AAPPCCAA

Farm PolicyFarm PolicyIn a Wilderness Without a Compass (Or GPS)In a Wilderness Without a Compass (Or GPS)

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Canadian Farm Business Management CouncilFarm Management Innovation Workshop

Ottawa, Ontario May 29, 2007

AAPPCCAA

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!

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

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

demand (Yes, even with ethanol)

– Agriculture cannot right itself when capsized by low prices

– (Always year-to-year random variability)

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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?”

AAPPCCAA

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

AAPPCCAA

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.

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

Implications for the WTO

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

AAPPCCAA

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

AAPPCCAA

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

• Multinationals may benefit but maybe not major-crop farmers

AAPPCCAA

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

AAPPCCAA

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)

AAPPCCAA

Complete This Phrase• A commodity policy should…

– Be realistic about the way aggregate agricultural markets work

– Take into account consumer behavior– Take into account producer behavior– Recognize limited ability of exports to

rebalance aggregate agricultural markets

– Recognize demand growth seldom outstrips supply growth for long

AAPPCCAA

Decoupled/Direct Payments

• Examine these using the test I have suggested:– Direct payments—

• Do not affect consumer behavior• Do not result in increased exports• Do not result in fewer planted acres when

prices are low• Are paid out even when farm prices and

income are high• Same is paid when prices are in the tank

AAPPCCAA

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”

AAPPCCAA

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

AAPPCCAA

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 as much land in production as possible to minimize paying farmers not to farm

– Provide a needed energy source not unlike the horsepower of times past

AAPPCCAA

Above All Remember…Above All Remember…

• Worldwide Excess Capacity Will Again Be a 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

AAPPCCAA

Evaluate Carefully Evaluate Carefully

• Reason for farm/commodity programs

• Exports—present and future

• Importance of agriculture

• Farm family income

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

AAPPCCAA

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

www.agpolicy.org

Thank YouThank You

AAPPCCAA

To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edurequesting to be added to APAC’s Policy Pennings listserv

Weekly Policy ColumnWeekly Policy Column