| 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
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; email@example.com;
Daryll Ray's column is written with the research and assistance
of Harwood D. Schaffer, Research Associate with APAC.