| August 4, 2005: U.S.
farm payments are under pressure because of the need to reduce
the budget deficit and because of the demand by less developed
countries that rich countries, like the U.S., reduce their subsidies
as a part of the World Trade Organization’s Doha Round
of trade negotiations. While at the G-8 summit in Scotland,
attended by eight of the world’s major economic powers,
President Bush suggested that developed countries eliminate
the $112 billion a year that they spend on subsidizing their
farmers. Bush’s goal is to achieve these reductions by
2010. At home, Bush has targeted the farm program for budget
cuts - cuts that have been resisted by farm state senators and
representatives.
While the possibility of getting both the U.S. and the E.U.
to eliminate their farm subsidies as a part of the WTO negotiations
may seem remote, we pose this question: setting aside for
now whether the high-cost, government-payment components of
the current farm programs would need to be replaced with other
program types, what arguments could one use to justify the
elimination of costly government payment programs - in addition
to the too costly part? Last week, we looked at some of the
arguments that might be used to justify the elimination of
the direct payment program under such ground rules. This week,
we will look at Loan Deficiency Payments/Marketing Loan Gains
(LDP/MLG).
First, a little background. LDP/MLGs were initially used
with the cotton and rice crops beginning with the 1985 crop
year and effectively extended to the remaining program crops
in later legislation. These payments were a part of the effort
to make U.S. crops more price competitive in world markets.
The proponents of LDP/MLGs argued that U.S. farm program provisions
established crop prices at levels above those prevailing in
the world marketplace.
The institution of LDP/MLGs allowed the domestic price of
covered crops to fall below the crop’s support price
or non-recourse loan rate with the U.S. government picking
up the tab for the difference. The introduction of LDP/MLGs,
along with the elimination of annual set-asides in the 1996
Farm Bill, means government programs no longer provide a price
floor for program crops. And, since the Farmer-Owned Grain
Reserve was eliminated and the Commodity Credit Corporation
no longer holds significant commodity stocks, prices are not
constrained on the top side either.
Here are some of the effects. Farmers have every incentive
to use all their land to produce as much as possible. With
the elimination of supply control, they, of course, did just
that. With the LDP/MLGs, prices declined and, for a given
stock level, declined more sharply than under previous legislation.
For example, corn price studies completed here at APAC show
that beginning with the 1998 crop year, for the same stocks-to-use
ratio, the price of corn was 35 cents a bushel lower than
it was the prior 25 years. Similarly, at comparable stock
levels, prices for other major crops decline more sharply
under current farm policy than under previous policy regimes.
Demanders have no incentive to bid up prices because they
know farmers will receive the difference between the price
and the loan rate as a payment and, without the possibility
of acreage set aside, they know that next year’s supplies
will likely be ample, so there is no need to buy ahead.
In fact, one of the significant beneficiaries of this program
has been grain and soybean demanders. With the government
supplying half - to more than all - of crop farmers net farm
income in some years, clearly, integrated livestock producers,
food processors, and export customers purchase feed and food
ingredients at substantially below the full-cost.
Viewed this way, it becomes clear that by providing output
at well below the full-cost of production, crop farmers are
passing-through the government subsides to grain and soybean
demanders.
The other major beneficiary of the all-out-production-then-compensate-for-resulting-low-prices
approach is agribusiness. The fact that much to more than
all of crop farmers’ net income is from government payments
means that too much is being produced to fetch prices that
cover the cost of production.
Said another way, less needs to be produced which also means
that less seed, fertilizer, insecticides, herbicides and other
agribusiness supplied inputs are being applied to the nation’s
farms. Similarly, larger than economically-justifiable output
means agribusinesses and others that provide volume-based
services after commodities leave the farmgate are getting
more business than otherwise would be the case. Such services
would include marketing transactions, handling, transportation
and other logistic services.
While those in countries that import our grains and seeds
benefit from low-priced commodities, below-cost-of production
prices can have a devastating affect on farmers in developing
countries. Unlike many developed countries that replace lost
market receipts with payments, countries in Africa and other
developing parts of world can not and do not provide such
protection.
U.S. farm policy has been criticized in the past as market
distorting because of the “high” levels at which
price supports were set in certain periods. Of course, from
an economic theory perspective, market distortions resulting
from policy-caused “low prices” are equally troublesome.
The combination of using LDP/MLGs and the elimination of other
program instruments may have caused program-crop markets to
be more distorted in recent years than in previous times under
other configurations of commodity programs.
Daryll E. Ray holds the Blasingame Chair of Excellence
in Agricultural Policy, Institute of Agriculture, University
of Tennessee, and is the Director of UT's Agricultural Policy
Analysis Center (APAC). (865) 974-7407; Fax: (865) 974-7298;
dray@utk.edu; http://www.agpolicy.org.
Daryll Ray's column is written with the research and assistance
of Harwood D. Schaffer, Research Associate with APAC.
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