Farm Market Deregulation: Failed Bailouts
By Brad Wilson at Oct 01, 2008
Daryll E. Ray, an agricultural economist at the University of Tennessee, points out that farm commodities fail to self correct under free market conditions.1 They fail in the aggregate, (ie. in groups of crops grown in a certain geographical area). Production shifts from one crop to another under changing market conditions, but overall production and prices do not change very much or very quickly in response to these changes. The reason is that farm commodities have “price inelasticity,” they lack “price responsiveness” on both supply and demand sides. One simple example is that we (people who can easily afford food,) don’t eat more meals (ie. four or five,) when prices go low. Likewise, farmers typically don’t reduce production when prices are low. They have to grow something on the land to try to cover fixed costs, and may increase production.
Ray argues that, as a result, farm prices have usually been low, for well over 100 years. There are exceptions: 1910-1914, early to mid 1970s following the Russian grain purchases, today since about fall 2006. These exceptions were times when farmer got adequate prices from the market without needing help from adequate regulations.
Ray insists that the lack of price responsiveness has long been common knowledge among agricultural economists. The farm policy proposals they have made, nevertheless, often have not adequately addressed the problem. Their solutions vary widely depending upon ideology.2
Corporate influences upon farm market regulations are easily seen as depending upon obvious self interests. The output complex, those buying from farmers, (the Cargills, Bunges, ADMs, Kelloggs, Tysons and Smithfields) want low, free market prices for commodities, way below costs. The input complex, those selling to farmers, (the Monsantos, DuPonts,) want maximum production, maximum acreage for selling their products, and maximum use of inputs to maximize production on each acre of that land. Maximum productivity on maximum acreage usually results in the lowest prices possible.
The Great Depression followed the farm depression of the 1920s. Under Roosevelt and Agriculture Secretary Henry Wallace, the lack of price responsiveness was addressed through regulations.1 The free market was curbed with effective price floor loans and supply management.3 Farmers could get decent money from the loans if not from the market. If prices were too low, they could turn the commodity over to the government, which could reduce supply, (reduce production,) and make out well when prices rose. Using this tool, farmers and the government kept prices above the floor. On the top side price ceilings were used along with commodity reserves. If prices spiked to a trigger level, reserves were released as necessary to keep prices below the ceiling. Cheap imports were not allowed to come in massively to destroy this system.
These programs were also seen as economic stimulus instruments, for example in the Steagall Amendment of 1941, which went through the banking committees.4 We’ve seen that the Bush stimulus packages handed out borrowed money, to be paid back sometime later with interest, in higher taxes. It was like giving citizens credit cards to run up one time bills to be paid back later according to tax category and availability of loopholes. In the New Deal and the Steagall Amendment, the powerful economic multipliers for raw materials and especially for farm commodities, provided effective wealth creation.
U.S. price floors were lowered starting in 1953. Starting in the early 1960s, U.S. farm program added commodity subsidies to compensate farmers for increased market losses.5 The basic idea of farm subsidies was to have the government pay farmers for most of the losses generated by market failures. Farmers lost money increasingly over the years, with a relatively few exceptions, and they received increasing compensations for these losses. The U.S. government shelled out billions, as the U.S. economy lost huge amounts on exports, (for example, for a quarter century, 1981-2006, as I show below,) devastating local and regional farm economies around the world and fostering massive concentration of the agribusiness output and input complexes. Value added livestock farming largely moved off of U.S. family farms to unsustainable large scale animal factories and feedlots, as these corporations received the de facto subsidization of below cost feedgrains. A Tufts University study found, for example, that Tyson (poultry) and Smithfield (hogs) each gained more than 2.5 billion dollars 1997-2005.6 I estimate that Cargill and ADM each gain multibillions yearly in below full cost commodity purchases.
Increases in subsidies over the years did not necessarily result in gains for farmers. For example, under Ronald Reagan, the 1985 farm bill increased subsidy potentials, (which resulted in increased actual subsidies,) but dropped price floors an even larger amount (and actual market prices followed,) which resulted in net decreases in farm income. Farmers lost money but got blamed for increased welfare payments. Meanwhile commodity buyers reaped enormous below cost gains. These gains were not compensations. They didn’t have to lose money first to receive the benefits, like farmers did. In the 1996 “Freedom to Farm” or FAIR farm bill, price floors and supply management were eliminated.
Consider corn as an example.7 Between 1984 and 1990 the price floor for corn (nonrecourse Loan Rate) was lowered from $2.55 per bushel to $1.57. That's a decrease in free market regulation of 98 cents per bushel. The Target price was lowered from $3.03 in 1984 to $2.75 in 1990, representing a decrease in goal levels for combined market prices and subsidies of 28 cents per bushel for corn. In other words, the program was set up so that, in 1984, for example, farmers might get $2.55 per bushel from the market and 47 cents more in subsidies for a total of $3.03. This was changed by 1990 so that they might get $1.57 from the market plus $1.18 in subsidies for a total of $2.75. That was the farm “bailout” of 1985 and it was often said in the mainstream media that “they pumped a lot of money into the rural economy.” The actual numbers for all of this show that market prices averaged above the decreasing price floors (ie. yearly “harvest period”* prices 1980-1984 averaged $2.68 and 1985-1990 averaged only $2.03; alternately, averages of “seasonal average”* or “market year average”* prices were 1980-1984, $2.80 and 1985-1990, $2.14). (*Note: I’m using numbers from the USDA NASS data, which changed one of their methods of figuring corn prices from “seasonal average” to “market year average” starting in 1985.)
Actual subsidies averaged less than the maximum (ie. about 73 cents per bushel for corn from 1985 into the 1990s, and also actually well below the maximum possible for the years 1980-1984).8 (Note: subsidies were smaller the farther above the price floor that market prices reached under the terms of these programs. If farm prices rose high enough there were no subsidies. In 1983, for example, there were no subsidies for corn. Prices were higher, (a “harvest-period price”* of $3.21, a “seasonal average price”* of $3.21,) but farmers still lost money compared to full costs, netting about seven cents per bushel below zero.)
In the debate for the 2007/2008 farm bill and in the final bill passed by Congress and signed by President Bush, “reforms” of subsidy caps and green subsidies did nothing to regulate free markets. With the important exception of the National Family Farm Coalition’s Food from Family Farms Act, (and related work, like Daryll Ray’s econometric examples, which set price floors just high enough to eliminate subsidies,) there were no policies proposed for the Commodity Title of the U.S. Farm Bill to adequately regulate the free market.
Note here that it was market deregulation, (reductions in price floors and supply management 1953-1995, and elimination of them since 1996,) combined with the lack of price responsiveness in free agricultural markets, that resulted in low market prices. The economic cause was not the adding of compensatory subsidies 1961-2008, as implied by free traders at the WTO and in mainstream media and among progressives and others around the world in recent farm bill discussions.9
In the context of world export markets, the dominating role of the U.S. is a major factor here. We were able to cut back on production and raise world market prices single handedly for many commodities, while others could not. This was especially true for corn and soybeans where U.S. export market share has been huge, sometimes well above 60%.10 These kinds of programs have worked somewhat differently for other commodities where we play a smaller role in the world, for example in sugar, a commodity where they still exist.11. Sugar is also not a “storable” commodity, (until it is processed,). These programs, with commodity reserves, for example, are for storable commodities.
These days the National Family Farm Coalition’s Food From Family Farms Act is the leading model for the key regulatory mechanisms (price floors with supply management to set a minimum, and price ceilings with reserves and release levels to set a maximum for protection of consumers and processors).12 Within this range and within these limits the free market is allowed to operate. No commodity subsidies are needed. (They could be used in modest ways, however, to help repair the damage done by free markets over the years.) Supply management can be unpaid and mandatory. This is not, therefore, big government spending. From 1933-1952 it was estimated that the government made $13,000,000 on the programs, from interest paid by farmers on the price floor loans.13
In recent years support has grown to implement policies along these lines on an international basis. Esther Vivas stated recently that “In response to neo-liberal policies, we must generate mechanisms and regulations of intervention, which stabilize market prices, control imports, stabilize quotas, prohibit dumping, and in moments of over-production, create specialized reserves for food shortages.”14 Certainly it is politically easier to implement supply management inside of the U.S. if other countries will do the same. The Africa Group at WTO, has called for supply management.15 Strategic reserves are being discussed more in light of recent sharp rises in food prices.
Today as the government considers another bailout, lessons can be learned from this history of farm market regulation and deregulation. In deregulating markets by reducing and ending these programs, we’ve seen repeatedly, (as illustrated above for the 1985 farm bill,) that subsidy money can be poured in in ways that make things worse, not better for the U.S. as a whole, even as the make things better for selected corporations. For example, U.S. farmers lost billions of dollars in the market (vs. “full” costs) virtually every year for more than a quarter of a century (1981-2006 for corn, wheat, cotton, rice, soybeans, grain sorghum, barley, oats, except in 1996 when it all added up to less than 5 million dollars above zero).16 This meant massive losses on farm exports for the country as a whole, as dumping studies also show.17 Figures for the magnitude of impacts from unregulated free markets grow much higher when “living wage,” “fair trade,” or parity prices are used as a standard set well above zero, when losses from farm market deregulation back into the 1950s are considered, when the factor of economic multipliers is brought in, when numbers are put in current dollars, when additional farm commodities are considered, and when world export and production figures are added in. I find that the economic impacts easily move into the multi trillions and double digit multi trillions.
1. For a brief discussion see 2 policy columns of Daryll E. Ray, Blasingame Chair of Excellence and Director, Agricultural Policy Analysis Center, Department of Agricultural Economics, University of Tennessee. These are: “It's Price Responsiveness! It's Price Responsiveness!! IT'S PRICE RESPONSIVENESS!!!” at http://agpolicy.org/weekcol/248.html; and “Are the five oft-cited reasons for farm programs actually symptoms of a more basic reason,” http://agpolicy.org/weekcol/325.html. For a more extended discussion see his “Agricultural Policy for the Twenty-First Century and the Legacy of the Wallaces,” http://www.agobservatory.com/library.cfm?refID=30416; and also Daryll E. Ray, Daniel G. De La Torre Ugarte and Kelly J. Tiller, Agricultural Policy Analysis Center
Department of Agricultural Economics University of Tennessee, 2003, Rethinking US Agricultural Policy: Changing Course to Secure Farmer Livelihoods Worldwide, http://www.farmingsolutions.org/pdfdb/RAP.pdf
2. See again, Daryll E. Ray, et al, Rethinking US Agricultural Policy, Appendix B.
3. On this history see Crisis By Design, by Mark Ritchie and Kevin Ristau, league of Rural Voters, 1987, http://www.iatp.org/iatp/publications.cfm?accountID=258&refID=48644; A Legacy of Crisis: Farmer Solutions, Corporate Resistance, by George Naylor and Bert Henningson, Jr.
Ames, Iowa, http://www.inmotionmagazine.com/ra07/crisis_86.html; Farm Bill Basics: Formula for Prosperity and Fairness, by George Naylor, Jim Dubert,, Bert Henningson, Jr. and Curt Stofferahn, Ames, Iowa, http://www.inmotionmagazine.com/ra07/farmbill_86.html.
4. “It's About America,” by Willie Nelson, (contains speech at 81st Annual Convention, National Farmers Union, San Diego, California, March 1, 1983 by Eddie Albert), Published 9/6/03 by CommonDreams.org, http://www.commondreams.org/views03/0906-02.htm.
5. U.S.D.A. Office of Communications, Agricultural Fact Book 1994, “Direct Government payments, by program, 1950-92,” appendix Table A-3, p. 174.
6. Timothy A. Wise and Elanor Starmer, “Industrial Livestock Companies’ Gains from Low Feed Prices, 1997-2005,” Global Development and Environment Institute, Tufts University, February 26, 2007, http://www.nffc.net/Learn/Fact%20Sheets/CompanyFeedSvgsFeb07.pdf
7. Historical program data for corn and other program commodities can be found in Program Provisions for Program Crops: A Database for 1961-90. By Robert C. Green. Agriculture and Trade Analysis Division, Economic Research Service,, U.S. Department of Agriculture. Staff Report No. AGES 9010. http://www.ers.usda.gov/publications/ages9010/ages9010.pdf. Price data for corn and other crops can be found in USDA ERS databases for commodity costs at http://www.ers.usda.gov/Data/CostsAndReturns/testpick.htm, and in United States Department of Agriculture. National Agricultural Statistics Service, Crop Production Historical Track Records, April 2007, http://usda.mannlib.cornell.edu/usda/nass/htrcp//2000s/2007/htrcp-04-27-2007.pdf.
8. 73 cents is my recollection from calculations I made on the average of yearly average data from U.S.D.A. Office of Communications, Agricultural Fact Book 1989, appendix. The raw data is available in Program Provisions for Program Crops, cited above in footnote #7.
9. See, for example, Ray, et al, Rethinking, in footnote #1, p. 9. More specifically, major econometric studies of subsidy elimination, as summed up by Timothy Wise of Tufts University, often found price increases of less than 5% (minus 3% for corn as land shifted to from cotton in one study). See Timothy Wise, The Paradox of Agricultural Subsidies, Table 4. Estimated Price Effects of Subsidy Elimination, Measurement Issues, Agricultural Dumping, and Policy Reform Global Development and Environment Institute, Tufts University, Working Paper no. 04-02, p. 21. This contrasts with dumping levels for major program commodities, which have often been in the 20% to 40% range, and hit 61% for cotton. See the Institute for Agriculture and Trade Policy, United States Dumping on World Agricultural Markets: February 2004 Update, http://www.tradeobservatory.org/library/index.cfm?ID=2458.
10. Ibid, Figure 6, p. 17.
11. R. Dennis Olson, Sweet or Sour: The U.S. Sugar Program and Threats Posed by the Dominican Republic-Central America Free Trade Agreement, Institute for Agriculture and Trade Policy, April 2005, http://www.iatp.org/iatp/publications.cfm?accountID=451&refID=72784, see Appendix A: “U.S. sugar program: No dumping, no taxpayer subsidies, no kidding,” pp. 27-30.
12. Learn more at http://www.nffc.net/, especially http://www.nffc.net/Learn/Fact%20Sheets/FFFA2007.pdf
13. See Ritchie and Ristau, Crisis by Design, page 3, (see footnote #3).
14. See, for example, Esther Vivas, “Facing the food crisis: what alternatives?”
September 26, 2008 http://www.zcommunications.org/znet/viewArticle/18923.
15. “On the Right Path to Development: African Countries Pave the Way” By Carin Smaller and Sophia Murphy 16th June 2006, http://www.iatp.org/tradeobservatory/genevaupdate.cfm?messageID=120055
16. I used USDA ERS data for corn costs per acre from http://www.ers.usda.gov/Data/CostsAndReturns/testpick.htm. For corn the “historical” spreadsheet downloads as H-USCorn.xls.xla, and the “recent” spreadsheet as R-USCorn.xls.xla. I’m using “Residual returns to risk and management” (scroll down), not “Gross value of production less cash expenses” for the years 1975-1995. After 1995 I use “Value of production less total costs listed,” not “Value of production less operating costs.” Figures for each crop can then be multiplied by yearly acreage figures and added together to get yearly totals. For acreage figures I used USDA-NASS Crop Production Historical Track Records, cited in footnote #7.
17. See the Institute for Agriculture and Trade Policy, United States Dumping on World Agricultural Markets: February 2004 Update, http://www.tradeobservatory.org/library/index.cfm?ID=2458