The Next Farm Bill Will it Look Forward or Backward

The origin of commodity price supports may be traced to attempts during the farm depression of the 1920s to establish “parity” prices for farmers based on a 1910-1914 index, when farm pr

The Next Farm Bill:

Will it Look Backward or Forward?

Robbin S Johnson*

C Ford Runge**

Prepared for the Woodrow Wilson Center for Scholars, Washington, D.C with support from the Hewlitt Foundation We gratefully acknowledge the research assistance and support of Kari Heerman

* Robbin S Johnson is a Teaching Fellow at the Hubert H Humphrey Institute of Public Affairs, University of Minnesota and formerly Senior Vice President, Cargill, Inc., Minnetonka, Minnesota

** C Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota and Director, Center for International Food and Agricultural Policy (CIFAP)

U.S Agricultural Policy: Looking Backward1

This paper will focus on what are traditionally called the “commodity programs”: the main subsidy provisions which underwrite U.S agriculture In addition to dairy supports, the commodity programs are aimed primarily at five field crops: corn, wheat, soybeans, cotton and rice In fact, these five crops today account for over 90 percent of all farm subsidies While other programs cover crops such as sugar, tobacco, peanuts and a host

of fruits and vegetables subject to “marketing orders,” the five main field crops plus dairy receive the main share of subsidies under Title I of U.S agricultural legislation, the

“Commodity Title.” It is this aspect of farm policy on which our analysis will

concentrate In other papers, we will consider biofuels, agricultural trade, and rural development As Congress prepares to authorize a new farm bill, we have sought to sketch a case for reform

The origin of commodity price supports may be traced to attempts during the farm depression of the 1920s to establish “parity” prices for farmers based on a 1910-1914 index, when farm prices were especially attractive The first serious attempt to achieve parity prices for farmers involved the division of the market for a commodity like wheat into a domestic market and a foreign market Supplies in the domestic market would be limited to an amount that would drive up domestic farm prices to the parity level; the remainder, or the surplus, would be dumped on the foreign market for whatever it would bring The plan was introduced into the Congress in 1924, and in each succeeding year through 1928 Although vetoed by President Coolidge, it laid the groundwork for

subsequent efforts to raise farm prices through government intervention

Between the stock market crash of 1929 and 1932, farm prices continued to decline, falling over 50 percent in three years In the face of this near total collapse, President Hoover attempted to stem the tide with a Federal Farm Board, making loans to

stabilization corporations and acquiring surpluses in an effort to hold them off the market The Farm Board and its stabilization corporations did not have the financial capacity to stem the decline in world prices of staple commodities

In April 1929, President Hoover recommended to Congress a limited upward revision of tariffs as a means of protecting domestic agricultural markets In response to the

presidential recommendation, Congress passed the Smoot-Hawley Tariff Act of 1930, raising tariff duties to an all-time high This action set off a wave of protectionism around the world, serving to shut off foreign trade of all kinds and exports of American farm products in particular

After these policy failures, agricultural economists devised an alternative, the Domestic Allotment Plan, in which each farmer would receive an allotment, or “right to produce,” based on farm production history The sum total of such rights was to coincide with

1 This material draws in part on Chapter 3 of the 1992 book by Willard W Cochrane and C Ford Runge,

Reforming Farm Policy: Toward a National Agenda.” Iowa State University Press.

domestic consumption levels The allotment would thus provide a subsidy only on domestic production; the remaining surplus would enter export markets at world prices This “two-price” scheme, while never enacted, resurfaced in the famous Agricultural Adjustment Acts of the New Deal

The Agricultural Adjustment Act (AAA), adopted May 12, 1933, was established as part

of a tripartite New Deal “emergency” agricultural policy Title I, the AAA, dealt with price and income supports Title II provided for debt relief and farm credit, while Title III authorized the president to manipulate the exchange value of the currency Title I

contained elements of the proposals of the 1920s as well as provisions to control

production through acreage reduction on individual farms, the authority to purchase and store commodities, and the authority to regulate the marketing of specialty crops through the employment of marketing agreements and orders To implement these tools as “base acres” on individual farms,2 the parity concept and “nonrecourse loans”3 were forged The centerpiece of the AAA was the reduction of production through the control of crop acreages on individual farms For complying with the approved reduction in crop

acreage, farmers received a benefit payment The money to make these benefit payments was to be raised through excise or processing taxes on the commodities involved

This essential feature—acreage control in return for government payments—remained at the heart of all subsequent policies until the mid-1980s But appraisals of the AAA in 1933-36 reached two conclusions First, the production control features of the AAA were largely unsuccessful Farmers in the 1930s found ways to circumvent the acreage control programs by “renting” their poorest acres to the government and by raising noncontrolled crops on the controlled acreage so that the total production of each farm was reduced little if at all This came to be known as “slippage.” (The droughts of 1934 and 1936 did, however, reduce total agricultural production.) On the positive side, the benefit payments

to farmers succeeded in bolstering the farm economy, helping farmers to purchase food, feed and supplies, and pay taxes Thus, all but a handful of farmers supported the AAA,

as did their farm organizations

The Supreme Court found the AAA unconstitutional in early 1936 on grounds that processing taxes on commodities used to finance the control of their production was illegal New farm legislation was enacted in 1938, eliminating the processing tax The Agricultural Adjustment Act of 1938 for the first time provided comprehensive price support and production control based on the constitutional authority of Congress to regulate interstate and foreign commerce

2 Base acres refer to the number of acres enrolled with the USDA, eligible for payments for growing a particular commodity, such as corn or wheat In recent years this base has been a moving average of previous years’ plantings This number is an accounting unit, not a specific acre of land on a farm.

3 Nonrecourse loan refers to the mechanism that USDA uses to provide cash advances to farmers, which may then be repaid either in cash (at subsidized rates of interest) or in-kind, by surrendering the crop to the government in lieu of the loan itself Because the government has no recourse to the loan principal, it is designated a “nonrecourse” loan This mechanism accounts for a large share of the surplus commodities acquired by the government in times of low commodities prices.

World War II did for the U.S economy what the New Deal could not do; it brought full employment and pulled surplus labor on farms out of agriculture and into industries Farm prices and incomes began to rise substantially Whatever discontent had formed to the farm programs of the New Deal was forgotten as farmers reveled in their prosperity Yet worry was widespread over the prospect of a farm depression immediately following the end of the war In the event, farm prices did not collapse as so many people expected Because of the destruction in Europe and Asia, and the strong demand for food stocks and supplies among the victorious and occupying powers to feed the hungry, food stocks remained short and supplies inadequate As a result, farm and retail food prices soared between 1945 and 1948 They dipped modestly in 1949 and moved upward again in

1950 and 1951 in response to the Korean War

When wartime price support legislation expired at the end of 1948, the policy debate anticipated conflicts over commodity programs down to the present day Two camps were identifiable The principal policy goal of the first camp was to lower the level of price support on farm commodities and thereby reduce the extent of government

intervention in the farm economy In this camp were to be found most, but not all, Republican party leaders, businessmen from the agribusiness complex, and most

economists The overriding goal of the second camp was to maintain a high level of farm price support as a means of protecting farm incomes They would accept whatever government intervention was required to implement the price support objective Here were to be found Democratic party leaders from the South and the Plains, most, but by no means all, farm organization leaders (the president of the Farm Bureau was no longer supportive of high price supports) and some government economists and union leaders

In 1952, Dwight D Eisenhower appointed Ezra Taft Benson Secretary of Agriculture Benson believed that government intervention in the economy was wrong and

determined, with the support of the American Farm Bureau, to move to a system of flexible and market-oriented price supports Yet farm prices began to sag in 1952, and by

1953 were falling badly At the same time, productivity in agriculture due to

technological advance was increasing rapidly

To deal with the growing problem of surpluses, the “soil bank” concept was enacted into law in the Agricultural Act of 1956 It had two main parts One was the Acreage

Reduction Program (ARP) which operated in 1956, 1957 and 1958 Under this program, some 21 million acres were “banked,” so that no crop could be harvested and livestock could not be pastured The second was the Conservation Reserve Program (CRP), designed to assist farmers to reduce the production of crops by shifting below-average cropland into long-range conservation uses

Another policy idea developed in this period was to dispose of surplus agricultural products abroad, primarily in the less-developed world, through sales for nonconvertible foreign currency and other “soft” or concessional terms This idea was enacted into law

in the Agricultural Trade Development and Assistance Act of 1954, better known as P.L

480 or “Food for Peace.”

The 1960s brought a new administration to Washington, convinced that farm prices could

be increased and government costs could be reduced through a combination of demand expansion and mandatory production controls Wheat farmers voted down mandatory production controls in referendum on May 21, 1963, ending all efforts by the Kennedy-Johnson administration to deal with the farm price and income problem in this manner Congress then passed the Agricultural Act of 1964, which gave farmers participating in the acreage control program price support at $2.00 per bushel on their domestic share of the market, plus a voluntary acreage control program in which farmers were paid to retire their wheat base acres from production This “paid diversion” added yet another twist to

the basic quid pro quo of dollars for reduced production To make cotton and wheat more

competitive in international markets, the administration concocted programs which lowered the domestic price support of these commodities down to the export (or world market) price while guaranteeing producers that they would be paid the 1963 support value for their domestic share—$2.00 per bushel for wheat and 30 cents per pound for cotton Once again, a “two-price” plan prevailed

This export-oriented strategy, which prevailed through the 1970s, was not unanimously praised Export-oriented agriculture in general received especially bad publicity as a result of the infamous Soviet grain deal, valued at 750 million dollars, in the summer of

1972 This drove grain prices sky high in 1973-74 Yet the Agricultural and Consumer Protection Act of 1973 was a direct extension of the acts of 1965 and 1970, with one new concept: a “target price”—a “what-ought-to-be price”—for measuring the size of the income support, or “deficiency payments” to farmers

In 1976, Jimmy Carter appointed Bob Bergland, a farmer from northern Minnesota, to be his secretary of agriculture The Food and Agricultural Act of 1977 carried farm policies and programs forward largely as they had emerged in the acts of 1965, 1970 and 1973 The contribution of the Carter administration was a frank recognition of the growing concentration of production among fewer large farmers, and the decline of the small and medium-sized farm Farms in the United States declined from 6.7 million in 1934 to 2.7 million in 1978 Some 64,000 farmers in 1978 with sales valued at $200,000 or more accounted for nearly 40 percent of the total sales from farming

The election of Ronald Reagan in November 1980, with landslide support in farm

districts reacting to the Carter embargo on grain sales to the Soviet Union following its invasion of Afghanistan in 1979, brought what many felt would be a hard-edged

conservatism back to agricultural policy Few predicted that after decrying Carter’s excessive spending on commodity programs, which reached an annual high of $3 billion, Reagan would go on to spend nearly $26 billion in 1986

The Agriculture and Food Act of 1981 was passed by the Congress and signed by Reagan

in December 1981 It contained 17 titles ranging from floral research to dairy price supports It also contained all the major elements of the farm programs of the 1970s A combination of good weather and weak production controls in 1982 produced record breaking crops Grain exports, given a mounting world recession, also declined These developments caused USDA-controlled inventories and loans outstanding to soar in

1982-83 to heights never experienced, leading to the Payment-In-Kind (PIK) program Under PIK, the Office of Management and Budget hoped to keep farm program payments

“off-budget” by paying for massive land retirements with grain stocks already owned by the government But as the emergency PIK program attempted to cut into surpluses, the forces of nature intervened unexpectedly—a major drought hit the corn belt in 1983, reinforcing the effects of PIK and driving down surplus stocks However, even more powerful events were conspiring to drive agriculture into a true crisis Falling export demand was coupled with rising real interest rates, as the inflationary period of the 1970s was forced to an end The Federal Reserve Bank under Chairman Paul Volcker

concluded that the pain of deflation was to be endured in the name of slaying inflation The result was an extraordinary turn-around in real interest rates These rates, which had actually been negative in 1979, at the height of the Carter inflation, were allowed to rise

by 1983 into double digits, and actually exceeded 20 percent in real terms for a time, as the Fed hit the money supply brakes

The farm sector was caught in a pincer: falling export demand resulted in declining overall farm prices and incomes, while rising real interest rates made large investments in farmland and equipment, which had boomed in the 1970s, suddenly appear to have been grave mistakes in judgment Farmland and asset values, which had appreciated by over

500 percent in many rural areas, suddenly began a downward spiral that would not end until the late 1980s As farmland fell in price, loans taken out in the boom days of the 1970s started going bad, and highly leveraged farmers were seriously threatened with total losses

This situation developed rapidly into an agricultural depression in which many large and previously wealthy farmers appeared to face total ruin This set the scene for the 1985 farm bill debate When the nearly 1,000 page bill was signed into law, it retained all of the old mechanisms of target prices, loan rates and acreage reduction The essential compromise resulted from a desire, first, to protect farm incomes by holding target prices steady In order to reduce the number of acres on which generous subsidies were paid, large Acreage Reduction Programs (ARPs), as high as 27.5 percent in wheat, were implemented The second objective was to regain lost export markets A third

distinguishing feature of the 1985 bill was the re-creation of a Conservation Reserve Program (CRP), this time with the objective of removing 45 million acres from

production The new CRP, together with much stricter conservation requirements

accompanying price supports, signaled the emergence of a potent new lobby in

agricultural policy: environmental interest groups

The export competitiveness sought by the 1985 farm bill appeared to have been achieved

by the late 1980s as a falling dollar and lower loan rates took hold In the United States,

a conviction to use the General Agreement on Tariffs and Trade (GATT) to help move toward changes in domestic policy led to a radical trade proposal in the Uruguay Round

of multilateral trade talks beginning in 1986 to reform agricultural programs by doing away with the majority of them and substituting direct income supports in their place,

“decoupling” payments from specific crops

As the 1990 farm bill drew near (the 1985 bill created a five-year cycle, in an attempt to allow new administrations greater influence over policy), there was increasing

recognition that farm policy was an increasingly antiquated and extraordinarily expensive enterprise But what could be done? A combination of tax cuts and major increases in government spending under Reagan (largely for defense, but also for agriculture), led to huge deficits

But over and above the need for deficit reduction was the greatest of all political

imperatives: re-election How could costs be trimmed in a way that was least painful to politicians facing races every two or six years? The result was a compromise 1990 farm bill feature known as “flexibility.” Flexible acreage could be planted to any program crop that was not a “fruit or vegetable,” and still receive guaranteed support, but at a reduced level The political bargain was: “we will give the farmer flexibility, and he will surrender a portion of his deficiency payment guarantee.”

Another force driving the 1990 bill was the environmental movement, which demanded that CRP be extended and expanded, while a new Wetlands Reserve Program (WRP) was established

In 1996, encouraged by surging exports, high farm prices and falling deficits under President Clinton, the Republican majority in the House led by Speaker Newt Gingrich and Agriculture Committee Chairman (now Senator) Pat Roberts (R-KS) took a fateful step The 1996 bill, originally dubbed the “Freedom to Farm” bill, not only decoupled payments from production, but ramped them down over the 1997-2001 period so that the farm sector would at last freely face the market’s winds, from which they had been largely sheltered since 1933

But it was not difficult to see a central problem with this scheme The problem was that market price signals were distorted by two factors One was a new “marketing loan” feature that paid farmers when prices fell below the loan level without requiring them to forfeit their crop as collateral This tended to encourage production even as commodity prices were falling The other factor was that subsidies under the 1996 farm bill started at

high levels in 1996 and 1997 and were scheduled to fall each year from 1998 to 2001

Hence, falling prices were not offset by rising subsidies—exactly the opposite There was, in economic jargon, no “counter-cyclicality” to the lump-sum payments

Predictably, farm groups began to chafe in 1998 as prices fell along with subsidies, triggering political demands, usually based on localized weather events, for “emergency relief.” Regardless of weather, Congress stepped up to the plate with year after year of these “emergency” payments, leading then-Senate Majority Leader Tom Daschle of South Dakota, eager to discredit Republicans, to observe that every year is an emergency year in farm country These generous emergency payments offset the cuts in subsidies under the 1996 legislation, upping the ante and returning the farm sector to its traditional entitlement psychology

By the time the 1996 bill was passed, U.S agricultural production came from for by about 2.1 million farms But this included a multitude of hobbyists, part-timers and absentee landlords who placed acreage in conservation easements By the mid-1990s about 85 percent of U.S production was accounted for by no more than 400,000

producers, who were technologically and politically sophisticated by any standard These 400,000 received nearly 90 percent of all subsidy payments Under the 1996 legislation, total subsidy payments amounted to a whopping $91.58 billion over six years, an average

of $15.3 billion a year Subsidy payments rose almost three-fold from 1996 to 1999 and stayed at or above $20 billion through 2001 because Congress topped off subsidy

payments with “emergency assistance” and loan deficiency payments, adding $13.7 billion in these two categories in 1999, $14.9 billion in 2000, and $13 billion in 2001

By 2002, the first Congressional election year in George W Bush’s first term, before budget surpluses had reverted to huge deficits from new rounds of tax cuts, both

Republicans and Democrats shed any illusions about getting government out of

agriculture Instead, they orchestrated a complete retreat from the market-orientation of earlier farm bills In its place they competed to offer more and better subsidies for political reasons alone, markets and trade policy be damned

Under the 2002 farm bill, what used to be “emergency” funding became the new status quo Payments under the Commodity Title of the 2002 Farm Bill came in three forms: direct payments, marketing assistance loans, and countercyclical payments Direct payments on corn rose from 26 cents in 2002 to 28 cents Wheat rose from 46 cents to 52 cents Soybeans were granted a direct payment of 44 cents for the first time The price floor established by the marketing assistance loans also increases from $1.89 per bushel

to $1.98 in 2002-2003 for corn, from $2.58 to $2.80 for wheat, and decreases from $5.26

to $5.00 for soybeans, which were thought to be getting too far out ahead of corn The marketing loans assured farmers a loan deficiency payment if the local price is below the loan rate The third category of subsidy, the counter-cyclical income support payment, was to be made whenever the “effective” price is less than the target price Counter-cyclical payments, together with marketing assistance loans, vary inversely and

unpredictably with market prices (while direct payments will not) Therefore, since no one knows for sure what future prices will be, the total levels and costs of this subsidy could only be guessed

The result was a subsidy bonanza in farm country, flowing especially to the several hundred thousand largest farms Transfers in the form of direct payments, marketing loans and countercyclical payments averaged $20 billion per year Among large

commercial growers, who collected the lion’s share of these subsidies, they were hugely popular The result in 2007 was to raise calls to roll the 2002 legislation over in 2007 In

2005 alone, with pre-tax farm profits at a near record of $72 billion, the U.S government

handed out $25 billion in subsidies—half again as much for no more than half a million

farmers as it spent on ten million welfare families receiving cash or food stamps Unlike these welfare families, the welfare farmers were organized as usual so that the biggest landowners got the biggest payments Gary Mitchell, a family farmer in Kansas and a former Republican aide to then-Congressman Roberts, described the 2002 policies in

these terms: “We’re just sending big checks to big farmers They’re just living off their welfare checks.”

The Evolution of a Subsidy-Dependent Sector

When U.S farm programs began in the 1920s and early 1930s, collapsing export and domestic demand were pressing farm gate prices to painfully low levels With roughly a quarter of the population living on generally diversified farms, a logical action was to prop up the prices of basic commodities that underpinned the food, feed and fiber sectors

As described in the historical review, supporting prices to achieve social welfare goals eventually led to the accumulation of unwanted surpluses Storing these excess supplies, enticing land out of production and giving away food aid were all adopted as strategies for sustaining high price supports In the early 1960s it became clear that this approach

to farm policy could only be sustained through mandatory production controls and large surplus disposal programs But in 1962 wheat farmers rejected mandatory controls, and the Green Revolution in the middle of the decade signaled a lessening dependence on food aid in key recipient nations like India

Farm policy then began evolving from price support to income support strategies, largely through the combination of lower non-recourse loans and higher “target” prices triggering supplemental income payments This income support strategy endured through

exploding exports in the 1970s, which made the approach appear more successful than it was, largely because exports of grains grew from 1.8 to 5.1 billion bushels, allowing market demand to dominate government subsidies in setting the terms of farm income growth

The frailties of income support approaches became clearer in the 1980s, when exports fell back to 3.5 billion bushels or less, surplus stocks re-emerged and draconian monetary policies to curb inflation drove agriculture’s borrowing costs through the roof It became increasingly difficult by the mid-1980s to muster the political will or the budget resources necessary to guarantee all farmers adequate incomes Moreover, the number of farmers receiving these subsidies continued to shrink, falling to two million or fewer by the 1990s

By the 1990s, many analysts concluded that only success in the emerging global market for America’s major field crops and the animal agriculture they fed, together with nascent industrial uses such as ethanol, could ensure U.S agriculture’s financial success The two major policy initiatives signaling this new outlook were the launching of the Uruguay Round trade negotiations with agricultural trade reform at its heart and a shift in the focus

of U.S farm policy away from income support and toward two goals: (1) better risk management through marketing loans, the phasing out of government supply

management tools like annual set asides; (2) a migration away from trade-distorting farm programs to more “decoupled” support programs

A mixed strategy of partially coupled risk management and partially decoupled income supports rode a recovery in export demand in the first half of the 1990s, including

strengthening meat exports and rising industrial uses of corn and oilseeds But the mixture failed the tests of the latter half of the 1990s Risk management tools like

marketing loans prevented decoupling from working as intended by maintaining

production incentives even as market prices called for cutbacks Neither direct payments nor loan deficiency payments discouraged Congress from topping up benefits through annual emergency bills, as described above These measures set new high-water marks for farm payments, and deepened the sense of entitlement among the now largely wealthy class of farm subsidy recipients And although the Uruguay Round Agricultural

Agreement, concluded in 1993, achieved a conceptual breakthrough in bringing

agricultural protection under the disciplines of the new World Trade Organization, it failed to achieve deep enough cuts in export subsidies, import barriers or domestic supports to shift trade flows along lines of comparative advantage

The new millennium brought with it many signs of a new age: (1) the Millennium Development goals unified countries around the objective of halving poverty (and

hunger) by 2015; (2) the tragedy of 9/11 underlined how hopelessness and radicalism could combine to strike Americans on their own soil; and (3) the launching of the Doha Development Round gave the trade negotiators’ goal of “substantial reductions in

protection and support” a new, more compelling rationale – relieving human misery among the half of the world’s population living on less than $2 per day and the sense of desperation to which it was giving rise

Despite the potential for a new, trade-based era of farm policy, the Doha Round and development promises were belied by the extraordinarily retrograde 2002 Farm Bill The

2002 Farm Act was out of sequence – pushed ahead a year to reap the largesse of a temporary budget surplus – and out of step with its times It undermined what little decoupling there was in U.S farm policy by permitting updating of bases and yields; it continued the marketing loan program, which perpetuated artificial production incentives

in an egregiously trade-distorting way, and it introduced a new risk management tool – countercyclical payments – that was perceived by many trading partners as yet another layer of trade-distorting subsidy And it did all this with bipartisan support, built on the high-water levels of subsidies resulting from the “emergency” payments of the late 1990s

Meanwhile, as more and more farm subsidy money flowed to fewer and fewer entitled landowners, farm and rural economies continued to change Consolidation of farms led

to a sizable out-migration from farming and a stratification into very different types of farm operations Perhaps three-fourths of what are called farms in the United States would be better described as rural residences Those 1.6 to 1.7 million farms have no appreciable farm income and, typically, little in the way of farm program payments Their incomes come from non-farm sources and, on average, are modestly higher than national average incomes of American families