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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
2. Farmers' Interests Take a Back Seat
3. Will reductions in domestic supports in OECD countries raise crop prices in developing countries? If not, what would?

1. The CRP and the Negative Impact on Rural Communities

By Daryll E. Ray
Agricultural Policy Analysis Center

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
Agricultural Policy Analysis Center

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