So Why Do We Have Farm Policy?

1. So Why Do We Have Farm Policy? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center ABA National Agricultural Bankers Conference Miwaukee, Wisconsin October 29, 2007

2. Lost 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!

3. 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

4. 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

5. Ag 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

6. Characteristics 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

7. Characteristics 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

8. 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)

9. Historically—there have beenTwo Major Components of Farm\Commodity 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

10. When Policy of Plentyis 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

11. Traditional Farm Policy Elements • 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

12. Critical Changesin 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

13. Exports, 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?”

14. China Net Corn TradeWhat We Expected During Debate of 1996 FB: Mil. Bu. 1996 FAPRI Projections of Net Corn Trade Corn Imports Corn Exports 1996 FAPRI Projections

15. China Net Corn TradeWhat We Got: Mil. Bu. 1996 FAPRI Projections of Net Corn Trade Corn Imports Corn Exports PS&D Actual Net Corn Trade with 2004 Projection

16. Total Agricultural Exports Billion Dollars Bulk Exports What About Exports?

17. What About Exports US Domestic Demand US Population US Exports *Adjusted for grain exported in meat Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0

18. 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

19. Long-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?)

20. Long-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

21. Long-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

22. Implications for the WTO • Market access may not be sufficient • May benefit beef and Anjou pears • What about crops covered by the Farm Bill?

23. What About Exports? US Exports Thousand Metric Tons Developing Competitors’ Exports Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

24. Implications 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

25. Policy 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

26. Status 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

27. 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

28. Thank You

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