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Published June 09, 2014, 10:14 AM

How farm policy used to work

Between the 1930s and 1992, farm bills generally instituted compensation policies that took the form of price supports. These policies were designed to manage the surplus production that resulted from centuries of developmental policies while allowing U.S. farmers the chance, with hard work and good management skills, to provide their family with a livelihood.

By: By Darryl E. Ray and Harwood Schaffer,

Between the 1930s and 1992, farm bills generally instituted compensation policies that took the form of price supports. These policies were designed to manage the surplus production that resulted from centuries of developmental policies while allowing U.S. farmers the chance, with hard work and good management skills, to provide their family with a livelihood. Compensation policies, also allowed farmers to remain on the land until labor demands in other parts of the economy enticed them and their children to leave the farm.

While price support policies varied, they were generally tools that, in one way or other, managed the supply of various agricultural products.

For the major row crops, the price support policies were based on a nonrecourse loan rate — established in legislation or a formula written into the legislation — that allowed the producers of storable grains and fibers to take out a loan with the Commodity Credit Corp. — a government corporation — instead of having to sell the crop at harvest, a time to pay off production expenses. The harvested crop served as collateral for the loan.

This was important because prices at harvest were generally at their lowest point of the year. With the loan, farmers could market their crop later in the year at what they hoped would be a higher price. The loan was usually for nine months and bore an interest rate that was lower than farmers could get from a local lending institution. Those taking out loans were responsible for the storage of the crop and keeping it in marketable condition.

Farmers were permitted to sell the crop at any time — the rules for the Farmer-Owned-Reserve were different — and pay off the loan, plus interest. They could then keep the difference between the loan repayment costs and the sale price.

In the event that farmers were unable to sell the crop at a profit, they could forfeit the ownership of the crop to the government and deliver it to a CCC storage facility. The delivery of the grain served as full payment of the loan plus interest and the government had no recourse to force farmers to pay the difference between the value of the loan and the current value of the crop, thus the term nonrecourse loan.

Thus the loan rate served as a floor price for the covered crops because farmers could always take out a loan at the loan rate and deliver the crop to the CCC. The CCC would then hold the crop until the market price reached a pre-determined release price, at which time it would begin liquidating its holdings.

To protect against the CCC holdings becoming too cumbersome, various mechanisms were used to take land out of production and reduce overproduction and allow the price to remain above the loan rate.

If the loan rate and the release price were reasonably set, this mechanism served the interests of producers by ensuring a minimum price and doing what farmers could not do on their own — reduce production to ensure supply and demand were in balance at a lower price limit that at least allowed them to remain in production. It also served the interests of consumers in the U.S. and abroad by assuring a reliable supply of grains and fibers — at a pre-determined upper price limit — in the event of a reduction in supply or a surge in demand.

Because it is a major economic, political and agricultural power, the U.S. serves as the oligopoly price leader for many agricultural products and their substitutes with other countries selling their crops at a discount to the U.S. price, plus shipping. This relationship between the U.S. price and prices elsewhere remains the same whether the loan rate is high or low or whether the price is high or low. Others are always price followers.

FOR

The FOR was a variation on the CCC program with the major exceptions being that the loan period was longer and farmers were allowed to retain ownership of the crop, were paid a storage fee, and were allowed to capture the difference between the loan rate and the release price that was otherwise captured by the CCC.

While this type of storage and supply management system worked well for crops that had a long shelf-life, it was ill-suited for other crops. Crops like fruits, vegetables and nuts, instead, are eligible for marketing orders, which are authorized under the Agricultural Marketing Agreement Act of 1947 and subsequent amendments.

Marketing orders, under the oversight of the U.S. Department of Agriculture, allow a majority of producers of a given crop like cranberries to manage the supply of their crop through mechanisms like specifying the grade and quantity of their crop that can be shipped to market. They also can establish mechanisms for handling surplus production, provide for reserves, and establish sanitary standards and standardized sizes of marketing containers.

With these tools, producers can affect the supply of their product going to market, thus influencing price. Marketing orders work best for crops that are grown in a limited locale, have limited substitutes, and have a consumer demand that is relatively stable through a range of prices.

Milk producers also used marketing orders, while tobacco used marketing quotas for many years. In the past, sugar was most often protected by import quotas.

Livestock, unlike crops, have historically had production cycles that reflect the nature of production, as well as the ability of producers to manage the supply going to market. Unlike crops where the major asset — land — is fixed, with livestock the major asset — the cow or sow — can be sent to town when prices are low. When prices are high, livestock producers can keep an extra female or two to increase production in the medium-run.

These policies weren’t perfect, not by a long shot. There were times in which grain stock levels became burdensomely large. There were times in which politics overtook reason.

But in retrospect, the overall approach, even with its well-publicized warts, seems more defensible as a public policy than the programs of the past couple decades. Also, the earlier commodity programs — though highly criticized for their government costs and market interventions — on average cost less and arguably cause less economic disruption than current commodity and safety-net programs.

Editor’s note: Ray is the director of the Agricultural Policy Analysis Center at the University of Tennessee. Schaffer is a research assistant professor at APAC.

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