Transcript The Current Situation in Crop Agriculture

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
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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!
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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?
• 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 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
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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
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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
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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)
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Historically—there have been
Two 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
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When Policy of Plenty
is 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
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
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• Deficiency payments for the difference between target price
and market price
Critical Changes
in 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, 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 Trade
What We Expected During Debate of 1996 FB:
1000
Corn Imports
750
500
1996 FAPRI Projections
of Net Corn Trade
250
Corn Exports
0
-250
-500
-750
1994
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1996
1998
2000
2002
2004
2006
2008
1996 FAPRI Projections
China Net Corn Trade
What We Got:
1000
Corn Imports
750
500
1996 FAPRI Projections
of Net Corn Trade
250
Corn Exports
0
-250
-500
-750
PS&D Actual Net Corn Trade
with 2004 Projection
1994
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1996
1998
2000
2002
2004
2006
2008
What About Exports?
70
60
Billion Dollars
Total Agricultural Exports
50
40
Bulk Exports
30
20
10
1975
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1980
1985
1990
1995
2000
2005
What About Exports
1.6
1.4
US Domestic Demand
1.2
US Population
1
0.8
0.6
US Exports
*Adjusted for grain exported in meat
0.4
0.2
1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops
1979=1.0
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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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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?)
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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
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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
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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?
160,000
Thousand Metric Tons
140,000
US Exports
120,000
100,000
80,000
Developing Competitors’ Exports
60,000
40,000
20,000
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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
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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
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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
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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
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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
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Thank You
Agricultural Policy Analysis Center
The University of Tennessee
310 Morgan Hall
2621 Morgan Circle
Knoxville, TN 37996-4519
www.agpolicy.org
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