1. CAAP Past and Current Policy Responses to Agricultural Price Volatility Daniel De La Torre Ugarte Agricultural Policy Analysis Center University of Tennessee Séminaire Européen Volatilité des marchés agricoles Conséquences et Réponses politiques Le mardi 21 juin 2011 10h00 - 13h00 Au Parlement Européen (salle PHS 7C50)

2. CAAPBackground Price volatility has become a serious problems. Volatility in itself is not new to agriculture. The new element is that instruments to deal with price volatility have been abandoned. Believe that free trade can deal with price volatility. What can we learn from U.S. experience?

3. CAAP The Basis for U.S. Ag. Policy Long standing 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 Government programs were implemented to deal with unique supply and demand characteristics of agricultural markets.

4. CAAP Critical Changes in U.S. Ag Policy Since 1985 “policy makers” believed that exports should drive agricultural growth, consequently markets should be allowed to “work”. This finally materialized in the 1996 FAIR Act: –Elimination of supply management instruments: reserves and set aside programs –Elimination of non-recourse loan as support price mechanism Safety Net shifted from government intervention, to market driven solutions: free trade, decouple payments, crop insurance

5. CAAP U.S. Corn Seasonal Average Price

6. CAAP U.S. Corn Ending Stocks and Price

7. CAAP Contribution of Decouple Payments to the Safety Net Two type of decouple payments, Direct Payments and Countercyclical Payments Direct Payments are fixed, regardless of the price environment. Helpful during low prices, but are they necessary during high prices? Countercyclical Payments, vary according to price and are based on “base acreage”. Protect revenue. Neither address market imbalanced, nor protect consumers or farmers around the world.

8. CAAP Crop Insurance: As a Safety Net? If loss of yield, protection is high during high prices; protection is low if prices are low. In a high price environment, falling market prices trigger indemnities, therefore crop insurance preserve high prices for farmers. In a low price environment, crop insurance indemnities are triggered if prices continue to fall, therefore crop insurance protect from…? Moreover, in a low price environment, is when farmers can afford the least crop insurance.

9. CAAP Trends in Crop Insurance & Commodity Payments Outlays Billion US$

10. CAAP How can Market Regulation contribute to a Safety Net Crop Insurance can protect farmers from losses caused by local events: hail, localized drought or floods, or any other events limited in their ability to impact national/global markets. Government sanctioned/sponsored intervention need to manage market wide impacts. Safety Net should incorporate not only domestic producers, but also consumers, and also farmers and consumers around the world.

11. CAAP Managing Extreme Price Variability 80% Commodity X Time

12. CAAP What Instruments Could be Used Inventory Management or Food Reserves: build reserves when prices are below lower threshold and release them when prices are above upper threshold. Expand mandate/use of crops for agro-fuels at low prices, limit their use at high prices. Implement short or long-term soil reserves if necessary. Aim to make the food reserve system self- financing.

13. CAAP Benefits of Reducing Extreme Variability in Ag Prices Protect farmers from very low prices, in exchange of protecting consumers from very high prices. Extreme prices increases pressure on natural resources. Increase efficient use of resources and promote investments.

14. CAAP Final Remarks Go back to the basics of Agricultural Policy. The objective of Market Regulations could focus in managing extreme variability. Key challenge is to define an adequate Safety Net. Global vs. Domestic? Benefits of Safety Net need to extend beyond farmers and even borders.

15. CAAP Thank You !