apca farm policy for the long haul daryll e. ray university of tennessee agricultural policy...

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Farm Policy for the Long Farm Policy for the Long HaulHaul

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

American Corn Growers Association20th Anniversary Convention

Moline, Illinois January 19, 2007

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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 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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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 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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40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004

Acreage Response toAcreage Response toLower Prices?Lower Prices?

Acreage Response toAcreage Response toLower Prices?Lower Prices?

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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• 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 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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• 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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My Question to US Farmers Is: What My Question to US Farmers Is: What Are You Going to Do About It?Are You Going to Do About It?

• One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda– That is exactly what producers have increasingly done since

the mid-eighties!!!

– Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray

– Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin.

– And, given the realities of agriculture discussed so far, they hold little promise for the future.

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My Question to US Farmers Is: What Are My Question to US Farmers Is: What Are You Going to Do About It?You Going to Do About It?

• One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda– That is exactly what producers have increasingly done since

the mid-eighties!!!

– Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray

– Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin.

– And, given the realities of agriculture discussed so far, they hold little promise for the future.

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• Must be a mindset change– Producers and farm and commodity

organizations must refuse to carry water

– Must design policies based on “the realities” not hope or wishful thinking

– Work as hard to become independent as we have “worked” to become subservient in the past

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• Did I mention that there must be a mindset change?

• Everything should be on the table. Take nothing for granted.– Previous programs: DNA testing (seeing what

happens when most of them are eliminated) have exonerated most of the “failed programs of the past”

– In all cases, do not contradict or ignore any of “the realities” when developing policy

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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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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—bring back the nonrecourse loan

– These approaches provide means to deal with the price unresponsiveness of supply and demand

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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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From My Perspective…• Merge Ag and Energy Policy

– Biofuels recycle atmospheric, not fossil, carbon

– Look at crops not in food equation & NOT internationally traded

– Switchgrass (as an illustrative example only)

• Perennial• Reduced inputs• Multi-year setaside• Burned in boilers for electricity• Converted to ethanol• Less costly than present ag programs

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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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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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Conservation Reserve Conservation Reserve ProgramProgram

• Purpose

– Reduce soil loss on highly erodible cropland

– Reduce soil sedimentation

– Improve water quality

– Increase wildlife habitat

• Additional impact

– Reduce production and increase crop prices

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CRP Land by UseCRP Land by Use

Grass – 79.6%

Trees – 6.5% Wetland and Wildlife – 13.7%

Other – 0.2%

Grass is the predominant cover crop for CRP Acreage

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CRP Cover by Location, 2006CRP Cover by Location, 2006 Distribution of Grass and Other CRP Lands

Type of CRP Lands1 Dot = 10,000 acres

Grasslands

Other

Grass cover predominates in the Great Plains and the upper Midwest. Tree cover predominates in the Southeast and the lower Mississippi River Valley

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CRP Acres by LocationCRP Acres by Location

The bulk of CRP acres are located in a wide band from the Dakotas to Texas

CRP ACRES Available in 2015

CRP Acres

Zero

Less than 5 thousand

5 to 50 thousand

50 to 200 thousand

Over 200 thousand

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Elimination of CRP: Crop Acreage, 2015Elimination of CRP: Crop Acreage, 2015

0

20

40

60

80

100

Corn Wheat Soybeans Cotton

Baseline Simulated

Mill

ion

Ac

res

The acreage corn, wheat, soybeans, and cotton increases as a result of the elimination of the CRP. Soybeans show the greatest increase.

+ 2.5

+ 1.5

+ 5.0

+ 0.2

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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

• CRP is the last place to look for more cropland

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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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apca farm policy for the long haul daryll e. ray university of tennessee agricultural policy...

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