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![Page 1: APCA Designing a Farm Bill While Under the Influence Designing a Farm Bill While Under the Influence of Euphoria Daryll E. Ray University of Tennessee.](https://reader035.fdocuments.us/reader035/viewer/2022062409/56649ed05503460f94bddd3b/html5/thumbnails/1.jpg)
AAPPCCAA
Designing a Farm Bill While Designing a Farm Bill While Under the InfluenceUnder the Influence
of Euphoria
Daryll E. RayUniversity of Tennessee
Agricultural Policy Analysis Center
National Farmers Union105th Anniversary Convention
Orlando, Florida March 4, 2007
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AAPPCCAA
In Times of Exploding Demand
– The current program will work
– Environmental payments will work
– Rural development payments will work
– Any farm program will work
– NO program at all will work
• The key question is:Are high prices the future?
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AAPPCCAA
Are High Prices the Future?Are High Prices the Future?
• The 2007 USDA Baseline projects:
– Corn demand for ethanol• 3.2 billion bushels for 2007—double 2005
(AFBF says 3.5)
• 3.7 billion bushes in 2008 (AFBF says 4.9)
– Over 10 years, baseline prices range from $3.30 to $3.75
– Very low corn stock levels by historical standards
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AAPPCCAA
Logical ImplicationsLogical Implications
• Subsidies for program crops would:
– Largely be replaced by market receipts
– Cease to be a budgetary problem for the Federal Government• Could even transition the direct (AMTA)
payments like 1996 intentions
– Cease to be a stumbling block in trade negotiations
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AAPPCCAA
Short-Term ConsiderationsShort-Term Considerations
• US supply response
– Arbitrage of crop acres in US to corn• March Crop Intentions?
• 7 million additional acres, 10? 11? 12?
– Means less soybeans, wheat, and cotton and more corn
– Some land converted to cropland; more of such conversion in long-run
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AAPPCCAA
Short-Term ConsiderationsShort-Term Considerations
• International supply response– Increased international production
• Mexican crop response: 4 million ac.
• Argentina, Brazil, Africa– All have indicated that $4.00 corn may alter planting
response (Friday DTN story: 230 million bushels more “second season” corn in Brazil – 80 million to be exported)
– Internationally there may be a decreased need for corn imports from the US
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Long-Term ConsiderationsLong-Term Considerations
• US supply response
– Conversion of pasture and grassland—some in CRP?—to crop production
– Investment in yield enhancing technology (300 bu./ac on best land?)
– Conversion of land to cellulosic feedstocks, some of which will not be from current cropland
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Long-Term ConsiderationsLong-Term Considerations
• International supply response
– Development and adoption of drought and saline resistant crops
– Globalization of agribusiness: Near universal access to the new technologies world-wide
• Narrowing of technology and yield differentials between US and the rest of the world
– Same DTN story said Brazilian corn yields will increase:
» 10 percent this year due to better varieties
» an additional 10-20 percent with introduction of GMOs
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Long-Term ConsiderationsLong-Term Considerations
• International supply response
– Long-run land potentially availability for major crops
• Savannah land in Brazil (250 mil. ac. -- USDA says 350)
• Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.)
• Land in former Soviet Union (100 mil. ac.)
• Arid land in China’s west (100 mil. ac. GMO wheat)
• Savannah land in Sub-Saharan Africa (300 mil. ac. --10 percent of 3.1 bil. ac. of Savannah land)
– Easy to underestimate supply growth
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Greatest Short-Term RiskGreatest Short-Term Risk
• Weather event– 2007 US corn carry-out projected to be 5.3%
of utilization (in 2005 it was 17.5%)– For full 10 year USDA baseline, the projected
range is 4.5 and 5.7• Recent historic range has been 10% to 20%
– In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year
– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices
• $6 or more per bushel
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Uncharted TerritoryUncharted Territory
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year ending commercial stocks-to-use ratio for US corn1960-2005 (actual), 2006-2016 (2007 USDA Baseline)
1974 (7.4%) 1983 (5.4%) 1995 (4.6%) 2009 (4.5%)
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AAPPCCAA
Greatest Short-Term RiskGreatest Short-Term Risk
• Weather event– 2007 US corn carry-out projected to be 5.3%
of utilization (in 2005 it was 17.5%)– For full 10 year USDA baseline, the projected
range is 4.5 and 5.7• Recent historic range has been 10% to 20%
– In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year
– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices
• $6 or more per bushel
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Short-Term Impact of $6 CornShort-Term Impact of $6 Corn• Demanders
– Outrage & economic pain by • Livestock and ethanol producers
• Food processors and consumer groups
– “Dependable supplier” issue returns• Can the US really guarantee that export
embargoes will never again be imposed?
• Suppliers– Switch more acres to corn
• US (road-ditch to road-ditch?)
• Brazil, Argentina, Mexico and elsewhere
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Greatest Long-Term RiskGreatest Long-Term Risk
• Acreage and yields greatly increase worldwide—just a question of how fast– With $6 per bushel corn
• Acreage shifts in the short-run
• Longer-run investments that increase acreage and yields
– With $3 to $4 corn or somewhat lower• Increases in acreage & yields but at slower rate
• Lower prices return– Recreate problems for farmers worldwide and for
the US treasury
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On Knife’s EdgeOn Knife’s Edge
• Short-term object lesson?– Need strategic reserves
• Like a properly managed Farmer-Owned-Reserve• Reduce economic dislocation
• Long-term reality?– “New Era?” (fourth “New Era” in my lifetime)
– Supply growth has always caught and then surpassed demand growth (and it does not take long)
• This time, surge in productive capacity will be global
• Need a “Policy for All Seasons”
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Can’t the Market Take the Production Away Can’t the Market Take the Production Away That It Brought Forth?That It Brought Forth?
• 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
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Characteristics of Ag SectorCharacteristics 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
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Characteristics of Ag SectorCharacteristics 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
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Why Chronic Problems In Ag? 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
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Why Chronic Problems In Ag?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
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What Was That Again?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)
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Historically—there have beenHistorically—there have beenTwo Two Major Components of Farm\Major Components of Farm\
Commodity PolicyCommodity 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
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When Policy of PlentyWhen Policy of Plentyis Too Muchis 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
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Traditional Farm Policy Traditional Farm Policy ElementsElements
• 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
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Critical ChangesCritical Changesin U.S. Policyin 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
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Exports, Exports, ExportsExports, 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?”
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China Net Corn TradeChina Net Corn TradeWhat We Expected During Debate of 1996 FB:
-750
-500
-250
0
250
500
750
1000
1994 1996 1998 2000 2002 2004 2006 2008
1996 FAPRI Projections of Net Corn Trade
Co
rn E
xp
ort
sC
orn
Im
po
rts
Mil. Bu.
1996 FAPRI Projections
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China Net Corn TradeChina Net Corn TradeWhat We Got:
-750
-500
-250
0
250
500
750
1000
1994 1996 1998 2000 2002 2004 2006 2008
1996 FAPRI Projections of Net Corn Trade
PS&D Actual Net Corn Trade with 2004 ProjectionCo
rn E
xp
ort
sC
orn
Im
po
rts
Mil. Bu.
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What About ExportsWhat About Exports
Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops1979=1.0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
US Population
US Exports
US Domestic Demand
*Adjusted for grain exported in meat
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What about Exports?
10
20
30
40
50
60
70
1975 1980 1985 1990 1995 2000 2005
Bill
ion
Do
llars
Bulk Exports
Total Agricultural Exports
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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
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Implications for the WTO
• Market access may not be sufficient– May benefit beef and Anjou pears– What about crops covered by the Farm Bill?
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What About Exports?What About Exports?
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel
Th
ou
san
d M
etri
c T
on
s
US Exports
Developing Competitors’ Exports
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Implications for WTOImplications 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
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What Agribusinesses WantWhat 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)
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Whose Policy Is It, Anyway??Whose Policy Is It, Anyway??
• 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
– Tufts University estimated that the poultry and hog industries alone saved $20 billion between 1997 and 2005 because corn and soybean prices were below the cost of production
• Tyson saved $2.6 billion
• Smithfield saved $2.5 billion
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Whose Policy Is It, Anyway??Whose Policy Is It, Anyway??
• 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.
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My Question to US Farmers Is: What My Question to US Farmers Is: What Are You Going to Do About It?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
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My Question to US Farmers Is: What My Question to US Farmers Is: What Are You Going to Do About It?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
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Some Policy OptionsSome 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”
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From My Perspective…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
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AAPPCCAA
From My Perspective…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—bring back the nonrecourse loan
– These approaches provide means to deal with the price unresponsiveness of supply and demand
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AAPPCCAA
From My Perspective…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
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AAPPCCAA
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
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AAPPCCAA
In Times of Exploding Demand– Any farm program will work
– NO program at all will work
• But times of exploding demand always come to an end
• And crop agriculture is no better at adjusting to low prices now than decades ago
• Need a “Policy for all Seasons”
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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
Thank YouThank You