—by John A. Schnittker and Neil E. Harl*
 
 

Federal farm policies require major changes in 2001 and 2002 if they are to serve producers and the public adequately in the years ahead.

• Commodity price and income policies for grains and oilseeds should be amended to end surplus production and high government costs, reduce existing stocks, establish a reserve program, and increase farm prices. Income payments to farmers should be counter-cyclical to offset low prices, and targeted to support family farmers, not guaranteed regardless of market conditions or financial position. Programs for peanuts and sugar should be aligned with both farm policy and trade policy.

• Conservation and environmental programs for farms and farmland require renewal and broadening of existing authorities. More money is needed for technical assistance to farmers and for stewardship incentives to increase production of public benefits as well as benefits for farmers and landowners.

• Gains from open agricultural trade policies are inherently slow to develop. While continuing to press for access to all world markets, and ending unilateral sanctions affecting food exports, we need to adopt realistic expectations for export expansion. We can export increased, but not unlimited, amounts of farm products in competition with other exporting countries whose crop yields are also rising.

• More effective anti-trust authority and enforcement are needed to ensure competition in both farm product and farm supply markets, to get farmers fair prices when they buy and sell.

• The 600,000 remaining, moderate-sized family farms need to be aided by special income supports not available to larger farms; to offset the scale and technological advantages enjoyed by very large farms.

• Other important policy issues affecting farmers deserving early attention include estate taxes, biotechnology, and better global food policies.

Five key problem areas require major improvements in 2001 and 2002 if farmers, consumers and taxpayers are to be better served by federal farm policies. They are: (1) commodity price and income support programs, where present failures include crop surpluses, low prices, high public costs, and conflict with established trade policies; (2) increased funding of conservation programs, to reduce soil loss and improve water quality, and to foster preservation of open space; (3) development of realistic expectations for export expansion via trade policy changes; (4) reestablishment of competition in agricultural supply and product markets; and (5) developing the will and creating the authority to provide special assistance to small family farmers.

Five other issues also require early attention in the interest of fairness to farmers and recognition of the complex world in which they are competing. They are: (1) amendment of the federal estate tax; (2) increased attention to global food and agricultural policies; (3) rationalization of the role of agricultural biotechnology in domestic and international food affairs; (4) realistic assessment of the impacts of agricultural production technology both at home and abroad, and (5) reconsideration of the potential role of tax-deferred farmer savings accounts in providing a better safety net for farmers.

1. Commodity price and income policies are on a collision course. Rising crop surpluses generated under the FAIR Act of 1996 have built commodity stocks to surplus levels and have driven prices to long-time lows. FAIR Act costs the last three crop years have been around 3 times those projected when it was passed.

• The FAIR Act has a fatal flaw. Existing resources, present and prospective technologies, the tendency of farmers to continue high levels of production no matter how low prices fall, and available domestic and export markets virtually guarantee that crop surpluses and government costs will rise, and prices will fall further under present programs. Only low crop yields arising from adverse weather, or legislative intervention to reduce production will alter that course.

Fundamental changes are also needed in any long-term extension and

amendment of the FAIR Act, as indicated below. This debate is now expected in 2002 but could occur in 2001 if there is strong Presidential and Congressional leadership to amend failing programs.

2. Conservation and environmental programs applicable to agriculture

require both supplemental legislation and increased funding. Farmers need to be encouraged by direct cash incentives to improve their environmental performance, in their own and the public interest. Farmers and landowners cannot by themselves and at their own expense meet the public demand for water and air quality, open space, recreation, and mitigation of climate change. They need more public financing to produce and maintain the rural amenities the public wants and deserves.

Extension of existing programs, with some amendments, increased funding, more technical assistance, expansion and careful targeting of the CRP, and closer coordination with commodity programs can generate environmental products on farmland, producing material gains in water and air quality, and helping to preserve farmland as open space.

3. Agricultural trade policy, the Holy Grail of agricultural politics and the disappointing "fail-safe" of current price and income support programs requires patience in regard to market expansion. The euphoria arising from export gains in the early 1990s was never justified. We need a realistic reassessment of farmer and Congressional expectations for trade expansion in relation to our agricultural productive capacity.

Our export experience under the FAIR Act since 1996 does not support the assumption that we can sell everything we produce at remunerative prices. Low prices and excess supplies have not increased export volume materially, but have caused a sharp decline in the value of agricultural exports. Technological improvements affecting agricultural production travel fast, increasing production worldwide, thereby limiting export growth.

4. Increased concentration of farm supply and marketing companies, driven in part by rapidly evolving technologies in communications and in agriculture is creating new relationships among producers, suppliers, marketing firms and food processors. These changes threaten farmers via reduced competition affecting the cost and availability of inputs such as seeds and chemicals, and product pricing in markets for farm products,

especially cattle, hogs, and poultry, but also for field crops.

Anti-trust authority and enforcement geared to the realities of the agricultural marketplace, transparency in contracts between producers and suppliers and marketers, and improved opportunities for farmers to develop countervailing power via agricultural cooperatives and other organizations represent possible actions in this area.

5. Our family farm structure is composed principally of about 600,000 farms with gross sales of less than $250,000 per year. These farms produce about 30% of all farm products marketed. Around 1.3 million residential and very small farms produce 9% of annual farm marketing, while some 165,000 large farms produce over 60% of all products marketed.

These 600,000 farmers represent the last remaining hope for continuation of commercial family farms. They are at a constant disadvantage to large farmers in respect to the cost of credit, seed, machinery and chemicals, as well as in marketing knowledge and arrangements. This disadvantage can be overcome only by a federal income support program, over and above the income supports payments available to all farmers, targeted to family farmers, probably those with gross sales below $250,000 a year.
 
 

1. Commodity Price and Income Support Programs

Failure of the FAIR Act has been characterized by rising crop surpluses, extremely low prices, and annual federal expenditures far above the level anticipated when the Act was passed. FAIR Act prospects are blighted by an expectation that crop surpluses will rise further, prices will fall further, and government costs will increase. Only severe droughts here or abroad reducing crop yields, or voluntary, counter-surplus acreage reduction programs, instituted via amendments to the FAIR Act whenever surpluses and low prices become unbearable to farmers and the budget, can overcome this flaw in present agricultural policies.

Corn stocks near 2.0 billion bushels, soybean stocks near 400 million

bushels, and wheat stocks near 900 million bushels by mid-2001, are well above the levels generally considered desirable to insure adequate supplies, stabilize prices at remunerative levels without costing consumers unnecessarily, and ensure that most farm income is generated in markets, thereby minimizing government costs. Full production on farms in 2001 and 2002, when present law expires, is expected to increase each of those stockpiles, although weather conditions may alter that prospect.

An emergency program for 2001

To avoid further increases in surplus stocks, to begin to reduce stocks,

and to increase farm prices and reduce government costs in 2001, a 2-part program is suggested, as follows:

• Congress should quickly authorize the Secretary to reduce acreages of grains and oilseeds on a voluntary basis, for payments, subject to continued high stock levels. This authority would apply only when corn and soybean stocks are expected to exceed 10-15 percent of annual disappearance; and wheat Congress stocks are expected to exceed 20-25 percent of a year's disappearance. The producer’s flexibility to plant any mix of crops would be continued.

• Congress should provide authority to reestablish the farmer-owned reserve for grains and oilseeds early in 2001, especially if crop acreage cannot be reduced right away. If existing authority could be used to do that (as was done in 1977, when the farmer-owned reserve was first created by administrative action of Secretary Bergland), the new Secretary of Agriculture should establish the reserve under that authority. This action would isolate a portion of existing stocks from the market, under producer ownership and federal financing, to be marketed only when total stocks decline, or when farm prices rise to a pre-set levels. This would immediately increase farm prices, reducing or ending loan deficiency payments and the need for emergency payments in 2001.

When the FAIR Act expires, it should be amended as follows:

• Replace the fixed Agricultural Market Transition Payments (AMTA) with counter-cyclical marketing loan or target price payments.

• Set marketing loan levels at remunerative but moderate levels, in the area of $2.00 for corn, $4.80 for soybeans, and $3.00 for wheat.

• Provide contingent, voluntary, acreage reduction authority, applicable only when grain and soybean stocks become excessive.

• Establish a long-range grain reserve program to limit the impact of future surplus supplies on prices and government costs, and to help stabilize both domestic and world markets.

• Incorporate the short-term conservation program described above, and strengthen the link between conservation compliance and eligibility for loan deficiency and acreage reduction payments, and eligibility for crop insurance subsidies.

• Provide special income payments to relatively small farmers, over and above what those farmers may be eligible for under regular farm programs.

• Align sugar and peanut price support programs with other commodity programs, and with U.S. trade policies.

Program Operations. Corn and other feed grains, soybeans and other

oilseeds, and wheat acreages may need to be reduced from recent levels by about 10 percent per year for two years to reduce stocks to levels which do not depress prices, unless drought reduces crop yields in 2001. This could be done via a voluntary reduction of the acreage available to grow all grain and oilseed crops on the farm, in order to preserve the popular "flexibility" feature, which enables farmers to plant any crops they choose to plant on the acreage available.

Incentives to reduce crop acreages would be provided either via "diversion payments" attractive enough to achieve the necessary participation, or by other monetary incentives. Incentives would need to be attractive enough to ensure participation by around 2/3 of the crop base, so that production is reduced materially.

It is essential to proceed cautiously with acreage reduction, to avoid a situation where a massive land retirement program coincides with a severe drought. In 1983 and 1988, for example, corn acreage reductions of 26 and 12 percent, respectively, from the base year coincided with yield reductions of 28 and 29%, causing sharp reductions in reserve stocks and large increases in corn prices.

Uncertainty in Crop Production. Farmer response to any overall reduction in the acreage planted to all the crops mentioned above would be somewhat uncertain. Weather effects, and continuation of planting flexibility could affect production. This feature also makes it essential that production adjustment be pursued over several crop seasons, and that marketing loan levels provide appropriate incentives to plant alternative crops, especially corn and soybeans. The soybean loan should be about 2.4 times the corn loan, down from the present 2.78 ratio. Remedying the error of the 1996 Act in setting the soybean loan too high will be difficult. Production incentives arising from marketing loan levels would be less important, however, once crop prices had increased as a result of the new programs.

Expanding Exports While Reducing Stocks. Paradoxically, corn exports in the 1983, 1987, and 1988 seasons (when acreage and production were reduced sharply) were higher than in the preceding year. Higher prices and reduced supplies in the 1983 season still permitted a 65 million bushel increase in exports over 1982. Similar conditions in 1987 coincided with increased exports of 224 million bushels concurrent with acreage reductions. This was followed by a sharp increase in 1988 corn exports, as stocks declined further because of acreage reduction and drought, and as average prices rose.

The doctrine adopted by agribusiness and Congress in recent years, that "acreage reductions have caused other countries to increase acreage, and have given away our export markets," and that "we can use and export as much as we produce" is far from valid. Equally invalid is the notion that large supplies and low prices will expand exports almost automatically. Many factors influence exports. Experience since 1996, with huge supplies of corn, soybeans and wheat and low and declining prices is not encouraging. Feed grain exports in 1997 were below 1996. Volume of exports was slightly higher in 1998 and 1999, but their value was lower. Wheat exports in 1997, 1998, and 1999 were only fractionally higher than in 1996, before FAIR, despite rising supplies and extremely low prices. Soybean exports in 1997 and 1998 fell below the 1996 level, while 1999 exports exceeded it. Competitive prices and adequate supplies are the key to capturing a fair share of export markets for grains and oilseeds. Reserve stocks, properly managed and released, can help protect and expand export markets as well as large surpluses do.

Higher Farm Incomes; Lower Government Costs. Higher grain and oilseed prices plus incentive payments for acreage diversion could increase farm receipts from crops by around $10-15 billion a year in 2001 and $12-18 billion in 2002. This would offset the roughly $6 billion in emergency "market loss" payments and the ($8) billion per year in loan deficiency payments (LDPs) made in 1999 and 2000, but not needed in the years ahead.

Cost savings would be partially offset by increased spending for diversion incentive payments, and storage and related costs for the grain reserve program. Net savings in government costs could be as high as $10 billion per year.
 
 

2. Conservation and Environment.

Lakes and streams are increasingly polluted by runoff. Concentrated animal feeding operations are adding to water and air pollution in may states.

Some farm operations are inherently erosive and polluting, and need to be mitigated or changed.

To counter these adverse environmental impacts, we need:

• An increase of $100 million a year or more in support for conservation technical assistance for the NRCS of USDA.

• Funding of at least $500 million a year for the Environmental Quality Incentives Program (EQIP), to support long term commitments to the production of environmental benefits on farms.

• Amendments to existing agricultural conservation programs to further support federal initiatives, via local actions, to encourage long-term environmental practices on farms.

• An increase in the acreage authorized to be contracted in the CRP, and strong quidelines and adequate funding to ensure that most of the newly contracted acres are devoted to conservation buffers and other intensive environmental practices on farms.

• A strong conservation compliance program linked to acreage reduction, and to eligibility for price and income support payments and crop insurance benefits.

The need for emergency action to reduce crop production in 2001 and posssibly in 2002, and continuation of long-term, contingent acreage reduction authority arises directly from unmet trade expectations. If trade expands rapidly in the years ahead, reducing stocks and raising prices, such authority would not be used.

Trade expansion, by nature, is a long-range project, for which gains are far in the future in most cases. Extended negotiations, continuous monitoring, and commodity supplies at competitive prices will maintain and improve U.S. access to world markets. Realistic expectations in this area will guard against disappointment, as surpluses pile up while exports languish.

The FAIR Act implicitly made trade expansion responsible for clearing U.S. markets of whatever growers produce. This is too heavy a load

for trade policy to carry in the short run. Increased demand for exports of agricultural commodities has not kept pace and probably will not keep pace with increased production. A sober reassessment of trade expansion prospects for the next decade is an essential part of adoption of short-term and long-term price and income support policies.
 
 

4. Increased Concentration in Agribusiness

Unprecedented and growing concentration in input supply and output processing subsectors coupled with vertical integration from the top down are creating a deadly combination for producers who lack economic power. One casualty is free, open and competitive markets as market-based exchanges are replaced by negotiated prices. This applies to growing concentration in meat packing, especially in hogs (steer and heifer slaughter concentration has been at a high level for decades); farm machinery manufacturing; seeds and chemicals (more than $15 billion in acquisitions over the past four years with five firms dominating transgenic hybrid production); fertilizers; grain handling and shipping (particularly in light of the Cargill-Continental Grain merger); and food retailing.

The rapidly growing concentration in food retailing (the five largest firms are now responsible for 42 percent of sales with that figure expected to exceed 60 percent in three years) is causing those who sell to food retailers to merge in order to be better positioned to "do battle" with the food retailers (the recently announced merger of Pillsbury and General Mills specifically cited that as one of the major reasons for the merger). Thus, each successive level of operations below food retailing consolidates in order to be more effective in negotiating with the next level. Farmers, at the base of that process, have traditionally lacked economic power and still do.

If the agricultural sector is to be populated by farmers who are independent entrepreneurs, it is necessary for public policy to intervene on several fronts, to:

• Provide aggressive antitrust oversight over every merger, alliance, consolidation or amalgamation in subsectors displaying unacceptable levels of concentration.
• Evaluate mergers on the basis of impact on producers as well as the impact on consumers (the traditional approach, analytically). It is critical for farmers to have meaningful competitive options for inputs as well as products if the objective of independent entrepreneurs is to be met.
• Endeavor to reduce barriers to entry wherever concentration is at unacceptable levels with particular attention to the patenting of life forms and the use of plant variety protection certificates.
• Encourage producer groups to organize under the Capper-Volstead Act or otherwise to: (1) acquire inputs (2) market outputs and (3) process outputs where that can be done economically.
• Encourage states to enact legislation requiring transparency in contracts, outlawing confidentiality provisions, and mandating provisions assuring fair and equitable treatment for producers.

If family farms are to survive, it will be necessary to pursue four policy initiatives: (1) to halt the structural transformation of the agricultural sector as noted above; (2) to achieve reasonable economic stability for the sector through a rational price and income policy, also as noted above; (3) to assure continuous availability of information to family farmers through an augmented extension function conducted by the land grant universities; and (4) to utilize effective payment targeting and limitations in allocating government benefits to farmers.

It is also important to monitor technological developments and take steps to assure that, insofar as possible, technologies are scale neutral.
 
 

• The Federal Estate Tax. The federal estate and gift tax system should be amended and continued. It plays a role in taxing increases in value that are not subject to income tax; it encourages charitable giving; and it makes a modest contribution toward moderating the dramatic increase in concentration of wealth in recent years.

 

 
 
 

Relatively few operators of farm businesses are affected by the federal estate tax. However, it would be prudent to increase the exemption amount to around $4 million per couple, from the $2.6 million exemption now in force. It is also vital that modest-sized estates receive a complete step-up in the income tax basis at death.

• A Global Food and Agriculture Policy. Globalization of the food system, and the dominant position of the U.S. in food production, suggest that our agricultural policies must encompass global issues. Such policies would include: (a) strong support for Third World economic development. People in these countries are the last frontier for increasing the demand for food. Programs assuring adequate nutrition worldwide would have strong public support; (b) a food reserve to help ensure supplies and relatively stable prices; (c) fair and equitable sharing of germ plasm; (d) exemption of food from any politically-based trade sanctions, as part of overall policies for trade in farm products; and (e) a commitment by all major countries to concerted action to limit supply and price instability, and to increase the flow of development funds to poor nations.
• Rationalization of Concerns Re Agricultural Biotechnology. Biotechnology holds promise for improving the nutritional qualities of foods, to the benefit of consumers. It is vital, however, that the products of biotechnology gain widespread consumer acceptance if the benefits are to be realized. That, in turn, requires science-based regulatory processes which leave no doubt about food safety and threats to the environment. Commercialization processes should be reviewed to ensure, above all else, that a foundation is laid for consumer acceptance of the products of agricultural biotechnology.

 

 
 
 

A thorough Congressional and expert review of the division of autho0rity and responsibility among FDA, EPA, and USDA is needed to ensure effective regulatory oversight.
 

• The Aggregate Supply Impact of Agricultural Technology. The technology pipeline seems likely to assure that agricultural output will consistently outrun the demand for food, except in the occasional years when crop yields are reduced by adverse weather conditions. After making every possible effort to increase commercial exports and to feed hungry people everywhere, we must also act via domestic and international arrangements to prevent collapse of the farm economy and excessive reliance on the federal budget when crop surpluses develop.

• Tax-deferred farmer savings accounts may have merit in helping producers stabilized inter-year incomes, and should be studied and considered as supplements to other aspects of the farm safety net.

—by Neil E. Harl

1.    Agriculture has three huge problems—
        a.    GMOs (including the recent StarLinkÔ controversy).

        b.    The structural transformation of the sector (the deadly combination of concentration plus vertical integration, from the top down).

        c.    Price and income policy.

2.    The Congress faces essentially three choices on price and income policy—

        a.    Continue heavy subsidization for the "program" crops ($28 billion plus in 1999-2000; likely a higher amount in 2000-2001).

                (1)    We may be in the early stages of an economic downturn which could reduce available federal funds.

                (2)    In any event, such a policy distorts resource allocation and results in over-use of resources.

        b.    Reduce or eliminate the federal subsidies.

                (1)    That would result in a sharp reduction in land values (much of the subsidy amount is capitalized into cash rents and capitalized into land values).

                (2)    After the financially devastating adjustment, returns to labor and capital would return to near-normal levels; returns to land would be permanently reduced.

                (3)    Even with the sharp reduction in land values, pressure on prices would continue as supply fluctuates but with technology likely pushing the supply curve to the right faster than demand is likely to increase.

        c.    Return to the Secretary the authorities held from 1938 to 1996 to act as the surrogate CEO of agriculture to manage inventories as other CEOs do.

                (1)    Programs should be designed to encourage resource idling at the periphery and to do so in a market-oriented manner.

                (2)    Programs should take into account the clear trend for technology to boost supply faster than demand is likely to increase.

                (3)    Increases in demand are more likely to occur in developing areas of the world with a high income elasticity of demand. Support for third world development would be nearly universal with an objective of eliminating hunger and assuring an adequate level of nutrition everywhere by enabling consumers to purchase needed food.

3.    Overall objectives of farm policy—

        a.    Reduce the cost to taxpayers from present levels.

        b.    Operate in a market-oriented manner.

        c.    Emphasize Third World development.

        d.    Improve the economic health of rural communities.

        e.    Address environmental objectives.

        f.    Assure a safe and adequate food supply without undue price fluctuation.

4.    The structural transformation of agriculture—

        a.    We should work to assure competitive options for producers in obtaining inputs and marketing products.

        b.    The structure policy should work toward maintaining a sector of independent entrepreneurs.

        c.    Aggressive antitrust oversight is a vital part of the policy.

        d.    Creation of countervailing power on the part of farmers may be a necessary step to countering the market power of input suppliers and output processors, handlers and shippers.

5.    In conclusion—

        a.    Farmers need to start marching to their own drummer, not a drummer bought and paid for by someone else whose interests are to achieve maximum possible production.

        b.    Farm policy is much more than the cost of food at the farm gate.
 

* John A. Schnittker is an Economics Consultant from Santa Ynez, California, e-mail: jasjad@silcom.com.  Neil E. Harl is a Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics at Iowa State University, Ames, Iowa; he is a member of the Iowa Bar.