Efforts to make USDA farm-support programs more responsive to market forces ignore the fundamental purpose of farm policies – to help farmers when there is a market failure.
Beginning with the 1985 Farm Bill and coming to fruition in the 1996 Farm Bill, policy makers have sought to move away from inventory-management policies that were designed to balance out supply and demand for agricultural commodities at a price that allowed U.S. farmers to remain in production. The argument for this shift from inventory management is the belief that everyone is better off when market forces prevail—ignoring the problem of market failure, which was the reason the farm policies were instituted in the first place.
When prices tanked in 1998-2001 and U.S. farmers were in a financial bind, Congress approved four years of emergency payments and the 1996 agriculture legislation was scrapped a year early.
Beginning with the 2002 Farm Bill, Congress instituted a series of policies designed to maintain the “market orientation” of the 1996 Farm Bill and avoid returning to the earlier policies. By ignoring the issue of market failure, agricultural policy makers have come up with programs that have been far more problematic than the policies they were designed to replace. What follows is our analysis of those policies.
Revenue Insurance Fails as Safety Net
The latest and least defensible is the use of revenue insurance as the primary safety net for agriculture. The term “revenue insurance” includes standalone products and is a high-profile alternative in the current farm bill. It is the least defensible policy direction because it fails as a safety net.
It is the only major-crop farm-policy approach in memory that can potentially provide more subsidized income during times when prices are above full-production costs than when prices are below even cash variable costs for a series of years.
Revenue insurance is the epitome of an upside-down risk-management program. The addition of harvest-time pricing takes a faulty program and makes it worse by potentially increasing payments to farmers when they need it the least, while running up the cost to the public when farm income is already at high levels.
The time when farmers need risk-management programs the most is when the market price persists below the cost of production of even the most efficient major-crop farming operation. Since revenue insurance coverage is valued by observed prices, revenue insurance removes the safety net when prices plummet and when revenue insurance is needed most.
Farmers depend upon public goodwill when it comes to the passage of farm legislation. When the public comes to understand that they have been footing the bill for high revenue insurance payments when farmers are making money hand over fist, and providing them with little or no protection when the price is well below the cost of production, they may become soured on farm programs in general.
“Decoupled” Direct Payments not Much Better
The direct payments of recent farm bills are only slightly better than revenue insurance. Direct payments are paid whether prices are high or low and whether the farmer produces the crop or doesn’t. The rationale is that they are decoupled from production decisions, but it is our observation that they are only decoupled in theory. Any income that comes into a farm household affects production inasmuch as it provides a financial cushion. That extra income also gets captured by fixed resources. We saw that when the direct payments were instituted under the 1996 Farm Bill, cash rents went up as landlords sought to capture part of those payments.
In the years between 2002 and 2006, when farm prices remained low, these payments often made a significant difference to farmers, enabling them to remain in the black. But direct payments became unsustainable during the years that followed, when farmers were receiving $5 billion, prices and farm incomes were at historic highs, and farmers were receiving large revenue insurance payments as well.
Direct payments were paid when prices and incomes were high as well as low, but unlike revenue insurance, under no circumstances were payments larger during the prosperous times than the hard times.
Counter-Cyclical Payment Problems
Next in line are Counter-Cyclical Payments (CCP) that were made when the season average price paid to farmers for a given crop was below a specified benchmark that was below the full cost-of-production. To manage government costs, these payments were made only on a percentage of production, but they did provide some significant relief.
The problem with CCPs is that they allowed farmers to continue to produce a crop when the price was well below the cost of production. While allowing U.S. farmers to remain in production, this hurt farmers elsewhere in the world because they had no protection from the low prices. Worse yet, it allowed U.S. crops to be exported at prices that were below the cost of production. That is called dumping.
The original selling point of this type of program was that, by allowing prices to fall, quantities exported would explode past what they were in the early 1980s. That has not happened, and the U.S. share of major-crop world exports has plummeted, even for soybeans, which has enjoyed significant growth in US exports.
So where does that leave us? All of the policies that have been implemented in an attempt to get away from the “outdated policies of the past” seem to have created more problems than they have solved.
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). Harwood D. Schaffer is a Research Assistant Professor at APAC.