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Farmers' Interests Take a Back Seat; Will reductions in domestic supports in OECD countries raise crop prices in developing countries?; other news (Sunday Jan. 30, 2005 -- CropChoice news) -- 1. The CRP and the Negative Impact on Rural Communities 1. The CRP and the Negative Impact on Rural Communities By Daryll E. Ray The USDA recently released a report, "The Conservation Reserve Program:
Economic Implications for Rural America," in which it "estimates the
impact that high levels of enrollment in the Conservation Reserve
Program (CRP) have had on economic trends in rural counties since the
program's inception in 1985 until today." The report is available on the
internet at http://www.ers.usda.gov/publications/aer834/ . It would seem relatively obvious that the local suppliers of seed,
fertilizer, other farm chemicals, farm equipment and repair, and grain
storage, handling, and processing services would feel some impact when
acres are taken out of production and put into the CRP for 10-15 years. It is this concern that four major grain organizations highlighted as
part of their argument to the USDA calling for a major reduction in the
number of acres enrolled in the CRP. The National Grain and Feed
Association, the National Oilseed Processors Association, the North
American Export Grain Association, and the North American Millers
Association argued that "heavy CRP enrollment, particularly in the
plains states, has had a devastating impact on some local economies." First, looking at the US as a whole the USDA report found that "[h]igh
CRP enrollment was associated with a net loss of jobs in some rural
counties between 1986 and 1992, but this relationship did not persist
throughout the 1990s. Farm-related businesses, such as input suppliers
and grain elevators, continued contracting throughout the 1990s, but
other business expansions moderated the CRP's impact on total
employment." The report notes that the CRP may be responsible for some of this gain
which comes in "increased outdoor recreational expenditures in rural
areas." We write this not to minimize the impact the CRP may have had on
individual communities-because we know it was very real in some
areas-but to acknowledge that the picture is not one that only shows
losses. The second issue that we would like to raise is whether or not the
member firms of the four organizations want to establish community
impact as a criterion for determining whether or not they close down a
soybean processing plant, a grain operation or a flour mill in a given
rural community. Our suspicion is that they don't. For them the closing
of a mill or plant is one of internal economics for the firm and
community impact is of minimal concern. We have yet to see a press release announcing that a company's
management has decided to keep a chronically unprofitable processing
plant in operation because closing it would negatively affect the local
rural community. Community impact is by all means important and CRP implementation rules
and regs do explicitly take that into account. One could argue that more
consideration should be given to CRP impacts on local rural communities.
But, unless they are willing to abide by a correspondingly-high decision
standard, we are not sure the processing firms are the credible critics
in that regard. Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural
Policy, Institute of Agriculture, University of Tennessee, and is the
Director of UT's Agricultural Policy Analysis Center (APAC). (865)
974-7407; Fax: (865) 974-7298; dray@utk.edu; http://www.agpolicy.org.
Daryll Ray's column is written with the research and assistance of
Harwood D. Schaffer, Research Associate with APAC. 2. Farmers' Interests Take a Back Seat by Paul Beingessner Former Canadian Agriculture Minister Lyle Vanclief, the guy who said no
to everything, is only a bad memory on the farm. Under his direction,
Agriculture Canada generally treated farmers like the stuff that
collects on their rubber boots in calving season. Vanclief's one concession to farm woes (largely caused by his government
slashing farm subsidies while our competitors ramped theirs up) was
AIDA. AIDA salvaged the hog industry in Canada from its death throes. It
did darn little for the average farmer, but then, that was by design,
wasn't it? Vanclief's regime wanted to thin the ranks of the average farmer. Farmer's in western Canada got used to losing all kinds of battles over
the last few decades. Consider the formidable lobby formed to purchase
the government hopper cars when the government said it wanted rid of
them. It has fought that as yet unsuccessful battle for a decade. Or
consider the fight to get the Canadian Grain Commission to force grain
dealers to obtain the necessary licenses and bonding. Despite desperate
pleas from farmers, the CGC has refused for years to enforce its own rules. Competitive access on the railways, curbs on GM wheat, BSE testing for
all cattle, farm safety net programs that actually protect farmers, gun
registration rules that recognize the unique needs of rural and remote
areas, these are all things farmers see as common sense and integral to
their survival. In return for their lobbying, they are given the deaf
ear and extended finger from government. Generally, someone benefits from each of the decisions or non-decisions
by government. This goes on at the international level as well. Take the
issue of patents on plants. Patenting is out of hand. It threatens to
place control over the world's plant genetic resources in the hands of
private companies. This has generated an ongoing battle between some
private companies and citizens' organizations around the world. For
example, I've written several times in this column on how an American,
Larry Proctor patented a variety of yellow bean he took from Mexico.
Larry managed to kill a thriving bean industry in Mexico that was
exporting yellow beans to the U.S. International agencies have been
unable to get the patent overturned because you have to move heaven and
hell to convince the American patent office it got it wrong. Proctor's story doesn't amount to a hill of beans compared to Monsanto's
patent claim on 50 percent of the world's soybeans, or Myriad Genetics'
patent over a couple of genes implicated in breast cancer. Myriad claims
it can force anyone testing for these genes to use only the test it
developed. None of these things make any sense to an ordinary person. You need the
highly developed brain of a patent lawyer or politician to see why a few
companies need to be enriched at the expense of millions of regular folk. Actually, there is a reason big companies receive such favorable
treatment. It has to do with their privileged position on the world
stage. Take the world's largest agro-chemical company, Syngenta. Syngenta was involved in the race to decode the rice genome. While
publicly funded laboratories were publishing their results as they
decoded the rice genome, Syngenta was hoarding its knowledge. The
patents it subsequently asked for would give the company control over
the genes not just of rice but of most of the world's other major crops.
Scientists believe this could cause huge problems for plant researchers
around the world. Patents are intended to apply to inventions. Decoding the rice genome is
a discovery, not an invention. Nevertheless, major patent agencies like
the U.S. and European Patent Offices are allowing companies to patent
genetic codes. In Syngenta's case, this could give it immense power on a
global scale. Syngenta has huge influence in world decision making around issues like
patenting. The Syngenta Foundation is a member of the Consultative Group
on International Agricultural Research (CGIAR). CGIAR membership
consists of 46 countries, organizations like the World Bank and several
UN agencies, and, oh yeah, a foundation linked to a multinational
agro-chemical and seed company. Syngenta also has observer status at
several UN agencies and is able to present its views to these important
bodies. Farmers, on the other hand, must fight tooth and nail to be heard. In
the case of the government hopper cars, farmers are told their desire to
have a seat at the table in discussions over transportation is somehow
illegitimate. It's okay for the Syngenta's of the world to influence
policy to suit their ends, but farmers should sit down and shut up.
Sadly, they often do. (c) Paul Beingessner (306) 868-4734 phone 868-2009 fax
beingessner@sasktel.net 3. Will reductions in domestic supports in OECD countries raise crop prices
in developing countries? If not, what would? By Daryll E. Ray To most, the US and several other OECD countries are clearly to blame
for the recent spate of low farm prices and incomes in developing
countries. And no wonder, given the billions of dollars that are spent
on domestic farm programs in those countries. The developed countries
are also accused of coming up short on WTO's other two agricultural
trade reform pillars market access and export subsidies. While
acknowledging the other two pillars and a host of other constraining
influences on farmer prosperity in developing countries, the focus of
this paper is the criticism of domestic supports and domestic support
levels. The World Trade Organization (WTO) and a diverse list of others quite
logically assume there is a one-to-one connection between high US
domestic supports and US overproduction, which, in turn, puts downward
pressure on farm prices worldwide. The WTO solution is also quite
logical: Eliminate or significantly reduce domestic supports that are
classified as trade distorting. While no substitution of supports is
preferable, if domestic support must be considered, countries should
choose lump-sum payment schemes in which the amount paid to farmers is
invariant to what is or is not produced on their farms. Then the scourge
of overproduction will be laid to rest, prices will recover, and farmers
in developing countries will no longer suffer prices that are below the
(full) cost of production in the US or other developed countries. It sounds like a simple problem that can be solved simply. There are two
premises in this logic, however, that should be examined. The first
premise is that the reason the US overproduces is because of high
domestic supports. The other premise is that once domestic supports are
lowered, transformed into another type, or even eliminated, production
will decline markedly. This paper questions the validity of both of
these premises. The next logical question is then posed: if these
premises are wrong, what other approaches would actually achieve the
improvements in prices and incomes of farmers in developing countries
desired by governments of developing countries, non-government
organizations, and multilateral organizations? US Production and Productive Capacity The question is not whether US agriculture typically overproduces. It
does and has for scores of years. The question is why. The answer is not
encompassed by a simple statement that "US farmers receive subsidies to
produce." It's a puzzle with many pieces. At the present, let's consider
two of the component pieces. First, the US has long had a public policy
to expand the productive capacity of agriculture at taxpayers' expense.
Secondly, individual crop farmers have no rational choice but to use the
full productive capacity of their land all the time. US Policies that expand productive capacity From its birth as a nation, the US pursued policies that promoted a
phenomenal growth in the productive capacity of agriculture, supported
by the taxpaying public. These developmental policies increased
agricultural productive capacity by making agricultural inputs more
plentiful, more productive or less costly. It began with frontier expansion through land distribution. As early as
the late 1700s, the U.S government offered land for settlement at
bargain-basement prices per acre and offered it to Revolutionary War
veterans in recognition of their service.. In the mid-1800s, under the
Homestead Act of 1862, land was virtually given to anyone who would
settle and farm it. Once the frontier closed, the U.S.'s most important developmental farm
policy was public investment in experiment stations in each state (Hatch
Act of 1877), land-grant universities (Morrill Act of 1862) and
extension service (Smith-Lever Act of 1914). This set of institutions
increased the supply, lowered the cost, and improved the quality of
physical inputs like seed, chemicals, equipment, and of less tangible
inputs like the managerial and decision-making abilities of farmers.
Today private companies provide an increased measure of technologically
advanced inputs but nearly all of those products are built on a
foundation of basic and applied research completed through publicly
financed research stations. The mammoth growth in agricultural productive capacity in the U.S. was
the result of a continual public investment in agricultural research and
education. Economists compute the rate of return of the public's
investment in research and extension to be between 20 and 60 percent.
The combined annual expenditure by federal, state and local governments
on these agricultural research and education activities continues to
exceed $10 billion. It is estimated that private sector investment in
agriculture research equals or exceeds this amount. Since 1950, the
generation and diffusion of output-expanding technologies has doubled
the total output of the eight major U.S. crops. Clearly, the U.S. government has been intervening in agricultural
markets in a gargantuan way for well over a century to expand productive
capacity separate from any consideration of "farm program" subsidies. Farmers produce at full productive capacity In the agricultural sector, productivity-enhancing technologies are
quickly adopted, typically increasing supplies faster than growth in
demand, and putting downward pressure on prices. The lower prices, in
turn, become further incentives to adopt more cost-reducing
technologies, and prices continue their slide. In this way, production
agriculture is under constant price pressure, with periods of brief
reprieve generally the result of disasters or other random events. Given that food is a necessity for life, it is urgent that the
productive capacity of agriculture continue to stay well ahead of
immediate needs. Most agree that this important part of agricultural and
food policy should be continued. But the nature of crop agriculture
means that all of its productive capacity tends to be used all of the
time. This is true even as individual farmers go out of business because
the land almost universally remains in production just under new
management. The result of this kind of thinking was the 1996 Farm Bill, which
removed all vestiges of government price supports and annual supply
controls. It should be noted that the 1996 Farm Bill was debated and
passed during a period of very high prices and high optimism for growth
in the U.S. agricultural sector. The high prices were primarily a result
of tight world markets, compounded by weather conditions in the U.S.
that resulted in 1995 yields that were well below trend levels. At the
time, USDA forecasters were projecting tremendous growth in U.S. crop
exports for the foreseeable future. Why Agricultural Markets Fail to Self-Correct As suggested earlier, there are a number of components to the farm price
and income problem. To this point we have only mentioned a couple
elements: publicly-funded research continually expands productive
capacity and major commodity crop farmers tend to use all of available
productive capacity all the time. When the farm policy instruments that
traditionally gauged production to demand and supported prices were
eliminated in 1996, prices fell worldwide. But why should that be? If
aggregate agriculture worked as described in economics textbooks,
government production-throttling and other price-and-income bolstering
programs should not be necessary. It is important to understand why agriculture does not self-correct.
Once that is understood, expectations concerning how agriculture will or
will not react to changes in domestic and international policies can be
formed more accurately. The self-correction issue is so important because market disruptions
occur so frequently in agriculture. One obvious disruption is
weather-based, random fluctuations in yields. A longer term, continuing
force that affects agricultural markets is that productivity growth
tends to outstrip the traditionally slower growth in food demand. Domestic demand for agricultural products in a country like the US grows
with population but, unlike the demand for cars, houses, clothes and
most other product categories, doubling a consumer's income will have a
minor impact on his demand for food. Likewise, the rate of growth in
export demand over time has been disappointing, especially in the case
of grains. If the growth in demand for agricultural products kept up
with production, low farm prices and incomes would be much less of an
issue. But that is not the case, and as mentioned earlier, in order to reduce
costs farmers eagerly adopt new technologies as they become available.
As other farmers follow suit, output increases faster than demand and
prices fall. The lower prices, in turn, become further incentives to
adopt more cost-reducing technologies, and prices continue their slide. The mere presence of low prices is not the problem. What matters is how
consumers respond in terms of the amount they are willing to buy and how
producers respond in terms of the amount they are willing to produce
next season. If consumers bought more of the lower priced goods and
producers cut their production, excess inventories would quickly vanish
and prices would arrive at profitable levels once again. If this adjustment could take place in the agricultural sector, there
would be no fundamental price and income problem. This is exactly the
way it works in most product-producing industries: consumers buy more
and producers provide less in response to a drop in prices, an increase
in inventories, or a drop in sales. Prices rise and profitability
re-appears. But neither the quantity of crops demanded nor the quantity
supplied is significantly responsive to changes in price, so timely
market self-correction does not take place. Total annual output remains
relatively constant irrespective of prices, the level of subsidies, or
other sources of revenue. As mentioned earlier, even when individual farmers go bankrupt, total
output changes very little. In contrast to other industries, where a
plant closure means a reduction in industry size because the land and
other assets are sold to a different industry, crop acreage typically
remains in production. It is merely tilled by someone else. A farm sale
does not typically reduce the size of the agricultural industry. In
fact, output per acre may actually increase because the new owner may be
a better manager or is better capitalized. The bottom line is this: regardless of the cause of decline in revenue,
total crop output declines very little in response. Self-correction
works no better on the demand side than on the supply side. To establish
an agricultural policy based on the assumption that free market
adjustments will occur within a reasonable time is in direct conflict
with what we know about how agriculture works. The following section
provides examples of agricultures that continue to use nearly the same
land resources after severe price or government subsidy reductions. The
mix of commodities grown changes with changes in prices among products
but the land is not left idle. This does not mean that current U.S. farm policy is blameless. Far from
it. Excess production and fire-sale prices did not occur because farmers
responded to payments and increased production. It occurred, as
suggested earlier, because the U.S. no longer has the means to throttle
its ever expanding productive capacity or to establish a floor on
commodity prices. Acreage set asides and effective price supports are no
longer part of the current U.S. farm program so all of agriculture's
productive capacity is used all of the time. Predictably, when
additional production from the acreage-that would have been set-aside
under previous legislation-flooded the market, prices were driven below
formerly-available price-floors. Once the land was brought back into
production, it remained in production. By far, it is the expanding size of agriculture's productive capacity
that has the most depressing effect on prices. And yet, those public
expenditures that expand productive capacity, including research and
extension, general infrastructure and other capacity building
activities, are classified as non-trade distorting and put into the
green box. To me that classification and the conventional wisdom
attached to it are totally inaccurate. To me, all or most of the domestic support programs are assigned to
boxes of the wrong color. If judged by the degree to which a domestic
program depresses prices, an argument can be made that the blue-box
supply control programs and the amber-box price support programs belong
in the green box and the research, extension and many of the programs in
the green box belong in the amber box. Of course, the box designation
partially depends on the how each program is administered. If supply
control and price support programs were used to raise prices well above
the cost of production, the amber box comes back into the picture. If
research, extension and other currently designated "non-trade
distorting" activities are only invested to the extent required to
maintain productive capacity and not to expand it, then such policies
should logically remain in the green box. None of these possibilities
seem likely. The most striking conclusion of all this is that, given the mammoth and
likely accelerating growth in productive capacity and the nature of
agricultural markets, a subset of the domestic programs that the WTO and
others condemn may be the very programs that are needed to prevent
dumping and to achieve politically acceptable price levels, especially
in developing countries. If those or other programs were accepted, most
of the issues concerning government payments would be mute. Government
payments don't influence total crop production much no matter what but
payments also would be de-emphasized if more price-oriented policies
were implemented. This is an abridged version of an article written by Daryll E. Ray from
the Agricultural Policy Analysis Center, University of Tennessee,
Knoxville, TN | |
