres

Percentage of US acres used to produce crops for export have declined from a high of 43 percent in 1980 and 1980 to 33 percent for 2006

0%

10%

20%

30%

40%

50%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

% of US Acres Producing Crops for Export

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What About Exports?

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Do

llars per B

ush

el

Corn Exports

Corn Price

Th

ou

san

d M

etri

c T

on

s

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What About Exports?

• Why have exports not fulfilled our hopes?– Export demand is braked by issues of food

security/food sovereignty– International crop production is impacted by:

• Increased acreage: Stage of development• Yield advances: World-wide distribution of

technology• US role as the leading nation in the world

– Politically, economically, technologically, and militarily– And in prices too: Others price off US prices

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Implications for the WTO

• Market access may not be sufficient– May benefit beef and Anjou pears– What about crops covered by the Farm Bill?

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What About Exports?What About Exports?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

Th

ou

san

d M

etri

c T

on

s

US Exports

Developing Competitors’ Exports

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Implications for WTOImplications for WTO• WTO negotiations drastically limit the ability to set

domestic farm policy in this and other countries

– Seems as if it subscribes to the “What is good for General Motors (multinationals)…” syndrome

– To me:

• The whole WTO process shows a complete lack of understanding of the unique characteristics of food and agriculture

• Food security and other social objectives often trump economic considerations in the case of food and agriculture

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From My Perspective…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

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• Emerging agricultural powerhouses: Excess capacity will be a worldwide endeavor in the future




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40

60

80

100

120

1996 1997 1998 1999 2000

Acreage Response toAcreage Response toLower Prices?Lower Prices?

Ind

ex (

1996

=10

0)

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%

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40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004



Ind

ex (

1996

=10

0)

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

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Canada: Farmland PlantedCanada: Farmland Planted

0

10

20

30

40

50

60

70

1981 1986 1991 1996 2001

Mil

lio

n A

cres

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

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Australia: Farmland PlantedAustralia: Farmland Planted

0

10

20

30

40

50

60

1981-85 1986-90 1991-95 1996-00 2001-02

Mil

lio

n A

cres

Wheat

Coarse Grains

Oilseeds

• Australia dramatically reduced wool subsidies in 1991• Acreage shifted from pasture to crops• All the while, prices declined

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• Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future




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Worldwide Excess Capacity May Again Be a Worldwide Excess Capacity May Again Be a Long-run Problem (Despite Ethanol)Long-run Problem (Despite Ethanol)

• Dramatic yield increases in other countries (and in this country)– Cargill, Monsanto, John Deere, etc., etc., etc.

• Acreage once in production will be brought back in– Russia, Ukraine and others

• New Acreage– Brazil– China

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What Agribusinesses WantWhat Agribusinesses Want• Volume (paid flat per bushel rate; sell lots of 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)

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Monsanto’s Control of Crop Genetics

• In 2004, Monsanto’s technology accounts for:

– 85% of all U.S. soybean acreage

– 45% of all U.S. corn acreage

– 76% of all U.S. cotton acreage

• 84% of all U.S. canola acreage was genetically modified

Source: Center for Food Safety

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Control of U.S. Grains and Oilseeds

• Cargill, ADM, and Zen-Noh export 81% of U.S. corn

• ADM, Cargill, Bunge, and AGP control 80% of the U.S. soybean crush

• Horizon (Cargill and CHS), ConAgra, Cargill, and Cereal Food Processors control 63% of flour milling in the U.S.

Source: Mary Hendrickson

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• Current farm programs provide large share of income


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Government Payments as a Government Payments as a Percent of Net Farm IncomePercent of Net Farm Income

12.78.9

5.915.5

6.511.5

19.1

18.613.6

14.0

24.2202.0

53.8

165.2

37.3

87.3

25.0

65.3

148.6

29.0

16.844.712.7

2.8

6.7

69.039.0

42.1

154.3

82.7

60

52.3

85.8

14.2

36.510.8

20.5

12.7

121.5

11.9

3.6

29.2 104.5

129.3102.6

21.8

40.3

Government Payments as a Percentage of Net Farm Income

1999

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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17.820.0

9.813.1

8.113.4

29.8

21.916.1

13.5

21.545.5

105.8

123.0

78.7

55.2

26.2

49.1

105.8

25.5

18.658.614.2

2.1

7.5

88.142.0

55.8

87.0

100.6

56.9

42.6

114.9

16.3

46.915.6

25.5

15.0

97.5

12.3

3.9

36.0 113.3

117.8174.3

28.0

35.3


2000

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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10.96.0

5.018.5

7.79.8

15.3

19.710.5

9.7

19.815.6

102.0

117.9

36.3

40.1

23.3

50.280.3

18.6

17.147.414.6

4.4

5.0

80.437.9

47.6

74.7

70.1

58.3

38.8

83.4

12.2

25.910.8

22.6

10.0

86.3

12.2

5.0

27.5 132.9

127.1118.6

18.4

41.8


2001

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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12.515.4

6.79.2

6.57.2

12.9

8.94.6

7.1

10.820.3

20.4

28.9

15.1

33.5

13.6

23.522.4

10.5

12.122.37.6

9.0

9.6

38.917.1

18.5

18.9

21.1

19.8

15.2

44.0

9.4

17.09.7

16.3

7.1

22.2

4.1

5.1

6.2 26.6

48.039.1

10.0

9.8


2004

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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• Emerging agricultural powerhouses: Excess capacity is likely to be a worldwide creation in the future


• Current farm programs provide large share of income

• US policy alternatives and premises

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Some Policy OptionsSome Policy Options

• Continue the Exports/Trade Liberalization Will Save Us Course – Or All We Really Need is Market Access

• Switch to Green Payments based on Conservation/Environmental/ Rural Development Considerations

• Insurance/Farm Savings Accounts

• Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons”

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Policy-Option Premise CheckPolicy-Option Premise Check• Export Markets/Global Trade/Market Access

– Mechanisms (and What We Have Done): • eliminate all price floors

• use the bully-pulpit to generate high- export expectations

• extend trade liberalization

– Apparent Premises (faulty in my view): • 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

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15 Crop Exports for US and 15 Crop Exports for US and Developing CompetitorsDeveloping Competitors

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005


Th

ou

san

d M

etri

c T

on

s

US

Developing Competitors

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Policy-Option Premise CheckPolicy-Option Premise Check• Insurance/Farm Saving Accounts

– Mechanism: • Government subsidies to commercial insurers or

provides tax breaks for farmer savings accounts

– Apparent Premises (faulty in my view):• 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

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Policy-Option Premise CheckPolicy-Option Premise Check• Conservation/Environmental/Rural Development

– Mechanism: Shift commodity payments to various kinds of conservation, environmental or rural development activities

– Apparent Premises (faulty in my view):

• 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

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From My Perspective…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

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From My Perspective…From My Perspective…• The 2007/2008 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 and to ensure orderly marketing

– Inventory Management to manage acreage utilization in the same way that other industries manage their capacity

– Both these provide a means of dealing with supply and demand inelasticity

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From My Perspective…From My Perspective…

• The 2007/2008 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

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Setting for 2007 FBSetting for 2007 FB

• Commodity policy under “high” price expectations

• Demand euphoria but what about grain supply in the short-run and long-run?

• What is the greatest risk for agriculture in the short-run; in the long run

• Commodity policy implications

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Are High Prices the Future?Are High Prices the Future?

• The 2007 USDA Baseline projects:

– Corn demand for ethanol• 3.2 billion bushels for 2007—double 2005

(AFBF says 3.5)

• 3.7 billion bushes in 2008 (AFBF says 4.9)

– Over 10 years, baseline prices range from $3.30 to $3.75

– Very low corn stock levels by historical standards

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Logical ImplicationsLogical Implications

• Subsidies for program crops would:

– Largely be replaced by market receipts

– Cease to be a budgetary problem for the Federal Government• Could even transition the direct (AMTA)

payments like 1996 intentions

– Cease to be a stumbling block in trade negotiations

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Short-Term ConsiderationsShort-Term Considerations

• US supply response

– Arbitrage of crop acres in US to corn• March Crop Intentions?

• 7 million additional acres, 10? 11? 12?

– Means less soybeans, wheat, and cotton and more corn

– Some land converted to cropland; more of such conversion in long-run

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Short-Term ConsiderationsShort-Term Considerations

• International supply response

– Increased international production• Mexican crop response: 4 million ac.

• Argentina, Brazil, Africa– All have indicated that $4.00 corn may alter planting

response

– Internationally there may be a decreased need for corn imports from the US. That is, US corn exports would decline

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Long-Term ConsiderationsLong-Term Considerations

• US supply response

– Conversion of pasture and grassland—some in CRP?—to crop production

– Investment in yield enhancing technology (300 bu./ac on best land?)

– Conversion of land to cellulosic feedstocks, some of which will not be from current cropland

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– Development and adoption of drought and saline resistant crops

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

• Narrowing of technology and yield differentials between US and the rest of the world

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– Long-run land potentially availability 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)

– Easy to underestimate supply growth

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Greatest Short-Term RiskGreatest Short-Term Risk

• Weather event– 2007 US corn carry-out projected to be 5.3%

of utilization (in 2005 it was 17.5%)– For full 10 year USDA baseline, the projected

range is 4.5 and 5.7• Recent historic range has been 10% to 20%

– In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year

– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices

• $6 or more per bushel

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Uncharted TerritoryUncharted Territory

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Year ending commercial stocks-to-use ratio for US corn1960-2005 (actual), 2006-2016 (2007 USDA Baseline)

1974 (7.4%) 1983 (5.4%) 1995 (4.6%) 2009 (4.5%)

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Greatest Short-Term RiskGreatest Short-Term Risk

• Weather event– 2007 US corn carry-out projected to be 5.3%

of utilization (in 2005 it was 17.5%)– For full 10 year USDA baseline, the projected

range is 4.5 and 5.7• Recent historic range has been 10% to 20%

– In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year

– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices

• $6 or more per bushel

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Short-Term Impact of $6 CornShort-Term Impact of $6 Corn• Demanders

– Outrage & economic pain by • Livestock and ethanol producers

• Food processors and consumer groups

– “Dependable supplier” issue returns• Can the US really guarantee that export

embargoes will never again be imposed?

• Suppliers– Switch more acres to corn

• US (road-ditch to road-ditch?)

• Brazil, Argentina, Mexico and elsewhere

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Greatest Long-Term RiskGreatest Long-Term Risk

• Acreage and yields greatly increase worldwide—just a question of how fast– With $6 per bushel corn

• Acreage shifts in the short-run

• Longer-run investments that increase acreage and yields

– With $3 to $4 corn or somewhat lower• Increases in acreage & yields but at slower rate

• Lower prices return– Recreate problems for farmers worldwide and for

the US treasury

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On Knife’s EdgeOn Knife’s Edge

• Short-term object lesson?– Need strategic reserves

• Like a properly managed Farmer-Owned-Reserve• Reduce economic dislocation

• Long-term reality?– “New Era?” (fourth “New Era” in my lifetime)

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

• This time, surge in productive capacity will be global

• Need a “Policy for All Seasons”

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Rate of Use

FranceS. KoreaBrazilCanadaIndiaRussiaGermanyChina

U.S.Japan

Mexico

0% 10% 15% 20%5% 25%

Oil Reserves

U.S.NigeriaLibyaRussiaVenezuelaU.A.E.KuwaitIraqIranCanadaSaudi Arabia

2%2%

3%5%

6%8%8%

9%10%

14%21%

Updated July 2005. Source: International Energy Annual 2003 (EIA), Tables 1.2 and 8.1-O&GJ. Canada’s reserves include tar sands.

The United States uses more oil than the next five highest-consuming nations combined.3%

3%3%3%3%3%3%

7%

25%7%

3%

U.S. Dependence on Foreign OilU.S. Dependence on Foreign Oil

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U.S. Energy ConsumptionU.S. Energy Consumption

Biomass Consumption Million dry tons/year

Forest products industry Wood residues Pulping liquorsUrban wood & food & other process residuesFuelwood (residential/commercial & electric utilitiesBiofuelsBioproducts

TOTAL

44 52 35 35 18 6

190

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Where Could It Be Grown?Where Could It Be Grown?

Logging & ResiduesLogging & Residues

SwitchgrassSwitchgrass(2014, at $50/dt)Switchgrass Production, 2014

Dry Tons of Switchgrass

Zero

Zero to 300 thousand

Up to 1 million

Up to 2 million

Over 2 million

Ugarte, et al. 2006 (forthcoming). Economic Implications to the Agricultural Sector of Increasing the Production of Biomass Feedstocks to Meet Biopower, Biofuels and Bioproduct Demands.

Perlack, R.D., et al. 2005. Biomass as Feedstock for a Bioenergy and Bioproducts Industry: Technical Feasibility of a Billion-Ton Annual Supply.

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Feedstock for EnergyFeedstock for Energy**

0

200

400

600

800

2006 2011 2016

Mill

ion

Tons

Corn Grain Corn Stover Wheat Straw Energy Crop Wood Residue Soybeans

* Does not include forest harvest

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What Was That Again?What Was That Again?

• Crop exports did not deliver—will not deliver

• For crop agriculture, timely free- market self-

correction is a fantasy

• Demand explosions do not last: Excess capacity

is likely to again raise its ugly head

• Carrying water for agribusinesses typically

works against farmers’ best interests

• Need a policy for all seasons

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High Alert IssuesHigh Alert Issues

• Reason for farm/commodity programs

• Exports—present and future

• Importance of agriculture

• Farm income

• In a “New Era”—prices will never again be below…

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Why Chronic Problems In Ag? Why Chronic Problems In Ag?

• Technology typically 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

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Why Chronic Problems In Ag?Why Chronic Problems In Ag?

• Lower prices should automatically correct itself—Econ 101 says so– Consumers buy more– Producers produce less– Prices recover—problem solved!

• But in agriculture lower prices do not solve the problem– Little self-correction on the demand side

• People do consume significantly more food

– Little self-correction on the supply side• Farmers do not produce significantly less output

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• Farm family income

• In a new era—prices will never again be below…

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What About Exports?

10

20

30

40

50

60

70

1975 1980 1985 1990 1995 2000 2005

Bill

ion

Do

llars

Bulk Exports

Total Agricultural Exports

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What About ExportsWhat About Exports

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops1979=1.0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

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What About Exports?What About Exports?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005


Th

ou

san

d M

etri

c T

on

s

US Exports

Developing Competitors’ Exports

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Farming-dependent counties, 1998-2000. (Source USDA-ERS)

Farming-Dependent CountiesFarming-Dependent Counties

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• Farm Income – Farm family income??– Measures that reflect net income of farm

program crops??– What about usual financial measures?

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• Farm income


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In Times of Exploding Demand

– The current program will work

– Environmental payments will work

– Rural development payments will work

– Any farm program will work

– NO program at all will work

• But times of exploding demand always come to an end

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Worldwide Excess Capacity Will Again Be a Worldwide Excess Capacity Will Again Be a Long-run Problem (Despite Ethanol)Long-run Problem (Despite Ethanol)

• Supply growth has always caught and then surpassed demand growth (and it does

not take long)– This time, the surge in productive capacity will

be global

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Evaluate Carefully Evaluate Carefully






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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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Weekly Policy ColumnWeekly Policy Column

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APCA Farm Policy’s Historical Roots and Modern Influences Daryll E. Ray University of Tennessee...

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