The Rethinking US Agricultural Policy: Changing Course to Secure Farmer Livelihoods Worldwide slideshow gives a brief overview of policy barriers farmers face and smart solutions.

1. Rethinking
US
Agricultural
Policy:
Changing Course to
Secure Farmer
Livelihoods Worldwide
Daryll E. Ray
Daniel G. De La Torre Ugarte Agricultural Policy Analysis Center
Kelly J. Tiller The University of Tennessee

2. Agriculture: In a Policy-Caused
Economic Crisis
• US commodity prices have plummeted
• Lower US prices triggered low prices in
international ag commodity markets
• Accusations of US dumping
• Countries in the South unable to
neutralize impacts of low prices
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3. US Six Cereals and FAO
Cereals Price Indices
130
FAO Cereals Adoption of
Price Index 1996 Farm Bill
110
90
70
US Six Cereal Price Index
50
1980 1985 1990 1995 2000
After 1996
• US prices plummeted
• World prices followed
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4. US Net Farm Income and
Government Payments
60
Net Farm Income
50
Billion Dollars
40
30
Total Government Payments
20
10
0
1990 1992 1994 1996 1998 2000
Since 1996 US
• Government payments are up over 100%
• Net Farm Income declined anyway
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5. US Prices and Cost of Production
2001-2002 Average
$3.00 $1.00
Cost of Production
$2.50
$0.80
$2.00
$0.60
$1.50
$0.40
$1.00
Price
$0.20
$0.50
$0.00 $0.00
Corn Cotton
• Prices cover only 60 to 75% for cotton and corn, respectively
• Even less for other crops
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6. Exports and Government Payments
1.6 25
1.4
US Export of 8 Major Crops* 20
1.2
Index: 1979=100
Billion Dollars
1 15
0.8
10
0.6
5
0.4
US Government Payments Simple Correlation: - 0.27
0.2 0
1979 1983 1987 1991 1995 1999
After skyrocketing government payments following the
adoption of the 1996 Farm Bill
• US export volume for 8 major crops remained on flat trend
*Adjusted for grain exported in meat
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7. US Net Export Acreage
140
for 8 Major Crops
120
100
Million Acres
80
103.6
60 76-85 Average
86.8
40 86-95 Average
77.0
20 96-02 Average
0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
27 million fewer acres are currently used for eight major crop exports
than in the 1976-1985 period
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8. Who Benefits from
Low Crop Prices?
• Hurts all crop farmers: US and worldwide
• Users of agricultural commodities benefit by
not paying full cost of production:
– Large livestock producers
– Agribusinesses: input and machinery,
processors, marketing and retailers
– Importers
– Consumers, if marketing system transmits lower
prices
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9. Historical Background
• Longstanding 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
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10. Critical Changes in U.S. Policy
• Since 1985 “policy makers” believed that to
allow exports to drive agricultural growth,
markets should be allowed to work
• This finally materialized in the 1996 FAIR Act:
– Elimination of supply control instrument:
set aside program
– Elimination of non-recourse loan as
support price mechanism
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11. Exports Did Not Deliver
Index of US Population, US Demand* for 8 Crops and US
Exports* of 8 Crops 1979=100
1.6
1.4
US Domestic Demand
1.2
US Population
1
0.8
0.6
US Exports
0.4
*Adjusted for grain exported in meat
0.2
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
• Exports down to flat for last two decades
• Domestic demand increases steadily
• Since 1979, exports have NOT been the driving force in US crop markets
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12. Nature of Crop Markets
• Technology expands output faster than
population and exports expand demand
• Market failure: lower prices do not solve the
problem
• Little self-correction on the demand side
– People will pay almost anything when food is short
– Low prices do not induce people to eat more
• Little self-correction on the supply side
– Farmers tend to produce on all their acreage
– Few alternate uses for most cropland
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13. Acreage Response to
Lower Prices?
120
Eight Crop Acreage
Index (1996=100)
100
80
60
Eight Crop Price
40
1996 1997 1998 1999 2000 2001
Since 1996 US
• Eight major crops maintain acreage
• Eight-crop price drops by 36%
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14. Acreage Response to
Lower Prices?
120
Four Crop Acreage
Index (1996=100)
100
Four Crop Price Adjusted for
Coupled and Decoupled Payments
80
60
Four Crop Price Adjusted
for Coupled Payments Four Crop Price
40
1996 1997 1998 1999 2000
Since 1996
• Aggregate US corn, wheat, soybean, and cotton acreage changed little
• While “prices” (take your pick) dropped by 40, 30 or 22%
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15. Impacts of Low Prices on Farmers
in Developing Countries
• No protection mechanisms:
– Pressure to deregulate economy
– Eliminated tariffs in compliance with trade
agreements
– Unable to provide payments to farmers
• Mexico: corn price halved and tortilla prices doubled
• Haiti: from self-sufficient to malnourished
• Africa and SE Asia in downward spiral
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16. Corn Price: US and Argentina
200 Argentina
Corn Price
U.S. Corn Price
Dollars per Metric Ton
150
100
50
Simple Correlation: + 0.88
0
1975 1978 1981 1984 1987 1990 1993 1996 1999
US and Argentine prices move together
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17. Continuation of Present
US Agricultural Policies
• More of the same
• Prices and net farm income will
remain largely flat
• Government payments will remain
high
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18. FAPRI
Projected US Prices of Five Major
Crops Under Current Farm Policy
$7.00 $0.70
Rice
$/bu. (corn, soybeans, wheat)
$6.00 $0.60
$5.00 $0.50
$/lb. (cotton)
$/cwt. (rice)
$4.00 Wheat $0.40
Cotton Soybeans
$3.00 $0.30
$2.00 $0.20
$1.00 Corn $0.10
$0.00 $0.00
2003 2005 2007 2009 2011
• Corn, wheat, soybean prices at $2, $3, $5 per bushel over period
• Some improvement in rice and cotton prices
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19. FAPRI
Projected US Net Farm Income and
Government Payments
60
US Net Farm Income
50
Billion Dollars
40
Total Government Payments
30
20
10
0
2003 2005 2007 2009 2011
• Net Farm Income flat through 2011
• Large government payments over full period
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20. Problems with Continuing
Current US Agricultural Policy
• Prices projected to remain below the cost
of production
• Continued “dumping”
• Large government payments in the US
• Depressed crop prices worldwide
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21. Conflicting Views:
How to Fix Broken Policy
• Free Market Solution
– Eliminate trade barriers and government
distortions
– Producers and consumers will properly adjust to
market signals
• Farmer Oriented Solution
– Recognizes unique characteristics of agriculture
– Policy should recognize farmers’ actual behavior
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22. What If We Did Get Rid of
Subsidies
• Worldwide price impacts
• US price impacts
• Supporting evidence from other
countries:
–Canada
–Australia
–Mexico
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23. IFPRI - IMPACT
No US Subsidies:
Worldwide Price Impacts, 2020
25
20
Percent
15
10
5
0
M
W
Ri
Be
Po
Po
Sh
C
or
ilk
he
ce
ef
rk
ul
ee
n
at
tr
p
y
&
In 2020, worldwide
G
oa
• Corn price increases by less than 3% over baseline
t
• Wheat price increases by less than 1% over baseline
• Rice price increases by less than 2% over baseline
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24. APAC - POLYSYS
No US Subsidies:
US Price Impacts, 2011
Baseline No Subsidy
2.5
Dollars per Bushel or Pound
2
1.5
1 Baseline No Subsidy
0.5
0
Corn Cotton
Corn prices decline slightly, while cotton prices edge upward
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25. APAC - POLYSYS
No US Subsidies:
US Farm Income Impacts, 2011
60
Baseline
50 No
Billion Dollars
Subsidy
40
30
Baseline
20
No
Subsidy
10
0
Net Farm Income Government Payments
• Net Farm income drops by $12 billion or 25% in 2011
• Government payments drop by $14 billion or 77% in 2011
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26. Canada: Farmland Planted
70
60 Other Oilseeds
50 Other Grains
Canola
Million Acres
40
Barley
30
20
Wheat
10
0
1981 1986 1991 1996 2001
• Canada reduced subsidies in 1990s
• Eliminated grain transportation subsidies in 1995
• Crop mix changed, total acreage remained flat
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27. Australia: Farmland Planted
60
50
Oilseeds
40 Coarse
Million Acres
Grains
30
20
Wheat
10
0
1981-85 1986-90 1991-95 1996-00 2001-02
• Australia dramatically reduced wool subsidies in 1991
• Acreage shifted from pasture to crops
• All the while, prices declined
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28. Mexico: Farmland Planted
40 Sugarcane
35 Green Coffee
30 Wheat
Sorghum
25
Million Acres
Dry Beans
20
15
10 Corn
5
0
1981-85 1986-90 1991-95 1996-00 2001-02
• Mexico eliminated or reduced supports in the 1990s
• Phased out import quotas under NAFTA
• Increased acreage of above selected major crops
• Total crop acreage also increases – 256 million acres in 1991, 265 million
acres in 2001
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29. Farmer-Oriented
Policy Blueprint
• Elimination of Government Payments
• Stock Management
• Set-Aside / Short-Term Land
Retirement Program
• Price Support Mechanism
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30. APAC - POLYSYS
Farmer-Oriented Blueprint:
US Price Impacts, 2011
Farmer-
Oriented
Blueprint
3.5
Dollars per Bushel or Pound
3 No
Baseline Subsidy
2.5
2
1.5 Farmer-
No Oriented
Blueprint
1 Baseline Subsidy
0.5
0
Corn Cotton
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31. APAC - POLYSYS
Farmer-Oriented Blueprint:
US Farm Income Impacts, 2011
Farmer-
Oriented
60 Blueprint
Baseline
50
No
Subsidy
Billion Dollars
40
30
Baseline Farmer-
20 Oriented
No Blueprint
10 Subsidy
0
Net Income Government Payment
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32. Farmer-Oriented Blueprint:
US Corn Price Variability
5.50
5.00
4.50
4.00
dollars per bushel
3.50
3.00
2.50
2.00
} Price band under
Farmer-Oriented
Blueprint
1.50 Baseline
1.00
2003 2004 2005 2006 2007 2008 2009 2010 2011
Higher and more stable corn prices
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33. Farmer-Oriented Blueprint:
US Net Farm Income Variability
65,000
60,000
55,000
50,000
} Price band under
Farmer-Oriented
million dollars
Blueprint
45,000
40,000 Baseline
35,000
30,000
25,000
20,000
2003 2004 2005 2006 2007 2008 2009 2010 2011
Slightly higher and reduced variability in Net Farm Income
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34. This Is Only A Blueprint
Alternative means of managing crop
production should be considered
• Adding to existing CRP acreage
• Creating a shorter-term CRP-like
program
• Energy crops – Could be a win-win-win
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35. Conclusions
• Low price policies benefit agribusinesses, integrated
livestock producers, import customers
• US is exporting poverty because it no longer manages
supply
• US farmers would produce nearly the same quantity of
aggregate crop output over a wide range of subsides
• Trade liberalization, by itself, is not a solution
• A farmer-oriented policy is possible
• Changing US policy alone is not enough, international
cooperation is needed
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36. 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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