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Commodity Policy: Is This What Commodity Policy: Is This What We Signed Up For?We Signed Up For?

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

2011 National Farmers Union Annual MeetingSan Antonio, Texas

March 14, 2011

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Commodity Policy?Commodity Policy?

• For as long as I can remember, I thought commodity policy was about a safety net

– I even thought I knew what it meant…• Minimize damage to commodity

prices/revenues when production outruns demand

• Protect farmers against catastrophic loses resulting from vagaries of weather

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Commodity Policy?Commodity Policy?

• In fact, it has been a mission of mine to explain why a safety net is important

– Crop markets respond differently than taught in Econ 101• Lack of timely response to low prices on the

consumer side—Cheap food does not induce people to eat 5 meals a day

• Lack of timely response to low prices on the producer side—Who can afford to rent land and leave it idle?

• Weather-caused variability happens

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Commodity Policy?Commodity Policy?

• But since the 1985 FB and especially since the 1996’s Freedom to Farm…

– Commodity programs have moved away from safety net and price stabilizing concepts

– Major policy instruments have been eliminated or made ineffective• No price floors, no stabilizing reserve or

other supply management instruments

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Why the Changes?Why the Changes?

• Changes based on ideas such as…• Unleashing grain exports makes price

stabilizing policies unnecessary– Reasonably set price supports, reserve

programs, set asides…• Just get in the way. So…

• Replace with payments if you must do something

– If world trade were perfectly free…• Agriculture would need no help of any kind

• Could get rid of payments, too!

• On the other hand, making payments when they are not needed is just fine (its WTO legal!)

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So How Incredible Is It?So How Incredible Is It?• Well, how would Congress and the

agricultural establishment react to a proposal to raise loan rate levels to: – $1.04 per lb. for cotton (85% of 1.23)– $5.11 per bu. for corn (85% of 6.01)– $11.39 for soybeans (85% of 13.40)

Annual cost (say): $9 billion for the 8 crops– Then add a $5 billion direct payment gift

$14 billion from U.S. treasury (when market prices are well above the cost of production)

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So How Incredible is it?So How Incredible is it?

• This year’s crop revenue insurance makes those “price equivalents” available to farmers (who are willing and able to pay their part of the premium)

– U.S. taxpayers are underwriting a guarantee of record profits to farmers at a time of 9% unemployment and people are losing their homes

– Plus paying $5 billion in direct payments

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So How Incredible is it?So How Incredible is it?

• Direct payments– Are paid even though prices are well north of

all costs– Are an embarrassment whether in rural cafes

or visiting our city cousins– And yet there are demands to continue them

in the next farm bill• Why? Well, because otherwise there would be

virtually no “baseline” money for farm programs

• Not because they make sense as a safety net (they don’t, of course—totally inadequate when prices collapse)

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So How Incredible is it?So How Incredible is it?

• Revenue insurance products…– Preferred by agricultural establishment,

especially insurance companies and agents– Protect farmers “pure” profits when prices are

really high—could cost tens of billions to do so– When (not if) prices fall and remain below the

cost of production, revenue insurance products “guarantee” a percentage of those below-cost prices (these guaranteed prices could be well below variable costs)

(So whose idea of a “safety net” is this??)

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Be prepared for…Be prepared for…• In the short-run:

– Push back on continuing Direct Payments– Further erosion of “good will” if insurance

products reimburse farmers for “lost profits” (even if current insurance products are tweaked)

– Tough sledding for EQIP and other programs

• In the longer-run:– Production that explodes and prices that

plummet (and prices will likely stay that way for several years)

– If Ag goes to “…. in a hand basket,” forget Direct Payment baseline concerns…

• Emergency payments will be legislated when needed• New baseline later

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Policy for All SeasonsPolicy for All Seasons• Bring back the “failed policies of past”

– Worked better than the upside-down “failed policies of the present”

• Assume the unexpected will happen– Random policy and weather events do occur—

Plan for them with a reserve program• Use the reserve and price floors to

stabilize prices; minimize use of payments• Keep productive capacity well ahead of

demand via public technology investment• Once reserves are in place, gauge use of

productive capacity to match demand

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank YouThank You

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