1. APCA Common Sense Farm Policy Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center National Farmers 2007 Convention Moline, Illinois January 17, 2007

2. APCA 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

3. APCA 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

4. APCA Ag Policy Did Not Start in 1932 Historic policy of plenty –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

5. APCA 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

6. APCA 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

7. APCA Why Chronic Problems In Ag? Technology typically expands output faster than population and exports expand demand –Much of this technology has been paid for by US taxpayers The growth in supply now is being additionally fueled by –increased acreages in Brazil, etc. –technological advance worldwide

8. APCA Why Chronic Problems In Ag? Lower prices should automatically correct itself –Consumers buy more –Producers produce less –Prices recover—problem solved! But in agriculture lower prices do not solve the problem –Little self-correction on the demand side People do consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

9. APCA What Was That Again? Supply and demand characteristics of aggregate agriculture cause chronic price and income problems –On average supply grows faster than demand (We will discuss ethanol later) –Agriculture cannot right itself when capsized by low prices –(Always year-to-year random variability)

10. APCA 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

11. APCA 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

12. APCA 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

13. APCA 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

14. APCA 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?”

15. APCA China Net Corn Trade China Net Corn Trade What We Expected During Debate of 1996 FB: 1996 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu. 1996 FAPRI Projections

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

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

18. APCA What about Exports? Billion Dollars Bulk Exports Total Agricultural Exports

19. APCA 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

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

21. APCA What About 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 Thousand Metric Tons US Exports Developing Competitors’ Exports

22. APCA Implications for WTO WTO negotiations drastically limit the ability to set domestic farm policy in this and other countries –Seems as if it subscribes to the “What is good for General Motors (multinationals)…” syndrome –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

23. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity will be a worldwide endeavor in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

24. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity will be a worldwide endeavor in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

25. APCA Acreage Response to Lower Prices? Index (1996=100) Four Crop Acreage Four Crop Price Since 1996 “Freedom to Farm” Aggregate US corn, wheat, soybean, and cotton acreage changed little despite a wide fluctuation in price

26. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

27. APCA Worldwide Excess Capacity May Again Be a Long-run Problem (Despite Ethanol) Dramatic yield increases in other countries (and in this country) –Cargill, Monsanto, John Deere, etc., etc., etc. Acreage once in production will be brought back in –Russia, Ukraine and others New Acreage –Brazil –China

28. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current US farm programs are not sustainable US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

29. APCA What Agribusinesses Want Volume (paid flat per bushel rate; sell inputs) Low Prices (low cost of ingredients) Price instability (superior information systems provide profit opportunities) Reduced regulation of production and marketing practices (seller-to and buyer-from beware) More market power over competitors and their customers/suppliers (Want everyone at a competitive disadvantage)

30. APCA Monsanto’s Control of Crop Genetics In 2004, Monsanto’s technology accounts for: –85% of all U.S. soybean acreage –45% of all U.S. corn acreage –76% of all U.S. cotton acreage 84% of all U.S. canola acreage was genetically modified Source: Center for Food Safety

31. APCA Control of U.S. Grains and Oilseeds Cargill, ADM, and Zen-Noh export 81% of U.S. corn ADM, Cargill, Bunge, and AGP control 80% of the U.S. soybean crush Horizon (Cargill and CHS), ConAgra, Cargill, and Cereal Food Processors control 63% of flour milling in the U.S. Source: Mary Hendrickson

32. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to rear its ugly head in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current farm programs provide large share of income US policy alternatives: The preferable (well, preferable in my opinion), the possible and the likely

33. APCA Government Payments as a Percent of Net Farm Income

34. APCA

35. APCA

36. APCA

37. APCA My Question to US Farmers Is: What Are You Going to Do About It? One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin. –And, given the realities of agriculture discussed so far, they hold little promise for the future.

38. APCA My Question to US Farmers Is: What Are You Going to Do About It? One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin. –And, given the realities of agriculture discussed so far, they hold little promise for the future.

39. APCA My Question to US Farmers Is: What Are You Going to Do About It? Must be a mindset change –Producers and farm and commodity organizations must refuse to carry water –Must design policies based on “the realities” not hope or wishful thinking –Work as hard to become independent as we have “worked” to become subservient in the past

40. APCA My Question to US Farmers Is: What Are You Going to Do About It? Did I mention that there must be a mindset change? Everything should be on the table. Take nothing for granted. –Previous programs: DNA testing (seeing what happens when most of them are eliminated) have exonerated most of the “failed programs of the past” –In all cases, do not contradict or ignore any of “the realities” when developing policy

41. APCA From My Perspective… Crop exports did not deliver—will not deliver For crop agriculture, timely free—market self-correction is a fantasy Emerging agricultural powerhouses: Excess capacity is likely to be a worldwide creation in the future Farmers version of the “Concentration” game: Buy inputs from few suppliers and sell output to few buyers Current farm programs provide large share of income US policy alternatives and premises

42. APCA Some Policy Options Continue 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 Insurance/Farm Savings Accounts Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons”

43. APCA Policy-Option Premise Check Export Markets/Global Trade –Mechanisms (and What We Have Done): eliminate all price floors use the bully-pulpit to generate high- export expectations extend trade liberalization –Apparent Premises (faulty in my view): Export markets are very price responsive Competing exporters will reduce production in the face of low prices Importing countries prefer to import rather than produce it themselves US agriculture will be a major beneficiary of trade liberalization

44. APCA 15 Crop Exports for US and Developing Competitors 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 Thousand Metric Tons US Developing Competitors

45. APCA Policy-Option Premise Check Insurance/Farm Saving Accounts –Mechanism: Government subsidies to commercial insurers or provides tax breaks for farmer savings accounts –Apparent Premises (faulty in my view): Low prices are a random event and seldom occur in a string of years Growth in supply and demand are equal –Possible Implications: Income protection ratchets down Land prices would go down Supplemental payments from Congress would skyrocket

46. APCA Policy-Option Premise Check Conservation/Environmental/Rural Development –Mechanism: Shift commodity payments to various kinds of conservation, environmental or rural development activities –Apparent Premises (faulty in my view): Commodity programs address no problem Better to have a broader group of farmers receive the money to achieve important (read real) objectives Farmers believe environmental degradation is a central concern and/or all that matters are WTO rules Payments in one form are as good as another –Implications Does not address the long-standing market characteristics of aggregate crop agriculture Could win a Farm Bill battle but loose the credibility war

47. APCA From My Perspective… Farm Bill needs to address: –Unique characteristics of crop agriculture that result in chronic price/ income problems –Variation in production due to weather and disease –Trade issues like dumping –Environmental and conservation issues –Rural development beyond agriculture

48. APCA From My Perspective… The 2007/2008 Farm Bill needs to include provisions for: –Buffer stocks to provide a reserve supply of grains and seeds in the case of a severe production shortfall and to ensure orderly marketing –Inventory Management to manage acreage utilization in the same way that other industries manage their capacity –Both these provide a means of dealing with supply and demand inelasticity

49. APCA From My Perspective… The 2007/2008 Farm Bill needs to include provisions for: –Bioenergy production to manage acreage utilization without heavy dependence on idling acreage –Keep the land in production so that we don’t pay farmers not to farm –Provide a needed energy source not unlike the horsepower of times past

50. APCA From My Perspective… Merge Ag and Energy Policy –Biofuels recycle atmospheric, not fossil, carbon –Look at crops not in food equation & NOT internationally traded –Switchgrass (as an illustrative example only) Perennial Reduced inputs Multi-year setaside Burned in boilers for electricity Converted to ethanol Less costly than present ag programs

51. APCA In Times of Exploding Demand –The current program will work –Environmental payments will work –Rural developments will work –Any farm The current program will work –NO program at all will work But times of exploding demand always come to an end

52. APCA Rate of Use 0%10%15%20%5%25% Oil Reserves Updated July 2005. Source: International Energy Annual 2003 (EIA), Tables 1.2 and 8.1-O&GJ. Canada’s reserves include tar sands. The United States uses more oil than the next five highest-consuming nations combined. 3% 7% 25 % 7% 3% U.S. Dependence on Foreign Oil

53. APCA Where Could It Be Grown? Logging & Residues Switchgrass Switchgrass (2014, at $50/dt) Ugarte, et al. 2006 (forthcoming). Economic Implications to the Agricultural Sector of Increasing the Production of Biomass Feedstocks to Meet Biopower, Biofuels and Bioproduct Demands. Perlack, R.D., et al. 2005. Biomass as Feedstock for a Bioenergy and Bioproducts Industry: Technical Feasibility of a Billion-Ton Annual Supply.

54. APCA Feedstock for Energy* * Does not include forest harvest

55. APCA What Was That Again? Crop exports did not deliver—will not deliver For crop agriculture, timely free- market self- correction is a fantasy Demand explosions do not last: Excess capacity is likely to again raise its ugly head Carrying water for agribusinesses typically works against farmers’ best interests Need a policy for all seasons

56. APCA Thank You

57. APCA To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edu requesting to be added to APAC’s Policy Pennings listserv Weekly Policy Column