| September 1, 2005: As
we begin the process of thinking about the shape of the 2007 Farm
Bill, we need a new vision for agricultural commodity policy. This
new policy vision needs to be based on a clear set of principles.
Here is our list:
First, farmers should receive the bulk of their income from the
marketplace and not the government. Government payments should not
be used to subsidize integrated livestock operations, agricultural
commodity processors and exporters with a below the cost of production
supply of grains and oilseeds.
Second, agricultural policy needs to be based on a clear understanding
of the unique characteristics of the marketplace rather than ideology.
In response to low prices, consumers do not switch to eating 4 or
5 meals a day. Similarly, in the short-run, farmers do not reduce
aggregate crop production in response to lower prices.
What this of course means is that producers produce and consumers
consume about the same amount of total agricultural output with
little regard to changes in price. That in fact is the crux of aggregate
crop agriculture’s price and income problems: self-correction
does not occur adequately when inventories swell and prices go into
a free fall, because neither producers nor consumers react much.
Third, the policy should not contribute toward the dumping of agricultural
products on international markets. And, fourth, given the current
budget pressures, the policy should cost less than the $20 billion
that the U.S. currently spends on farm programs.
One concept that could meet such criteria is the merging of agricultural
and energy policy. If some cropland were switched from corn and
soybeans to the production of dedicated bioenergy crops like switchgrass,
the carryover stocks of major crops could be reduced so that farmers
would receive higher prices for their food crops. Instead of relying
on idled acres to manage the production of major crops, the USDA
could subsidize the purchase of perennial biomass crops like switchgrass
by utilities for co-firing with coal to generate electricity.
Support would continue for the production of ethanol from corn
and biodiesel from soybeans and other oilseeds. The growing importance
of these two biofuels, particularly ethanol, has been instrumental
in increasing the domestic demand for these crops at a rate faster
than population growth.
Coupled with a program that diverts some cropland to the production
of dedicated bioenergy crops is the establishment and maintenance
of a buffer stock program of sufficient size as to be able to supply
domestic and export needs in the case of a significant weather or
disease related production shortfall. It is important that the production
of energy crops not result in food shortages. It would be anticipated
that policies would be put in place to establish this buffer stock
before acreage would be diverted from food production to the production
In the short-run, as utilities gear up to be able to burn biomass,
annual setasides could be used to manage the production of major
crops. This would result in higher crop prices.
In the long-run, given advances in crop yields and the increase
in crop acreage, particularly in Brazil, there is the need for the
major crop exporting countries of the world to establish cooperative
policies to manage the production of crops.
Comparing the program with the criteria we outlined at the beginning
of this article, we find that, to the extent that the nonrecourse
loan rate is closer to the cost of production than typical prices
of late, cattle feeders and integrated livestock producers, processors,
and grain exporting firms will have to pay closer to the cost of
production to meet their grain and oilseed needs, otherwise these
commodities will go into the buffer stock program. With these commodities
being sold at or above the nonrecourse loan rate, the issue of dumping
will become moot.
Using the production of dedicated bioenergy crops to manage the
production levels of feed and feed crops will provide an alternative
to idling land as a means of compensating for the lack of price
responsiveness on the part of producers, thus taking into account
the unique characteristics of crop agriculture.
And, as a bonus, studies by our office have shown that such a program
has the potential to cost half or less than current programs while
still maintaining net farm income at acceptable levels.
But the program specifics are really secondary at this point. What
is most important is the development of a consensus on the principles
that should underlie commodity programs. Commodity producers should
be at the center of that discussion. If they are not, others will
fill the void.
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; firstname.lastname@example.org;
Daryll Ray's column is written with the research and assistance of
Harwood D. Schaffer, Research Associate with APAC.