RethinkingUSAgriculturalPolicy:Changing Course toSecure FarmerLivelihoods Worldwide

Daryll E. RayDaniel G. De La Torre Ugarte

Kelly J. TillerAgricultural Policy Analysis CenterThe University of Tennessee

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Agriculture: In a PolicyAgriculture: In a Policy--Caused Caused Economic CrisisEconomic 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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US Six Cereals and FAO US Six Cereals and FAO Cereals Price IndicesCereals Price Indices

After 1996• US prices plummeted• World prices followed

50

70

90

110

130

1980 1985 1990 1995 2000

US Six Cereal Price Index

FAO Cereals Price Index

Adoption of 1996 Farm Bill

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US Net Farm Income and US Net Farm Income and Government PaymentsGovernment Payments

0

10

20

30

40

50

60

1990 1992 1994 1996 1998 2000

Total Government Payments

Net Farm Income

Billio

n D

olla

rs

Since 1996 US• Government payments are up over 100%• Net Farm Income declined anyway

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US Prices and Cost of ProductionUS Prices and Cost of Production

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

C o r n$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

C o t t o n

2001-2002 Average

• Prices cover only 60 to 75% for cotton and corn, respectively• Even less for other crops

Cost of Production

Price

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Exports and Government PaymentsExports and Government PaymentsIn

dex:

197

9=10

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1979 1983 1987 1991 1995 19990

5

10

15

20

25

US Export of 8 Major Crops*

US Government Payments

Bill

ion

Dol

lars

Simple Correlation: - 0.27

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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US Net Export Acreage US Net Export Acreage for 8 Major Cropsfor 8 Major Crops

0

20

40

60

80

100

120

140

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Mill

ion

Acr

es

103.676-85 Average

86.886-95 Average

77.096-02 Average

27 million fewer acres are currently used for eight major crop exports than in the 1976-1985 period

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Who Benefits from Who Benefits from Low Crop Prices?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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Historical BackgroundHistorical 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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Critical Changes in U.S. PolicyCritical 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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Exports Did Not DeliverExports Did Not DeliverIndex of US Population, US Demand* for 8 Crops and US

Exports* of 8 Crops 1979=100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

• 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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Nature of Crop MarketsNature 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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Acreage Response toAcreage Response toLower Prices?Lower Prices?

40

60

80

100

120

1996 1997 1998 1999 2000 2001

Inde

x (1

996=

100)

Eight Crop Acreage

Eight Crop Price

Since 1996 US• Eight major crops maintain acreage• Eight-crop price drops by 36%

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Acreage Response toAcreage Response toLower Prices?Lower Prices?

40

60

80

100

120

1996 1997 1998 1999 2000

Inde

x (1

996=

100)

Four Crop Acreage

Four Crop Price Adjusted for Coupled and Decoupled Payments

Four Crop Price Adjusted for Coupled Payments Four Crop Price

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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Impacts of Low Prices on Farmers Impacts of Low Prices on Farmers in Developing Countriesin 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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Corn Price: US and ArgentinaCorn Price: US and Argentina

0

50

100

150

200

1975 1978 1981 1984 1987 1990 1993 1996 1999

U.S. Corn Price

Argentina Corn Price

Dol

lars

per

Met

ric T

on

US and Argentine prices move together

Simple Correlation: + 0.88

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Continuation of PresentContinuation of PresentUS Agricultural PoliciesUS Agricultural Policies

• More of the same• Prices and net farm income will

remain largely flat• Government payments will remain

high

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Projected US Prices of Five Major Projected US Prices of Five Major Crops Under Current Farm PolicyCrops Under Current Farm Policy

FAPRIFAPRI

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

2003 2005 2007 2009 2011$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70

Corn

Rice

$/bu

. (co

rn, s

oybe

ans,

whe

at)

$/cw

t. (r

ice)

WheatCotton Soybeans

$/lb

. (co

tton)

• Corn, wheat, soybean prices at $2, $3, $5 per bushel over period• Some improvement in rice and cotton prices

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Projected US Net Farm Income and Projected US Net Farm Income and Government PaymentsGovernment Payments

FAPRIFAPRI

0

10

20

30

40

50

60

2003 2005 2007 2009 2011

Total Government Payments

US Net Farm Income

Billio

n D

olla

rs

• Net Farm Income flat through 2011• Large government payments over full period

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Problems with Continuing Problems with Continuing Current US Agricultural PolicyCurrent 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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Conflicting ViewsConflicting Views: : How to Fix Broken PolicyHow 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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What If We Did Get Rid of What If We Did Get Rid of SubsidiesSubsidies

• Worldwide price impacts

• US price impacts

• Supporting evidence from other countries:

–Canada–Australia–Mexico

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IFPRI IFPRI -- IMPACTIMPACT

No US Subsidies: No US Subsidies: Worldwide Price Impacts, 2020Worldwide Price Impacts, 2020

0

510

1520

25

CornWheatRiceBeefPorkPoultrySheep & GoatMilk

Perc

ent

In 2020, worldwide• Corn price increases by less than 3% over baseline• Wheat price increases by less than 1% over baseline• Rice price increases by less than 2% over baseline

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No US Subsidies: No US Subsidies: US Price Impacts, 2011US Price Impacts, 2011

APAC APAC -- POLYSYSPOLYSYS

0

0.5

1

1.5

2

2.5

Corn Cotton

Baseline No Subsidy

Baseline No Subsidy

Dol

lars

per

Bus

hel o

r Pou

nd

Corn prices decline slightly, while cotton prices edge upward

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No US Subsidies: No US Subsidies: US Farm Income Impacts, 2011US Farm Income Impacts, 2011

APAC APAC -- POLYSYSPOLYSYS

0

10

20

30

40

50

60

Net Farm Income Government Payments

Baseline

No Subsidy

Baseline

Bill

ion

Dol

lars

No Subsidy

• 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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Canada: Farmland PlantedCanada: Farmland Planted

0

10

20

30

40

50

60

70

1981 1986 1991 1996 2001

Mill

ion

Acr

es

• Canada reduced subsidies in 1990s• Eliminated grain transportation subsidies in 1995• Crop mix changed, total acreage remained flat

Other Oilseeds

Other GrainsCanola

Barley

Wheat

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Australia: Farmland PlantedAustralia: Farmland Planted

0

10

20

30

40

50

60

1981-85 1986-90 1991-95 1996-00 2001-02

Mill

ion

Acr

es

• Australia dramatically reduced wool subsidies in 1991• Acreage shifted from pasture to crops• All the while, prices declined

Oilseeds

Coarse Grains

Wheat

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Mexico: Farmland PlantedMexico: Farmland Planted

0

5

10

15

20

25

30

35

40

1981-85 1986-90 1991-95 1996-00 2001-02

Mill

ion

Acr

es

• 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

Sugarcane

WheatGreen Coffee

SorghumDry Beans

Corn

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FarmerFarmer--OrientedOrientedPolicy BlueprintPolicy Blueprint

• Elimination of Government Payments

• Stock Management

• Set-Aside / Short-Term Land Retirement Program

• Price Support Mechanism

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FarmerFarmer--Oriented Blueprint: Oriented Blueprint: US Price Impacts, 2011US Price Impacts, 2011

APAC APAC -- POLYSYSPOLYSYS

0

0.5

1

1.5

2

2.5

3

3.5

Corn Cotton

BaselineNo

Subsidy

Farmer-Oriented Blueprint

BaselineNo

Subsidy

Farmer-Oriented Blueprint

Dol

lars

per

Bus

hel o

r Pou

nd

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FarmerFarmer--Oriented Blueprint: Oriented Blueprint: US Farm Income Impacts, 2011US Farm Income Impacts, 2011

APAC APAC -- POLYSYSPOLYSYS

0

10

20

30

40

50

60

Net Income Government Payment

Baseline

No Subsidy

Farmer-Oriented Blueprint

Baseline

No Subsidy

Farmer-Oriented BlueprintB

illio

n D

olla

rs

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FarmerFarmer--Oriented Blueprint: Oriented Blueprint: US Corn Price VariabilityUS Corn Price Variability

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

2003 2004 2005 2006 2007 2008 2009 2010 2011

dolla

rs p

er b

ushe

l

Higher and more stable corn prices

Baseline

} Price band under Farmer-Oriented Blueprint

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FarmerFarmer--Oriented Blueprint: Oriented Blueprint: US Net Farm Income VariabilityUS Net Farm Income Variability

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

2003 2004 2005 2006 2007 2008 2009 2010 2011

mill

ion

dolla

rs

Baseline

} Price band under Farmer-Oriented Blueprint

Slightly higher and reduced variability in Net Farm Income

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This Is Only A BlueprintThis 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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ConclusionsConclusions

• 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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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org