APCA Commodity Policy: Is This What We Signed Up For? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center 2011 National Farmers Union Annual Meeting San Antonio, Texas March 14, 2011

APCA Commodity Policy? For as long as I can remember, I thought commodity policy was about a safety net –I even thought I knew what it meant… Minimize damage to commodity prices/revenues when production outruns demand Protect farmers against catastrophic loses resulting from vagaries of weather

APCA Commodity Policy? In fact, it has been a mission of mine to explain why a safety net is important –Crop markets respond differently than taught in Econ 101 Lack of timely response to low prices on the consumer side—Cheap food does not induce people to eat 5 meals a day Lack of timely response to low prices on the producer side—Who can afford to rent land and leave it idle? Weather-caused variability happens

APCA Commodity Policy? But since the 1985 FB and especially since the 1996’s Freedom to Farm… –Commodity programs have moved away from safety net and price stabilizing concepts –Major policy instruments have been eliminated or made ineffective No price floors, no stabilizing reserve or other supply management instruments

APCA Why the Changes? Changes based on ideas such as… Unleashing grain exports makes price stabilizing policies unnecessary –Reasonably set price supports, reserve programs, set asides… Just get in the way. So… Replace with payments if you must do something –If world trade were perfectly free… Agriculture would need no help of any kind Could get rid of payments, too! On the other hand, making payments when they are not needed is just fine (its WTO legal!)

APCA So How Incredible Is It? Well, how would Congress and the agricultural establishment react to a proposal to raise loan rate levels to: –$1.04 per lb. for cotton (85% of 1.23) –$5.11 per bu. for corn (85% of 6.01) –$11.39 for soybeans (85% of 13.40) Annual cost (say) : $9 billion for the 8 crops –Then add a $5 billion direct payment gift $14 billion from U.S. treasury (when market prices are well above the cost of production)

APCA So How Incredible is it? This year’s crop revenue insurance makes those “price equivalents” available to farmers (who are willing and able to pay their part of the premium) –U.S. taxpayers are underwriting a guarantee of record profits to farmers at a time of 9% unemployment and people are losing their homes –Plus paying $5 billion in direct payments

APCA So How Incredible is it? Direct payments –Are paid even though prices are well north of all costs –Are an embarrassment whether in rural cafes or visiting our city cousins –And yet there are demands to continue them in the next farm bill Why? Well, because otherwise there would be virtually no “baseline” money for farm programs Not because they make sense as a safety net (they don’t, of course—totally inadequate when prices collapse)

APCA So How Incredible is it? Revenue insurance products… –Preferred by agricultural establishment, especially insurance companies and agents –Protect farmers “pure” profits when prices are really high—could cost tens of billions to do so –When (not if) prices fall and remain below the cost of production, revenue insurance products “guarantee” a percentage of those below-cost prices (these guaranteed prices could be well below variable costs) (So whose idea of a “safety net” is this??)

APCA Be prepared for… In the short-run: –Push back on continuing Direct Payments –Further erosion of “good will” if insurance products reimburse farmers for “lost profits” (even if current insurance products are tweaked) –Tough sledding for EQIP and other programs In the longer-run: –Production that explodes and prices that plummet (and prices will likely stay that way for several years) –If Ag goes to “…. in a hand basket,” forget Direct Payment baseline concerns… Emergency payments will be legislated when needed New baseline later

APCA Policy for All Seasons Bring back the “failed policies of past” –Worked better than the upside-down “failed policies of the present” Assume the unexpected will happen –Random policy and weather events do occur— Plan for them with a reserve program Use the reserve and price floors to stabilize prices; minimize use of payments Keep productive capacity well ahead of demand via public technology investment Once reserves are in place, gauge use of productive capacity to match demand

APCA Thank You

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