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
US Six Cereals and FAO Cereals Price Indices 130 110 FAO Cereals Price Index Adoption of 1996 Farm Bill 90 70 50 1980 1985 1990 1995 2000 After 1996 US prices plummeted World prices followed US Six Cereal Price Index
US Net Farm Income and Government Payments Billion Dollars 60 50 40 30 20 10 0 Net Farm Income Total Government Payments 1990 1992 1994 1996 1998 2000 Since 1996 US Government payments are up over 100% Net Farm Income declined anyway
US Prices and Cost of Production $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 2001-2002 Average Cost of Production Price $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 C o r n $0.00 C o t t o n Prices cover only 60 to 75% for cotton and corn, respectively Even less for other crops
Exports and Government Payments 1.6 25 Index: 1979=100 1.4 US Export of 8 Major Crops* 1.2 1 0.8 0.6 0.4 US Government Payments 0.2 1979 1983 1987 1991 1995 1999 Simple Correlation: - 0.27 20 15 10 5 0 Billion Dollars After skyrocketing government payments following the adoption of the 1996 Farm Bill US export volume for 8 major crops remained on flat trend *Adjusted for grain exported in meat
US Net Export Acreage 140 for 8 Major Crops 120 100 Million Acres 80 60 103.6 76-85 Average 86.8 40 86-95 Average 77.0 20 96-02 Average 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 27 million fewer acres are currently used for eight major crop exports than in the 1976-1985 period
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
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
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
Exports Did Not Deliver 1.6 Index of US Population, US Demand* for 8 Crops and US Exports* of 8 Crops 1979=100 1.4 1.2 1 US Domestic Demand US Population 0.8 0.6 0.4 US Exports *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
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
Acreage Response to Lower Prices? 120 Eight Crop Acreage Index (1996=100) 100 80 60 40 Eight Crop Price 1996 1997 1998 1999 2000 2001 Since 1996 US Eight major crops maintain acreage Eight-crop price drops by 36%
Acreage Response to Lower Prices? 120 Four Crop Acreage Index (1996=100) 100 80 60 40 Four Crop Price Adjusted for Coupled Payments Four Crop Price Adjusted for Coupled and Decoupled Payments Four Crop Price 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%
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
Corn Price: US and Argentina Dollars per Metric Ton 200 150 100 50 Argentina Corn Price U.S. Corn Price 0 Simple Correlation: + 0.88 1975 1978 1981 1984 1987 1990 1993 1996 1999 US and Argentine prices move together
Continuation of Present US Agricultural Policies More of the same Prices and net farm income will remain largely flat Government payments will remain high
FAPRI Projected US Prices of Five Major Crops Under Current Farm Policy $/bu. (corn, soybeans, wheat) $/cwt. (rice) $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $0.70 Rice $0.60 $0.50 Wheat $0.40 Cotton Soybeans $0.30 $0.20 Corn $0.10 $0.00 2003 2005 2007 2009 2011 $/lb. (cotton) Corn, wheat, soybean prices at $2, $3, $5 per bushel over period Some improvement in rice and cotton prices
FAPRI Projected US Net Farm Income and Government Payments Billion Dollars 60 50 40 30 20 Total Government Payments US Net Farm Income 10 0 2003 2005 2007 2009 2011 Net Farm Income flat through 2011 Large government payments over full period
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
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
What If We Did Get Rid of Subsidies Worldwide price impacts US price impacts Supporting evidence from other countries: Canada Australia Mexico
IFPRI - IMPACT No US Subsidies: Worldwide Price Impacts, 2020 Percent 25 20 15 10 5 0 Corn Rice Wheat Beef Pork Poultry Milk Sheep & Goat In 2020, worldwide 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 2.5 2 1.5 1 0.5 0 Baseline No Subsidy Corn Baseline No Subsidy Cotton Corn prices decline slightly, while cotton prices edge upward
APAC - POLYSYS No US Subsidies: US Farm Income Impacts, 2011 60 Baseline Billion Dollars 50 40 30 20 10 No Subsidy Baseline No Subsidy 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
Canada: Farmland Planted 70 Million Acres 60 50 40 30 20 10 0 Other Oilseeds Other Grains Canola Barley Wheat 1981 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 40 30 20 10 Oilseeds Coarse Grains Wheat 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
Mexico: Farmland Planted Million Acres 40 35 30 25 20 15 10 5 Sugarcane Green Coffee Wheat Sorghum Dry Beans Corn 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
Farmer-Oriented Policy Blueprint Elimination of Government Payments Stock Management Set-Aside / Short-Term Land Retirement Program Price Support Mechanism
APAC - POLYSYS 3.5 Farmer-Oriented Blueprint: US Price Impacts, 2011 Farmer- Oriented Blueprint Dollars per Bushel or Pound 3 2.5 2 1.5 1 0.5 Baseline No Subsidy Baseline No Subsidy Farmer- Oriented Blueprint 0 Corn Cotton
APAC - POLYSYS Billion Dollars Farmer-Oriented Blueprint: US Farm Income Impacts, 2011 60 50 40 30 20 10 Baseline No Subsidy Farmer- Oriented Blueprint Baseline No Subsidy Farmer- Oriented Blueprint 0 Net Income Government Payment
Farmer-Oriented Blueprint: US Corn Price Variability 5.50 5.00 4.50 dollars per bushel 4.00 3.50 3.00 2.50 } Price band under Farmer-Oriented Blueprint 2.00 1.50 Baseline 1.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 Higher and more stable corn prices
Farmer-Oriented Blueprint: US Net Farm Income Variability 65,000 60,000 million dollars 55,000 50,000 45,000 40,000 35,000 Baseline } Price band under Farmer-Oriented Blueprint 30,000 25,000 20,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 Slightly higher and reduced variability in Net Farm Income
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
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
Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519 www.agpolicy.org