APCA The Evolution of US Agricultural Policy Daryll E. Ray University of Tennessee Agricultural...

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The Evolution of US Agricultural The Evolution of US Agricultural PolicyPolicy

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Kentucky Agricultural Leadership ProgramLexington, Kentucky December 14, 2010

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Lost Our Policy BearingsLost Our Policy Bearings• We seem to not have a clue 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

• We seem to be 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 not to use full capacity in other sectors—typically about 80% 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 is Ag’s Problem!!What is Ag’s Problem!!• Why does Ag get into seemingly

endless price and income problems?

• Econ 101 says markets correct on their own

• In times of low prices or increased inventories: – Consumers buy more– Producers produce less– Viola! Self-correction.

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So What’s Not ConsideredSo What’s Not Considered? ? • FOOD IS DIFFERENT—domestically…

– A biological necessity• People will pay almost anything to get what they need• When prices drop, they don’t buy more• People do not eat four meals a day in response to lower

prices• May change their mix of foods• Add services (Lean Cuisine, eat out, etc.)

– Aggregate domestic demand (quantity demanded) changes very little due to lower prices

Little self-correction from domestic demand

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So What’s Not ConsideredSo What’s Not Considered? ? • FOOD IS DIFFERENT—internationally…

– Food is a national security issue—just like military security is to the US. So …

• Countries want to domestically produce as much of their food staples as possible

• Political considerations– Need to feed the population– Need to provide a living for millions in agriculture– Need an orderly exit of workers out of agriculture

– Exports change much less than expected in response to lower prices

Little self-correction from export demand

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So What’s Not ConsideredSo What’s Not Considered? ? • FOOD IS DIFFERENT—in supply too

– Constrained by biological processes—unlike most manufactured goods

• Limited to annual production periods• Constrained by natural forces

– Weather—temperature, rainfall, hail, length of day– Pests

• As a result, a precisely controlled production environment is not available to crop agriculture

– These realities often overwhelm other influences on crop yields

Little self-correction in supply within season

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So What’s Not ConsideredSo What’s Not Considered? ? • FOOD IS DIFFERENT—in supply too

– Even when prices are low across seasons…• Farmers continue to plant all their acres• Farmers don’t and “can’t afford to” materially reduce their

use of fertilizer, seed, and other “high-yield” inputs• Who farms the land may change• But the essential resource—land—remains in production in

the short-to-medium run

– With continued low prices, farmers continue to produce—depleting equity if required

Little self-correction in aggregate supply from one year to next

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Putting It All Together Now…Putting It All Together Now…

• Technology typically expands output faster than population and exports expand demand– Which results in periodic/chronic downward

pressure on prices

• But in agriculture, the lower prices are not solved in a timely fashion– Little self-correction on the demand side– Little self-correction on the supply side

• Contrary to Econ 101, crop agriculture does not quickly “right-itself” when it capsizes

So THAT’s ag’s problem and reason for commodity policy

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What Was That Again?What Was That Again?

You must recite the following before you are allowed dinner tonight

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

demand (Partly due to public policy)

– Agriculture cannot right itself when capsized by low prices because…

– (Always year-to-year random variability, too)

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Historically—there have beenHistorically—there have beenTwo Two Major Components of Major Components of Farm/Commodity PolicyFarm/Commodity 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 or in other ways compensate farmers for consumers’ accrued benefits of productivity gains

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U.S. Ag Policy Did Not Start in 1932U.S. Ag 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

– Plus legal and other institutional structures

• This policy of plenty often resulted in production outstripping demand

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Historically—there have beenHistorically—there have beenTwo Two Major Components of Major Components of Farm/Commodity PolicyFarm/Commodity 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 or in other ways compensate farmers for consumers’ accrued benefits of productivity gains

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We have dropped the We have dropped the “Managing Plenty” Part“Managing Plenty” Part

• In the past farm policies for grains included:– Floor Prices (Non-recourse loans)

– Annual supply management tools (e.g., set-aside)

– Price stabilization and reserves (e.g., CCC and Farmer-Owned Grain 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 funded insurance schemes• In 2008 added another revenue based insurance scheme

(ACRE)

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic CrisisEconomic Crisis

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

4.45.6

1.32.2

7.74.6

10.2

4.92.2

3.4

4.4

10.9

28.5

30.9

14.7

18.1

7.4

16.228.5

21.6

10.147.39.3

1.8

4.8

47.328.6

32.7

38.9

24.9

31.6

32.2

49.1

15.0

28.213.7

19.6

6.8

29.3

4.3

6.4

16.6 25.1

77.270.1

12.6

23.0

Government Payments as a Percentage of Net Farm Income

1990

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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4.42.9

1.51.0

1.23.5

7.6

4.23.8

2.3

4.3

12.3

26

14.1

12.1

14.2

5.9

11.214.7

8.5

5.516.87.2

1.1

3.8

21.425.3

16.9

21.5

11.2

13.7

50.3

26.5

15.1

21.410.3

26.2

7.0

11.5

4.7

4.2

12.3 16.7

26.667.6

11.6

9


1996

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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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


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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Kentucky Net Farm Income and Kentucky Net Farm Income and Government PaymentsGovernment Payments

Mill

ion

Do

llars

KY Net Farm Income Less Government Payments

Kentucky Net Farm Income

Government Payments were 8.6% of Kentucky Net Farm Income in 1990s; 26.4% in 2000s

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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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When demand outstrips supply:– Short-Run

• Prices explode• Livestock 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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What is the Back Story: Why the Shift What is the Back Story: Why the Shift in US Policyin US Policy

• One element: The 1970s Syndrome• Between early and late 1970s loan rates

were increased substantially and then…• Conventional wisdom: high loan rates

putting a price umbrella over world prices

• 1985 Legislation– Lowered loan rates (Why?)– Introduced marketing loans (rice & cotton)

• What is a marketing loan?• What important shift was represented by this?

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1970s Syndrome1970s Syndrome

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

US Population

US Exports *Adjusted for grain exported in meat

US Domestic Demand

•Soviet Union policy change

•Oil money flowed to banks

•Banks lent money to less developed countries

•Those countries bought food

•Result: Grain import demand exploded

•US had capacity to capture most of the demand.

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What is the Back Story on the Shift in What is the Back Story on the Shift in US PolicyUS Policy

• Background: 1970s Syndrome• Between early and late 1970s loan rates



• 1985 Legislation– Lowered loan rates (Why?)– Introduced marketing loans (rice & cotton)

• What is a marketing loan?• What important shift was represented by this?

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Exports Plummeted Exports Plummeted

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

US Population

US Exports

US Domestic Demand

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• Background: 1970s Syndrome• Between early and late 1970s loan rates



• 1985 Legislation– Lowered loan rates– Introduced marketing loans (Rice and Cotton

– Export Enhancement Program

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• Debate preceding 1996 legislation when:– Crop prices and exports were “high”– Expected both to remain “high” in future

• Increasing per capita incomes worldwide especially in China and Asia in general

• Freer international trade• Convinced US is low-cost producer• Superior infrastructure

– Export-driven prosperity was expected was the conventional wisdom

• In no small part due to China moving from a corn exporter to an importer of corn

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

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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Commodity PoliciesCommodity Policies1985 to Present (cont.)1985 to Present (cont.)

• The 1996 legislation:– Eliminated the acreage diversion programs– Expanded the marketing loan to all crops– Eliminated the target price and target price-

based deficiency payment program– Instituted “decoupled” payments– Instituted planting flexibility

• But China did not follow the script…

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China Net Corn TradeChina Net Corn TradeWhat We Got:

1996 FAPRI Projections of Net Corn Trade

Actual Net Corn Trade

Co

rn E

xp

ort

sC

orn

Im

po

rts

Mil. Bu.

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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

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

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…• Need ag policy for all seasons including:

– 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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The Economic and Political Setting for The Economic and Political Setting for the 2012 Farm Billthe 2012 Farm Bill

• Tight Budget– Spending capped at 2008 FB level

• Less if order comes down from on high (reconciliation)

• More only if find something else to cut (pay as you go)

– Craig Jagger, House Ag Com. Econ. Says:• 37 programs have no baseline budget after 2012—

a $9 to $10 billion additional cost to bring back in– Wetland and Grassland Reserve Programs– SURE “permanent?” disaster program (ends after 2011)– McGovern-Dole International “School-Lunch” program

– Lose about $4.5 billion in “timing shifts”

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The Economic and Political Setting for The Economic and Political Setting for the 2012 Farm Billthe 2012 Farm Bill

• Economic Conditions (Shades of 1996)

– High prices and high incomes (But it’s different this time!)

• Farm Bill Preferences– Keep commodity programs as in the 2008 FB– Some want to redirect “Direct Payments” – Heritage Foundation and others want to:

• Replace subsidies with farmer savings accounts• Eliminate funding for Foreign Agriculture Service• Merge and reduce funding for four of USDA’s

research and outreach agencies– Some say only need global “market access”

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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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