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So Why Do We Have Farm Policy?So Why Do We Have Farm Policy?

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

ABA National Agricultural Bankers ConferenceMiwaukee, Wisconsin

October 29, 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 1933Ag Policy Did Not Start in 1933

• Historic policy of plenty—all market interventions—never had a free market– 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?• Supply and demand characteristics of

aggregate agriculture cause chronic price and income problems– On average supply grows faster than

demand (Yes, even “after the lovin” of the ethanol craze)

– Agriculture cannot right itself when capsized by low prices. Self-correction does not readily occur. Why? Well because:

• You won’t eat more meals each day• Farmers won’t quit growing so much

– (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 Exports?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?

• 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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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?)

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Long-Term ConsiderationsLong-Term Considerations

• International supply response—yield

– 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-Term ConsiderationsLong-Term Considerations

• International supply response—acreage

– 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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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 the US, Canada and other countries

– 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

• Agribusiness will benefit but not necessarily major-crop farmers in the US or Canada

– With increased/complete access achieved, international commodity markets may greatly/significantly increase trade

– But access—while necessary—may not be sufficient to generate the expected benefits to grain producers in the US and Canada

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Policy DirectionsPolicy Directions• Do 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

• Revenue Insurance/Risk Management Accounts (RMA)/Farm Savings Accounts

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

• Continue with current program with slight modifications

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Status of 2007 Farm BillStatus of 2007 Farm Bill• House

– Rebalance loan rates and target prices; try a revenue insurance program; payment limits changed; three entity role elminated

• Senate

– Average Crop Revenue Program Option (saves $3-$3.5 Bil.)

• No direct payments; $15 per acre instead

• Eliminates loan deficiency payments; AND replaces non-recourse with recourse loans

• Uses state yield estimates and actual prices

– Increased funding for: specialty crops ($1B), nutrition ($4B), conservation ($4B), renewable energy ($1.3B)

– Essentially assumes prices will be fine, yields variation is the real problem

• Conference Committee

– Compromises and changes

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In Times of Exploding Demand– Any farm program will work

– NO program at all will work

• But times of exploding demand always come to an end

• And crop agriculture is no better at adjusting to low prices now than decades ago

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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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