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The Setting for 2012 FBThe Setting for 2012 FB

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

2010 NASDA Annual MeetingDover, Delaware

September 19, 2010

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Lost Our Policy BearingsLost Our Policy Bearings• We have forgotten 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

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Why Commodity Policy?Why Commodity Policy?• Agriculture does not behave like our

Econ 101 teachers said it would– Inherent variability – weather and pests are

not problem in non-farm/non-food industries – The total food/agricultural market lacks

quick response to even sharp declines in prices

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It’s Lack of Price Responsiveness, It’s Lack of Price Responsiveness, Stu… Stu…

• Lower prices cause markets to automatically correct, right? Right!– Consumers buy more– Producers produce less– Prices recover—problem solved!

• But in agriculture, lower prices do not cause the same degree of reaction– 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– With little correction prices do not recover

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Once Upon a Time…Once Upon a Time…

• There were farm policies that provided– Floor Prices– Supply management tools– Price stabilization and 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 government-funded insurance schemes• The 2008 FB added another revenue based insurance

scheme (ACRE)

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has)(can and has)

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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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has, cont.)(can and has, cont.)

When demand outstrips supply:– Short-Run

• Crop prices explode• Livestock/dairy 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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Challenging Setting for 2012 FB Challenging Setting for 2012 FB DebateDebate

• Tight Budget– Spending capped at 2008 FB level or less– Craig Jagger, House Ag Com. Econ. Says:

• 38 programs have no baseline budget after 2011—a $9 billion additional cost for 5 years

• Lose about $4.5 billion in “timing shifts”

• Farm bill inertia (many groups want minor changes)

• “High” price and farm income expectations (it different this time, you’ll see)

– Shades of 1996 price conditions

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Are the Reasons for the “High” prices Are the Reasons for the “High” prices “Short-Term” or “Long-Term?” “Short-Term” or “Long-Term?”

• Price levels due to two sets of events– Ethanol and accompanying conniptions in

2007 and 2008– Current-year drastic yield shortfalls in the

former Soviet Union and US• Will such disruptions conveniently

continue for 5 or more years?– Maybe, if recent weather/climate is the norm– NO, if history is any guide

• Production expands greatly and prices crash

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Policy for All SeasonsPolicy for All Seasons• Need Grain/Oilseed/Food Reserves

– In either of the two scenarios we must be prepared for extreme weather shocks

• Keep productive capacity well ahead of demand (again in either case, more so if climate change)

• Provide means to hold arable land in rotating fallow during periods of overproduction (if history rules)

– Easy to underestimate supply response• 100s of millions of acres still available on several

continents• Multinationals delivers yield boosting inputs to all

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Parting CommentsParting Comments• Direct payments never made sense• Using insurance as a safety net for prices

is a flawed concept• Re-separate the safety nets for yield (which is

random, not really but kind of) and for price– Let FSA provide a single safety net for yields– Re-establish a comprehensive price

stabilization program for major crops

• Major crop exports– Shockingly unimpressive for 25 years– Not likely to change (despite same blue-sky rhetoric)

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8 Crop Exports8 Crop Exports

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

1979=1.0

US Population

US Exports

US Domestic Demand

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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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