Rethinking
US
Agricultural
Policy:
Changing Course to
Secure Farmer
Livelihoods Worldwide
Daryll E. Ray
Daniel G. De La Torre Ugarte
Kelly J. Tiller
Agricultural Policy Analysis Center
The University of Tennessee
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
APAC
US Six Cereals and FAO
Cereals Price Indices
130
Adoption of
1996 Farm Bill
FAO Cereals
Price Index
110
90
70
US Six Cereal Price Index
50
1980
1985
After 1996
• US prices plummeted
• World prices followed
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1990
1995
2000
US Net Farm Income and
Government Payments
Billion Dollars
60
Net Farm Income
50
40
30
Total Government Payments
20
10
0
1990
1992
1994
1996
1998
Since 1996 US
• Government payments are up over 100%
• Net Farm Income declined anyway
APAC
2000
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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Exports and Government Payments
25
1.6
1.4
20
1.2
1
15
0.8
10
0.6
5
0.4
US Government Payments
0.2
1979
Simple Correlation: - 0.27
0
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
APAC
*Adjusted for grain exported in meat
Billion Dollars
Index: 1979=100
US Export of 8 Major Crops*
US Net Export Acreage
for 8 Major Crops
140
120
Million Acres
100
80
103.6
76-85 Average
60
86.8
86-95 Average
40
77.0
96-02 Average
20
27 million fewer acres are currently used for eight major crop exports
than in the 1976-1985 period
APAC
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
0
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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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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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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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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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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Acreage Response to
Lower Prices?
120
Index (1996=100)
Eight Crop Acreage
100
80
60
Eight Crop Price
40
1996
1997
1998
1999
Since 1996 US
• Eight major crops maintain acreage
• Eight-crop price drops by 36%
APAC
2000
2001
Acreage Response to
Lower Prices?
120
Index (1996=100)
Four Crop Acreage
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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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
APAC
Corn Price: US and Argentina
Dollars per Metric Ton
200
150
Argentina
Corn Price
U.S. Corn Price
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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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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FAPRI
$7.00
$0.70
Rice
$6.00
$0.60
$0.50
$5.00
$4.00
$3.00
Wheat
Cotton
Soybeans
$0.30
$0.20
$2.00
$1.00
$0.10
Corn
$0.00
$0.00
2003
$0.40
2005
2007
2009
2011
•
Corn, wheat, soybean prices at $2, $3, $5 per bushel over period
•
Some improvement in rice and cotton prices
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$/lb. (cotton)
$/bu. (corn, soybeans, wheat)
$/cwt. (rice)
Projected US Prices of Five Major
Crops Under Current Farm Policy
FAPRI
Projected US Net Farm Income and
Government Payments
Billion Dollars
60
US Net Farm Income
50
40
30
Total Government Payments
20
10
0
2003
•
•
APAC
2005
2007
Net Farm Income flat through 2011
Large government payments over full period
2009
2011
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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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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What If We Did Get Rid of
Subsidies
• Worldwide price impacts
• US price impacts
• Supporting evidence from other
countries:
–Canada
–Australia
–Mexico
APAC
IFPRI - IMPACT
No US Subsidies:
Worldwide Price Impacts, 2020
25
Percent
20
15
10
5
0
oa
ilk
G
M
&
p
ee
Sh
try
ul
Po
rk
Po
f
ee
B
e
ic
R
at
he
W
n
or
C
In 2020, worldwide
APAC
t
• 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
APAC - POLYSYS
No US Subsidies:
US Price Impacts, 2011
Dollars per Bushel or Pound
Baseline No Subsidy
2.5
2
1.5
Baseline No Subsidy
1
0.5
0
Corn
Cotton
Corn prices decline slightly, while cotton prices edge upward
APAC
APAC - POLYSYS
No US Subsidies:
US Farm Income Impacts, 2011
60
Billion Dollars
50
Baseline
No
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
APAC
Canada: Farmland Planted
Million Acres
70
60
Other Oilseeds
50
Other Grains
Canola
40
Barley
30
20
Wheat
10
0
1981
•
•
•
APAC
1986
1991
1996
2001
Canada reduced subsidies in 1990s
Eliminated grain transportation subsidies in 1995
Crop mix changed, total acreage remained flat
Australia: Farmland Planted
60
Million Acres
50
Oilseeds
40
Coarse
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
APAC
Mexico: Farmland Planted
40
Sugarcane
Green Coffee
Wheat
Sorghum
35
Million Acres
30
25
Dry Beans
20
15
Corn
10
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
APAC
Farmer-Oriented
Policy Blueprint
• Elimination of Government Payments
• Stock Management
• Set-Aside / Short-Term Land
Retirement Program
• Price Support Mechanism
APAC
APAC - POLYSYS
Farmer-Oriented Blueprint:
US Price Impacts, 2011
FarmerOriented
Blueprint
Dollars per Bushel or Pound
3.5
3
2.5
No
Baseline Subsidy
2
FarmerOriented
No
Blueprint
Baseline Subsidy
1.5
1
0.5
0
Corn
APAC
Cotton
APAC - POLYSYS
Farmer-Oriented Blueprint:
US Farm Income Impacts, 2011
FarmerOriented
Blueprint
60
Baseline
Billion Dollars
50
40
No
Subsidy
30
Baseline
20
No
Subsidy
10
FarmerOriented
Blueprint
0
Net Income
APAC
Government Payment
Farmer-Oriented Blueprint:
US Corn Price Variability
5.50
5.00
dollars per bushel
4.50
4.00
}
3.50
3.00
2.50
2.00
Baseline
1.50
1.00
2003
2004
2005
2006
2007
2008
Higher and more stable corn prices
APAC
2009
2010
2011
Price band under
Farmer-Oriented
Blueprint
Farmer-Oriented Blueprint:
US Net Farm Income Variability
65,000
60,000
55,000
}
million dollars
50,000
45,000
40,000
Price band under
Farmer-Oriented
Blueprint
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
APAC
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
APAC
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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Agricultural Policy Analysis Center
The University of Tennessee
310 Morgan Hall
2621 Morgan Circle
Knoxville, TN 37996-4519
www.agpolicy.org
APAC