Farm recovery coming, but the next few years will challenge farmers

WASHINGTON – USDA’s top economist says the agriculture sector should continue to recover over the next several years from low prices and shrunken incomes, and that means less cost to the federal government.

But the question of how best to support farmers once the 1996 farm law expires remains something of a balancing act.

Pinning hopes on exports.

Keith Collins, chief economist at USDA, told the House Agriculture Committee, “Rising world demand for agricultural products along with continued progress toward freer trade through ongoing unilateral policy reforms in foreign countries and existing multilateral trade agreements are projected to lead to steady increases in U.S. agricultural exports.”

The increase in exports, combined increases in domestic use, increase farm cash receipts, “but farm income could fall below recent levels during the next few years, as gains in cash receipts fail to offset lower government payments,” Collins said.

“In the absence of any new supplemental assistance, government payments are projected to fall sharply from recent levels over the next couple of years.”

Government payments also decline because projected increases in market prices for major crops reduce loan deficiency payments, Collins said.

Cash production expenses are expected to stabilize over the next couple of years as fuel prices moderate slightly but fertilizer and chemical expenses rise, reflecting the lagged effects of higher petroleum prices and modest increases in planted area.

“If declining government payments are not offset by rising market income and off-farm income, farm finances may come under stress,” Collins said.

Beyond the next few years, the outlook for the farm sector improves as expanding exports could strengthen farm commodity prices and increases in farm income and farm asset values help to moderate farm financial stress, he added.

Off-farm income needed. Bruce L. Gardner, University of Maryland agricultural economist, said farmers’ reliance on off-farm income is sometimes seen as a sign of weakness in our rural economy, “but I see it as a sign of strength.

“Not only has it permitted farm households to catch up with the nonfarm population in standard of living, it is also the means by which many more of our small farms have been able to remain on the land than seemed possible 30 years ago.”

In 1970, a study of trends from 1920 to 1960 projected the number of farms would decline to 580,000 in 2000. As it turned out, the nation has almost four times that projection, Gardner said.

“The main factor not taken into account in 1970 was how many small farms would remain in place, supported by off-farm income,” said Gardner.

Programs of little use.

He told the committee that current commodity programs are an improvement over the programs in place prior to 1996, but “the remaining commodity programs serve little economically useful purpose from the national economic viewpoint.”

The smaller commercial farms that need them most don’t get enough from them to convert vulnerable farm operations into profitable ones.

Subsidizing risky ventures. With respect to safety nets and risk management, Gardner said a case can possibly be made for assisting farmers with broad-based risk management tools such as revenue insurance or tax-sheltered savings accounts.

“But these programs should operate on a commercial basis. They should not subsidize riskier relative to less risky production, as current crop insurance programs do,” Gardner said.

“Such subsidies are economically dubious in just the way it is dubious to subsidize hurricane insurance for people who build houses on barrier islands; you end up generating more of the risky outcomes that the policy is set up to deal with.”

Recommendation.

The “first-best” approach for future policy would be to convert at least the supplemental AMTA payments into “appropriate rural development, natural resource, education, and research programs,” said Gardner.

If that is not feasible, “a second-best approach would be to retain essentially the present program structure, leaving the level of payments to be determined by budgetary and political considerations, and relying less on CCC loan program support.”

A return to federal supply management and stock holding is the least promising approach, Gardner said.

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