Farm Stimulus Paid for Itself
By Brad Wilson at Jan 31, 2009
As political leaders move forward on hundreds of billions of dollars for an economic stimulus, I want to call attention to an economic stimulus that paid for itself. I refer here to the farm portion of the Steagall Amendment of 1941, and beyond that, the New Deal farm programs on which it was based. The New Deal farm programs came out of the Department of Agriculture, out of a series of farm bills that were passed. The Steagall Amendment was run through the banking committees.
The main policy mechanisms behind this stimulus were farm price floors, to raise farm prices to “parity,” and supply management to make it work. Additionally there were price ceilings backed up by strategic commodity reserves on the top side. When prices started to get too high, a release level triggered the release of reserves.
“Parity” or 100% of parity was essentially a standard for “living wage” or “fair trade” pricing. During the Steagall era, 1942-1952, U.S. agriculture received 100% of parity or more every year, but never exceeded 115% of parity. Under these “parity programs” a significant amount of non governmental money fueled agriculture’s powerful economic multipliers. At the time it was argued that $1 in agriculture generated $7 throughout the economy.
A key part of this package of policy tools was the price floor loan. Farmers could borrow money using their crops as collateral. They could “seal” the crops at the support price with nonrecourse loans. If prices didn’t go high enough, the commodities would go to the government. Meanwhile the government managed supply, balancing supply with demand, to keep prices high enough that the program would work. In this way they could later profitably sell grain that came to them through the program.
It was later estimated that the government made $13,000,000 on these programs, 1933-1952. They made money on interest on the price floor loans. There is a catch, of course, initially money was needed for the revolving loan fund, and the agricultural budget grew on that basis.
On the other hand, there was no need for commodity subsidies under these programs. Other than a few cotton subsidies, 1934-1939, there were no commodity subsidies (for grains and cotton) until 1961, when they were implemented for feedgrains (including corn) and wheat. Subsidies were added for cotton in 1964 and rice in 1976.
The subsidies were used because of low price floors. Under pressure from agribusiness commodity buyers and the input complex, (that wanted an end to supply management,) price floors were lowered, resulting in reductions below 100% of parity starting in 1953. For example, overall farm parity had dropped to 80% in 1960, 72% in 1970, 64% in 1980, 54% in 1990, 38% in 2000, and 37% in 2006. Individual program commodities had even lower parity ratios. As of September 2005 corn was 25% of parity, rice and cotton were 26%, soybeans and wheat were 32%.
A key reason for these programs is that these major farm commodities lack “price responsiveness” on both supply and demand sides. As agricultural economist Daryll E. Ray stated, the lack of price responsiveness was “The problem that Henry A. [Wallace, Secretary of Agriculture under Roosevelt,] identified.” What this means is that, without adequate New Deal/Steagall Amendment policy mechanisms, commodity prices are usually low, even far below cost. The reason for subsidies after 1961, then, was to pay farmers to compensate for part of the failure of the “free” market as price floors were set at lower and lower levels.
We can understand this economic stimulus by comparing it to the decisions of OPEC. OPEC came together to manage supply and raise oil prices. They had enough world export market share to make it work. So too in agriculture, the United States has had enough export market share to make the parity programs work. Since 1953, however, U.S. policy has been, not to work with other farm exporters for fair trade prices, but to compete against them, exporting farm commodities at a loss. USDA’s Economic Research Service, for example, shows major farm commodity prices to be below full costs most of the time 1981-2006. If the resulting net per acre is multiplied by acres for corn, wheat, cotton, rice, soybeans, grain sorghum, barley and oats, and then the totals are added together, we lost money on every one of those years except 1996.
This then means that we lost a lot of money on farm exports over that quarter century. We poured out our wealth in this way to foreign commodity buyers, fomenting massive poverty in Least Developed Countries around the world along the way. Least Developed Countries were found to be 73% rural in 2005 by the United Nations Department of Economic and Social Affairs, Population Division.
The main effort in Congress in recent decades to restore the New Deal economic stimulus that pays for itself was the Harkin-Gephardt farm bill of the 1980s and 1990s. Harkin and other Democrats abandoned that approach, however, when rose in power to become Senate Agriculture Chairman. Since then this farm bill economic stimulus has been championed by the National Family farm Coalition, in their proposal of the Food from Family Farms Act.
Harkin’s and the Democrats’ about face came during the Bush years. Now, with Obama and significant Democratic victories, and with Harkin still as Senate Agriculture Chairman, we have a great opportunity to enact this economic stimulus, and to end export dumping at the same time. We’ve had a recent farm price spike, which makes fair trade/living wage pricing seem more reasonable. Price floors, combined with price ceilings and grain reserves on the top side, can put an end to the volatility and speculation of the last few years.
The current, 2008 farm subsidy bill had none of these economic stimulus mechanisms, nor did the 2002 and 1996 bills. Additionally, the main subsidy levels in the 2008 farm bill were not adjusted for inflation. Annual projected cost figures from Iowa State University show costs of production for corn to have risen by 45% from 2007 to 2009, for example. The increases are greater over a five year period. For example, corn following soybeans is projected to cost $4.32 per bushel for 2009. Farmers get 83.3% of 28¢ per bushel as a direct payment under the program. Ok, on 1/30/09 the price here locally was $3.56, for example. That’s a 76¢ gap between projected cost and price. A 23¢ subsidy drops the gap to 53¢. If corn prices fall to $2.63, however, they are still too high for the Countercyclical subsidy to kick in, because the trigger level was not adjusted for inflation. Countercyclical subsidies max out at 85% of 36¢ or (based, like Direct Payments, on historical numbers, current or actual ones, so they approximate to real figures). That’s about 31¢. So that covers a drop in prices from $2.63 to $2.33. LDP (Loan Deficiency Payment) subsidies kick in down at $1.95. So again there’s a gap between $2.33 and $1.95, a gap of 38¢.
What these numbers mean is that the 2008 farm bill may soon fail, with a U.S. farm crisis or depression and a return to massive dumping on LDCs. After the 1996 “Freedom to Farm” farm bill failed, Congress passed and the President signed four successive emergency farm bills. That could happen again soon. This then could reopen the farm bill. Additionally, the new Secretary of Agriculture, Tom Vilsack has kept the comment period open on the new farm bill. These factors, combined with the Harkin factor, (and Harkin as the key mentor for fellow Iowan Vilsack, and through him, Obama) The opportunity could quickly emerge for an economic stimulus that pays for itself.
But are we ready to push for it to happen? We'd better be!