Chapter 10: Domestic Farm Policy: A Historical Perspective

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Chapter 10Domestic Farm Policy A Historical
Perspective

• AGBU 310

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Farm Policy

• Farm Policy set of government programs directly
  influencing agricultural production and marketing
  decisions
• Cyclical in nature
• Will look at farm policy from a historical
  perspective

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Farm Policy Goals

• Expand farm production
• Support and stabilize farm prices and incomes
• Adjustment of agricultural production to market
  needs
• Expand exports
• Resource conservation and preservation

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Six Policy Periods

• SETTLEMENT PERIOD (1776-1929)
• NEW DEAL ERA (1929-1954)
• FLEXIBLE PRICE SUPPORTS (1954-1970)
• MARKET ORIENTATION (1970s)
• A HIATUS
  (1980s)
• BUDGET-DRIVEN POLICY (1990s)

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SETTLEMENT PERIOD (1776-1929)

• The disposal of public lands in relatively small,
  widely dispersed parcels gave rise to the family
  farm structure of agriculture
• Homestead Act of 1862
• Gave small parcels of federal land at little or
  no cost
• USDA in 1862
• Influence in Executive branch
• Morrill Act of 1862
• Gave federal lands to landgrant college to endow
  colleges in agriculture and mechanical arts

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SETTLEMENT PERIOD (1776-1929)

• Hatch Act of 1887
• State grants for research led to Ag. Experiment
  Stations
• Smith-Lever Act of 1914
• Created Agricultural Extension Service for
  teaching, research, and outreach to farmers
• Federal Farm Loan Act of 1916
• Created 12 cooperative Federal Land Banks and
  todays Farm Credit System
• Smith-Hughes Act of 1917
• Federal support for vocational agriculture in
  High School
• Government presence did not influence
  farmers economic decisions, such as the
  selection of which crops to plant, how many acres
  of each to cultivate, and how to market the
  products.

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NEW DEAL ERA (1929-1954)

• Longest period of financial stress in 20th
  century
• Drastic depression conditions called for New Deal
  Farm Policy based on Roosevelts campaign
  promise for a new deal
• Non-Recourse Loan if the farmer does not sell
  the commodity by the due date, the commodity
  becomes the property of the CCC in full payment
  of the loan (commodity is the collateral)
• Farmer receives the loan at the support price
• Farmer pays cost of storage and is free to sell
  at any time, but must repay the loan plus
  interest immediately
• Will only sell if market price gt loan rate
  interest costs
• Loan rate becomes floor
• If the farmer cannot repay the loan the commodity
  is forfeited to the government in full payment of
  the loan

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NEW DEAL ERA (1929-1954)

• Purpose was to provide farmers credit for storage
  and market their goods later in the year when the
  prices were more favorable
• This was not what happened
• Increased loan rate increased production

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Pl lt Pm and market clears
P
Pm
Pl
Q
Q
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Pl gt Pm and surplus
P
Pl
Pm
Q
Qd
Qs
Q
Surplus to CCC stocks
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Price Supports Too High

• Supporting prices above market-clearing levels
  leads to higher levels of government involvement
  in production decisions in terms of encouraging
  involvement in commodity storage, domestic
  commodity disposal programs, foreign food aid, or
  export subsidies. If prices are supported too
  high, production controls occur.

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Price Supports Too High

• One of the early guidelines for setting the loan
  rate was the parity price
• Parity Price price that today gives a unit of
  the commodity the same purchasing power as it had
  in 1910-1914.
• Ex if a bushel of wheat would buy a pair of
  overalls in 1910-1914, then, to be at parity, a
  bushel of wheat should be priced so as to buy a
  pair of overalls today
• Political standard in the early 1930s thorough
  much of the 1960s

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Parity Flaws

• 1910-1914 was the Golden Age of Agriculture
• Farmers were well off compared to nonfarm sector
• Inputs have rapidly changed
• Production is more efficient today
• Since 1985 parity has not been mentioned

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CCC Storage

• Forfeiture of commodity from the price support
  loan program becomes the property of the CCC and
  goes into gov. storage
• This occurs when the loan rate is above
  market-clearing price
• Stocks continue to build if the loan rate is kept
  higher than market-clearing price
• 50s and 60s gov. owned many storage facilities
• Sold them off in 70s with World Food Crisis
• Now it contracts storage

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Production Controls

• Acreage reductions and marketing quota were used
  as mandatory production controls
• Acreage Allotment restricts farmers to planting
  only a certain number of acres based on the
  anticipated domestic consumption and trade needs
• Farmers just farmed available land more intensely
• Eventually led to marketing quotas
• Marketing Quota restrictions on the quantity of
  a commodity a farmer is allowed to sell

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Acreage Allotments

• Used to increase prices (Ex when technology
  increases yields)
• This will shift the Supply Curve to the left
• Therefore, if there is a price support program in
  place, the surplus can be removed by imposing
  marketing quotas.
• This reduced production from Q1 to Q2

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ACREAGE ALLOTMENT
S
P
S
Pl
Q2
Q1
Q
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MARKETING QUOTA
P
Pq
Qq
Q
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NEW DEAL PROBLEMS

• Principle objective was to raise farm prices
• Policies emphasized inadequate grain storage and
  price support programs
• Should have moved resources out of agriculture
  and curbed production

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1949 Farm Bill Permanent???

• 1949 Farm Bill was the last Farm Bill enacted
  without expiration
• All other Farm Bills are amendments to this one
• If a new Farm Bill is not in effect by the
  expiration of the previous one, the 1949 Farm
  Bill goes into effect
• High price supports
• Creates incentive for Congress to pass a new bill
  before expiration

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FLEXIBLE PRICE SUPPORTS 1954-1970

• Previously the price support level was 90 of
  parity
• In 1954 the price support level dropped to 75-90
  of parity
• Soil Bank established paid farmers to retire
  land for 10-years
• Why didnt rural communities like this?
• P.L. 480 which enhanced export markets

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MARKET ORIENTATION 1970s

• Price and Income support separated
• Price support through CCC loans
• Income support through direct payments
• Why direct payments?
• Lower price supports to restore competitiveness
  to world market

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MARKET ORIENTATION 1970s

• Target Price level of returns per unit of
  commodity on certain acreage guaranteed to
  farmers who participate in the programs.
• Target prices provide for direct payments to
  producers of the difference between the TP and
  the average market price when the average market
  price is lower than the TP.
• Deficiency Payment TP average market price
• TP only supports income
• LR supports prices and income

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MARKET ORIENTATION 1970s

• Congress sets TP based on national average COP
• 1) Pm gt Ptp NO DEF. PYMT.
• 2) Pl lt Pm lt Ptp (Ptp Pm)Q
• 3) Pm lt Pl lt Ptp (Ptp Pl)Q

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1
2
Pm
Ptp
Ptp
Deficiency Payment
Pm
Pl
Pl
3
Q
Q
Ptp
Deficiency Payment
Pl
Pm
Q
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Target Prices

• TP only paid on normal production
• When TP lower than market price, market price
  prevails and no effect on production
• When TP greater than market price, market price
  falls
• The market is in equilibrium, although not
  competitive equilibrium
• TP does not suppress quantity demanded as the LR
  did
• TP depresses market price
• TP increases production

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TP depresses market price
P
Ptp
Pc
Deficiency Payment
Pm
Pl
Qq
Q
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Set-Aside

• Set-Aside requires that a certain percentage of
  a farmers cropland be removed from production as
  a condition for receiving farm benefits
• Conditional land retirement program
• 1981 changed its name to Acreage Reduction
• What happens if you have TP and set-asides?

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Target Price Set-Asides
S
S
P
Ptp
Pl
Q2
Q1
Q
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Farmer-Owned Reserve

• FOR was alternative to gov. owned stocks
• FOR extended loan program for up to 3 yrs.
• Meant to stabilize prices and increase supply
  assurance to customers
• If in FOR, get a higher loan rate (entry price)
  than regular price support loan
• In return, farmer agrees not to sell until the
  market reaches a specified level

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A HIATUS 1980s

• Severe inflation in U.S.
• CCC stocks accumulated
• Payment in Kind (PIK) pays farmers in generic
  certificates to retire land from production
• Used to decrease stocks
• Paid 80-95 of yield in return for retired land
• Lots of participation
• In combination with a drought, temporarily
  lowered stocks and increased prices

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A HIATUS 1980s

• Financial crisis deepened
• Congress could not politically reduce price and
  income supports
• Stocks built back up
• PIK used in a different way
• Generic PIK pay participants in the form of
  negotiable certificates that can be redeemed for
  commodities held by the CCC

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A HIATUS 1980s

• Marketing Loans nonrecourse loan that can be
  paid off by the farmer at the world market price
• This lets markets clear despite a high loan rate
• This payment is called a marketing loan payment
• Differs from deficiency payment in that the ML
  payment is not subject to payment limits

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ML allows market to clear despite high LR
S
P
Ptp
Pl
Pm
Q
Q
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A HIATUS 1980s

• Conservation Reserve Program (CRP)
• 1985 environmentalists obtained political clout
• Price for support of Farm Bill was CRP
• Dual objectives
• Control erosion
• Reduce overcapacity
• ONLY HIGHLY ERODIBLE LAND COULD ENTER

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BUDGET-DRIVEN POLICY 1990s

• Attempt to bring spending under control
• FOR continued
• CRP continued