APCA Farm Policy In a Wilderness Without a Compass (Or GPS) Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Canadian Farm Business Management Council Farm Management Innovation Workshop Ottawa, Ontario May 29, 2007

APCA 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!

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

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

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

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 not consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

APCA 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 with ethanol) –Agriculture cannot right itself when capsized by low prices –(Always year-to-year random variability)

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

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

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

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

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?”

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 FAPRI Projections

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.

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

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

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?

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

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 Multinationals may benefit but maybe not major- crop farmers

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

APCA What Agribusinesses Want Volume (paid flat per bushel rate; sell lots of 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)

APCA Complete This Phrase A commodity policy should… –Be realistic about the way aggregate agricultural markets work –Take into account consumer behavior –Take into account producer behavior –Recognize limited ability of exports to rebalance aggregate agricultural markets –Recognize demand growth seldom outstrips supply growth for long

APCA Decoupled/Direct Payments Examine these using the test I have suggested: –Direct payments— Do not affect consumer behavior Do not result in increased exports Do not result in fewer planted acres when prices are low Are paid out even when farm prices and income are high Same is paid when prices are in the tank

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”

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

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 as much land in production as possible to minimize paying farmers not to farm –Provide a needed energy source not unlike the horsepower of times past

APCA Above All Remember… Worldwide Excess Capacity Will Again Be a Long-Run Problem (Despite Ethanol) –Supply growth has always caught and then surpassed demand growth (and it does not take long ) –This time, the surge in productive capacity will be global

APCA Evaluate Carefully Reason for farm/commodity programs Exports—present and future Importance of agriculture Farm family income In a new era—prices will never again be below…

APCA Thank You

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