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Ag Policy, Lecture 15 Knutson, 6 th Edition Chapter 7

Ag Policy, Lecture 15 Knutson, 6 th Edition Chapter 7. Target Price Review Policy Evolution 1970-2002 1970’s Market Orientation 1980’s Supply Control 1990’s Budget & Trade Concerns 1996 Farm Bill. Policy Evolution 1970-2002. 1973 Add Target Price

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Ag Policy, Lecture 15 Knutson, 6 th Edition Chapter 7

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  1. Ag Policy, Lecture 15Knutson, 6th Edition Chapter 7 • Target Price Review • Policy Evolution 1970-2002 • 1970’s Market Orientation • 1980’s Supply Control • 1990’s Budget & Trade Concerns • 1996 Farm Bill

  2. Policy Evolution 1970-2002 • 1973 Add Target Price Used in combination with non-recourse loan

  3. Policy Evolution 1970-2002 • 1980’s Depression and tight money policy reduced export demand and ag prices. Much of the decade was focused on supply controls and reducing CCC stocks. • 1985 Authorized the marketing loan

  4. Policy Evolution 1970-2002 • 1990 Budget problems led to making deficiency payments on only 85% of base acres Continued focus on Trade, which meant switching to marketing loans Continued Supply controls

  5. Policy Evolution 1970-2002 • Marketing loans became popular with cotton and rice, but were rarely used with grain commodities. Why?

  6. Policy Evolution 1970-2002 • More Costs savings: Farm Program Yields were frozen in 1985 Base Acres were frozen in 1990

  7. Policy Evolution 1970-2002 Payment Yield 10 year moving average of actual yields 1976-1984 and frozen in 1985. actual ’85 FPY 60’s 70’s 80’s

  8. Policy Evolution 1970-2002 • Leading up to 1996 Farm Bill • High prices in 93, 94, and 95 • Very little dependence on Marketing loan • Small if any deficiency payments • Policy driven production decisions • Required to plant only a % of base acres • Wildcatting: producing outside of gov’t programs • Some thought we had finally reach a market driven (as opposed to policy driven) agriculture

  9. Prior to 1996 Farm Bill Ag Prices 1995 S P TP LR TD

  10. 1996 Farm Bill • 1996 Freedom to Farm Bill • Planting Flexibility • No ARP’s (no longer a supply control) • No Target Price (no deficiency payment) • Created a direct payment (new tool) • Continued marketing loan for cotton & rice • Created marketing loan for wheat, soybean, and feedgrains

  11. 1996 Farm Bill • 1996 Freedom to Farm Why the name? In previous farm bills, participation in deficiency payments, marketing loans, and other program benefits was contingent on planting according to requirements • Cotton had to be planted on cotton base acres • Supply controls often dictated that you could only plant a fraction of your base acres. • The 1996 farm bill created “planting flexibility”

  12. 1996 Farm Bill • Planting Flexibility Program participation was no longer tied to what you plant • You could plant corn on your cotton base acres – corn production would be eligible for marketing loan gains • You could plant wheat on your cotton base acres – and the wheat production would be eligible for marketing loan gains. • Or you could not plant anything at all • In each of these cases you would still receive direct fixed payments (AMTA) for the cotton base acres

  13. 1996 Farm Bill • Direct Payments or Agriculture Market Transition Act (AMTA) Payments • Initiated in place of the Target Price • AMTA Payment = Payment Rate * Base Acres * FPY * 0.85 • Payment Rates were scheduled to decline throughout the life of the bill (2002) • We were “transitioning away from excessive support of agriculture” • Some even said it could be the last farm bill passed (now that you have had this class, you know better. What would have happened if we let the 1996 bill expire in 2002 without creating a new bill?)

  14. 1996 Farm Bill • Direct Payments or Agriculture Market Transition Act (AMTA) Payments Decoupled? Yes AMTA Payment = Payment Rate * Base Acres * FPY * 0.85 • Payment Rate is fixed • Base Acres are fixed • FPY is fixed • And receiving payment is not tied to production

  15. 1996 Farm Bill • Coupled vs. Decoupled • Similar to Hot vs. Cold, there are degrees and variations • Important for trade issues

  16. 1996 Farm Bill • So how did it turn out? • World recession reduced export demand and ag prices • Congress passed 4 ad hoc disaster payments, implemented by paying double the scheduled AMTA payment • Some dubbed a new name “Freedom to Fail” • High Prices (fixed AMTA vs. zero deficiency) seems like a good deal • Low Prices (fixed AMTA vs. Max deficiency) not such a good deal Ag Prices World recession 1995

  17. Lecture 15, Wrap up • Be able to explain the concepts, terms, and process that brought us through the 1996 farm bill, for example • What is planting flexibility? • What significant policy tool was dropped in 1996? What tool took its place? • What is meant by the term “ad hoc disaster payment”? • What are the significant points in the 1973-1996 timeline? What was changed/introduced/dropped? • Why did cotton and rice adopt the marketing loan so readily while other commodities didn’t? • How did “freezing” farm program yields lead to budget savings? • Explain the difference between coupled and decoupled.

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