Ag policy crisis: No cavalry in sight to rescue farmers

URBANA, Ill. – A combination of factors – declining commodity prices, flat farm income and a shift from ideology-driven to problem-driven solutions – have created an agricultural policy crisis facing the United States Congress as it attempts to craft new food and agricultural policy legislation in the coming months.

“The search for some compromises to address these factors has led us to the 11th hour, so to speak, with the decision not yet in sight and budget problems looming over any resolution,” said Robert G.F. Spitze, University of Illinois professor emeritus.

“What exactly constitutes the ‘public interest’ in agricultural policy has become quite elusive as the political landscape has abruptly changed since the last federal farm bill was passed in 1996.”

That legislation – termed “Freedom to Farm” by its supporters and “Freedom to Fail” by its critics – sought to gradually remove government economic support from farming. However, policymakers and the public alike are now able to review the consequences, and the wisdom, of that policy as the law’s expiration approaches in 2002.

Low commodity prices and weak world markets have left U.S. farmers heavily dependent on government subsidies. Not only has U.S. farm income gradually slipped since 1997, but in 2000 many farmers would have faced negative income if not for government subsidies.

“For years, many farm groups and others said government was the problem in agriculture. Now many of these same groups are saying government is the answer,” said Spitze.

Looming over the legislative process are conditions that may preclude an ideological-driven solution to the problems.

American farmers continue to produce more than can be consumed in the domestic market, periodically leading to surpluses that cannot consistently be exported to other nations. Off-farm income increasingly sustains the lifestyle of many family farms and the short-term fixes applied to a deteriorating agricultural sector over the past four years have only left producers hungering for the security of a longer-term policy.

“In the background is the knowledge that the budget surpluses of recent years have now turned into deficits and that many other needs are competing for federal dollars,” said Spitze. “It is also becoming clear that foreign markets are not a panacea in times of international turmoil and exchange volatility.

“A highly competitive industrial economy and urbanized society has found a growing need for security, safety nets, regulation – all of which demand greater, not less, government regulation.”

While political and ideological differences continue to exist among Washington policymakers about the shape of a new agricultural program, Spitze said farm groups are less divided than in the past.

The realities. Two “givens” exist as policymakers continue the process. First, excess capacity continues in American agriculture, only alleviated from time to time by weather-related production shortfalls or export spurts.

Second, poverty and poor nutrition continue to be facts of life for millions of people.

Spitze expects some continuities between the 1996 law and what evolves this year. Producers should continue to have a fairly free rein when it comes to planting decisions. Some sort of payment-to-producers system is likely to remain in the new law and the marketing loan approach will likely be the choice for supporting farm commodity prices. Funding will continue to be earmarked for food stamps, school food programs, elderly nutrition programs and the WIC program, with increases likely in the present period of sluggish economic growth.

This leaves a number of options for debate.

Open to debate. “Policymakers could continue the basic outline of the 1996 act by gradually declining payments to producers,” he said. “However, this would likely mean a gradual worsening of an already-poor farm income situation. It would, though, relieve some pressures on the federal budget.

“Another approach would be to try to balance supply and demand by restraining production through voluntary, paid set-asides or increased conservation acreage. Both of these approaches would result in greater federal outlays unless substituted for some existing payments.”

Policymakers might also decide to divide their approach – guaranteeing larger payments to farmers up front for the first two years of the policy and then leaving to later Congresses how to schedule the payments from the total remaining funds.

Another approach might be to shift the program’s thrust to counter-cyclical payments and to limit payments per farm.

Finally, the policy could target payments for both food aid recipients and farms based on income, and also strengthen the food quality oversight.

Basic economics. Spitze fears that unless policymakers tackle the underlying question of growth in supply frequently exceeding demand growth, American farmers will continue periodically to face trends of declining prices and declining incomes.

“This situation is hardly unique in our market economy,” he said. “It has become quite apparent that almost all U.S. domestic industries face the same problem. They periodically either balance production with expected demand or restructure. Even though trade will remain important to American agriculture, expecting to simply export all of its surpluses is not a dependable answer to the economic problems of the farm sector.

“It is hard to imagine how a high labor and capital value country like the United States could always outcompete in farm products many developing countries with lower labor costs and substantial agricultural land to use and even bring into production.

“For example, China and Russia at times are grain buyers and neither is an exporter of food now. Yet, both of these countries have been, and like many others, hope to first become self-sufficient in food production and then become exporters.

“It does not seem economically reasonable to depend on going full tilt in production and expect the rest of the world to pick up the unmet demand.”

While policymakers ponder the direction of future farm policy, Spitze noted that farmers face more immediate decisions, such as planting, which are dependent to a large degree on the shape of the new legislation.

“Since the last major agricultural and food cycle, short-term emergency fixes have been popular, and the search for the longer-term compromise in the public interest during the past two years is not yet apparent, ” he said. “Now, the crunch has come.”