rethinking us agricultural policy: changing course to secure farmer livelihoods worldwide daryll e....
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RethinkingUSAgriculturalPolicy:Changing Course toSecure FarmerLivelihoods Worldwide
Daryll E. RayDaniel G. De La Torre
UgarteKelly J. Tiller
Agricultural Policy Analysis CenterThe University of Tennessee
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Agriculture: In a Policy-Caused Agriculture: In a Policy-Caused Economic CrisisEconomic Crisis
• US commodity prices have plummeted
• Lower US prices triggered low prices in international ag commodity markets
• Accusations of US dumping
• Countries in the South unable to neutralize impacts of low prices
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US Six Cereals and FAO US Six Cereals and FAO Cereals Price IndicesCereals Price Indices
After 1996• US prices plummeted• World prices followed
50
70
90
110
130
1980 1985 1990 1995 2000
US Six Cereal Price Index
FAO Cereals Price Index
Adoption of 1996 Farm Bill
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US Net Farm Income and Government US Net Farm Income and Government PaymentsPayments
0
10
20
30
40
50
60
1990 1992 1994 1996 1998 2000
Total Government Payments
Net Farm Income
Bill
ion
Dol
lars
Since 1996 US• Government payments are up over 100%• Net Farm Income declined anyway
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US Prices and Cost of ProductionUS Prices and Cost of Production
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
C o r n
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
C o t t o n
Cost of Production
Price
2001-2002 Average
• Prices cover only 60 to 75% for cotton and corn, respectively• Even less for other crops
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Exports and Government PaymentsExports and Government PaymentsIn
dex
: 19
79=
100
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1979 1983 1987 1991 1995 1999
0
5
10
15
20
25
US Export of 8 Major Crops*
US Government Payments
*Adjusted for grain exported in meat
Bill
ion
Do
llars
After skyrocketing government payments following the adoption of the 1996 Farm Bill
• US export volume for 8 major crops remained on flat trend
Simple Correlation: - 0.27
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US Net Export Acreage US Net Export Acreage for 8 Major Cropsfor 8 Major Crops
0
20
40
60
80
100
120
140
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Mil
lio
n A
cres
103.6
76-85 Average86.8
86-95 Average77.0
96-02 Average
27 million fewer acres are currently used for eight major crop exports than in the 1976-1985 period
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Who Benefits from Who Benefits from Low Crop Prices?Low Crop Prices?
• Hurts all crop farmers: US and worldwide
• Users of agricultural commodities benefit by not paying full cost of production:– Large livestock producers
– Agribusinesses: input and machinery, processors, marketing and retailers
– Importers
– Consumers, if marketing system transmits lower prices
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Historical BackgroundHistorical Background
• Longstanding publicly supported research and consequent expansion in productive capacity
• Implementation of policy mechanisms to manage productive capacity and compensate farmers as consumers accrued benefits of productivity gains
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Critical Changes in U.S. PolicyCritical Changes in U.S. Policy• Since 1985 “policy makers” believed that to
allow exports to drive agricultural growth, markets should be allowed to work
• This finally materialized in the 1996 FAIR Act:– Elimination of supply control instrument:
set aside program– Elimination of non-recourse loan as
support price mechanism
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Exports Did Not DeliverExports Did Not DeliverIndex of US Population, US Demand* for 8 Crops and US
Exports* of 8 Crops 1979=100
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
US Population
US Exports
US Domestic Demand
*Adjusted for grain exported in meat
• Exports down to flat for last two decades• Domestic demand increases steadily• Since 1979, exports have NOT been the driving force in US crop markets
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Nature of Crop MarketsNature of Crop Markets• Technology expands output faster than
population and exports expand demand
• Market failure: lower prices do not solve the problem
• Little self-correction on the demand side– People will pay almost anything when food is short
– Low prices do not induce people to eat more
• Little self-correction on the supply side– Farmers tend to produce on all their acreage
– Few alternate uses for most cropland
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Acreage Response toAcreage Response toLower Prices?Lower Prices?
40
60
80
100
120
1996 1997 1998 1999 2000 2001
Ind
ex (
1996
=10
0)
Eight Crop Acreage
Eight Crop Price
Since 1996 US• Eight major crops maintain acreage• Eight-crop price drops by 36%
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40
60
80
100
120
1996 1997 1998 1999 2000
Acreage Response toAcreage Response toLower Prices?Lower Prices?In
dex
(19
96=
100)
Four Crop Acreage
Four Crop Price Adjusted for Coupled and Decoupled Payments
Four Crop Price Adjusted for Coupled Payments Four Crop Price
Since 1996• Aggregate US corn, wheat, soybean, and cotton acreage changed little• While “prices” (take your pick) dropped by 40, 30 or 22%
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Impacts of Low Prices on Farmers Impacts of Low Prices on Farmers in Developing Countriesin Developing Countries
• No protection mechanisms:– Pressure to deregulate economy– Eliminated tariffs in compliance with trade
agreements– Unable to provide payments to farmers
• Mexico: corn price halved and tortilla prices doubled
• Haiti: from self-sufficient to malnourished
• Africa and SE Asia in downward spiral
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Corn Price: US and Corn Price: US and ArgentinaArgentina
0
50
100
150
200
1975 1978 1981 1984 1987 1990 1993 1996 1999
U.S. Corn Price
Argentina Corn Price
Do
llars
per
Met
ric
To
n
US and Argentine prices move together
Simple Correlation: + 0.88
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Continuation of PresentContinuation of Present US Agricultural Policies US Agricultural Policies
• More of the same
• Prices and net farm income will remain largely flat
• Government payments will remain high
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Projected US Prices of Five Major Projected US Prices of Five Major Crops Under Current Farm PolicyCrops Under Current Farm Policy
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2003 2005 2007 2009 2011
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
Corn
Rice
$/b
u.
(co
rn,
soyb
ean
s, w
hea
t)$/
cwt.
(ri
ce)
WheatCotton Soybeans
$/lb
. (c
ott
on
)
• Corn, wheat, soybean prices at $2, $3, $5 per bushel over period
• Some improvement in rice and cotton prices
FAPRIFAPRI
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Projected US Net Farm Income Projected US Net Farm Income and Government Paymentsand Government Payments
0
10
20
30
40
50
60
2003 2005 2007 2009 2011
Total Government Payments
US Net Farm Income
Bill
ion
Dol
lars
• Net Farm Income flat through 2011• Large government payments over full period
FAPRIFAPRI
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Problems with Continuing Problems with Continuing Current US Agricultural PolicyCurrent US Agricultural Policy
• Prices projected to remain below the cost of production
• Continued “dumping”
• Large government payments in the US
• Depressed crop prices worldwide
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Conflicting ViewsConflicting Views: : How to Fix Broken PolicyHow to Fix Broken Policy
• Free Market Solution– Eliminate trade barriers and government
distortions
– Producers and consumers will properly adjust to market signals
• Farmer Oriented Solution– Recognizes unique characteristics of agriculture
– Policy should recognize farmers’ actual behavior
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What If We Did Get Rid of What If We Did Get Rid of SubsidiesSubsidies
• Worldwide price impacts
• US price impacts
• Supporting evidence from other countries:
–Canada–Australia–Mexico
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No US Subsidies: No US Subsidies: Worldwide Price Impacts, 2020Worldwide Price Impacts, 2020
IFPRI - IMPACTIFPRI - IMPACT
0
5
10
15
20
25
Per
cen
t
In 2020, worldwide• Corn price increases by less than 3% over baseline• Wheat price increases by less than 1% over baseline• Rice price increases by less than 2% over baseline
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No US Subsidies: No US Subsidies: US Price Impacts, 2011US Price Impacts, 2011
APAC - POLYSYSAPAC - POLYSYS
0
0.5
1
1.5
2
2.5
Corn Cotton
Baseline No Subsidy
Baseline No Subsidy
Do
llars
per
Bu
shel
or
Po
un
d
Corn prices decline slightly, while cotton prices edge upward
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No US Subsidies: No US Subsidies: US Farm Income Impacts, 2011US Farm Income Impacts, 2011
APAC - POLYSYSAPAC - POLYSYS
0
10
20
30
40
50
60
Net Farm Income Government Payments
Baseline
No Subsidy
Baseline
Bil
lio
n D
oll
ars
No Subsidy
• Net Farm income drops by $12 billion or 25% in 2011
• Government payments drop by $14 billion or 77% in 2011
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Canada: Farmland PlantedCanada: Farmland Planted
0
10
20
30
40
50
60
70
1981 1986 1991 1996 2001
Mil
lio
n A
cres
Wheat
Barley
Canola
Other Grains
Other Oilseeds
• Canada reduced subsidies in 1990s• Eliminated grain transportation subsidies in 1995• Crop mix changed, total acreage remained flat
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Australia: Farmland PlantedAustralia: Farmland Planted
0
10
20
30
40
50
60
1981-85 1986-90 1991-95 1996-00 2001-02
Mil
lio
n A
cres
Wheat
Coarse Grains
Oilseeds
• Australia dramatically reduced wool subsidies in 1991• Acreage shifted from pasture to crops• All the while, prices declined
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Mexico: Farmland PlantedMexico: Farmland Planted
0
5
10
15
20
25
30
35
40
1981-85 1986-90 1991-95 1996-00 2001-02
Mil
lio
n A
cres
Corn
Dry Beans
WheatSorghum
Green Coffee
Sugarcane
• Mexico eliminated or reduced supports in the 1990s• Phased out import quotas under NAFTA• Increased acreage of above selected major crops• Total crop acreage also increases – 256 million acres in 1991, 265 million
acres in 2001
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Farmer-OrientedFarmer-OrientedPolicy BlueprintPolicy Blueprint
• Elimination of Government Payments
• Stock Management
• Set-Aside / Short-Term Land Retirement Program
• Price Support Mechanism
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Farmer-Oriented Blueprint: Farmer-Oriented Blueprint: US Price Impacts, 2011US Price Impacts, 2011
APAC - POLYSYSAPAC - POLYSYS
0
0.5
1
1.5
2
2.5
3
3.5
Corn Cotton
BaselineNo
Subsidy
Farmer-Oriented Blueprint
Baseline
No Subsidy
Farmer-Oriented Blueprint
Do
llars
per
Bu
shel
or
Po
un
d
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Farmer-Oriented Blueprint: Farmer-Oriented Blueprint: US Farm Income Impacts, 2011US Farm Income Impacts, 2011
APAC - POLYSYSAPAC - POLYSYS
0
10
20
30
40
50
60
Net Income Government Payment
Baseline
No Subsidy
Farmer-Oriented Blueprint
Baseline
No Subsidy
Farmer-Oriented BlueprintB
illi
on
Do
llar
s
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Farmer-Oriented Blueprint: Farmer-Oriented Blueprint: US Corn Price VariabilityUS Corn Price Variability
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
2003 2004 2005 2006 2007 2008 2009 2010 2011
dolla
rs p
er b
ushe
l
Higher and more stable corn prices
Baseline
}Price band under Farmer-Oriented Blueprint
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Farmer-Oriented Blueprint: Farmer-Oriented Blueprint: US Net Farm Income VariabilityUS Net Farm Income Variability
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
2003 2004 2005 2006 2007 2008 2009 2010 2011
mill
ion
dolla
rs
Slightly higher and reduced variability in Net Farm Income
Baseline
}Price band under Farmer-Oriented Blueprint
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This Is Only A BlueprintThis Is Only A Blueprint
Alternative means of managing crop production should be considered
• Adding to existing CRP acreage
• Creating a shorter-term CRP-like program
• Energy crops – Could be a win-win-win
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ConclusionsConclusions
• Low price policies benefit agribusinesses, integrated livestock producers, import customers
• US is exporting poverty because it no longer manages supply
• US farmers would produce nearly the same quantity of aggregate crop output over a wide range of subsides
• Trade liberalization, by itself, is not a solution
• A farmer-oriented policy is possible
• Changing US policy alone is not enough, international cooperation is needed
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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