| July 15, 2005: President
George W. Bush dropped an agricultural bombshell at the G-8
Conference in Gleneagles, Scotland. At the least, it was a bombshell
for U.S. agricultural producers who see the present farm program
as essential to their survival. According to a July 7 Bloomberg
press release, Bush “is seeking agreement with the European
Union on a plan to eliminate, by 2010, the $112 billion a year
that rich countries spend subsidizing their farmers.”
Bush’s proposal goes well beyond the subsidy reductions
currently being considered as a part the ongoing trade negotiations
in the Doha Round of the World Trade Organization.
Of the $112 billion that Bush proposes to eliminate, one
can readily assume that some $20 billion of that would come
from reductions in U.S. farm program spending. For a moment,
let us set aside the political improbability that the U.S.
Congress would accede to such drastic cuts. Neither will we
consider whether it is necessary to find replacement programs
for eliminated farm-payment programs. Let’s focus only
on the arguments one could make to justify the elimination
of various subsidies paid to U.S. farmers.
The first “subsidy” that comes to mind is the
direct payments that farmers receive based on historical production
figures. This type of payment is said to be decoupled because
it is not tied to farmers’ current production levels.
And, since decoupled payments do not affect production and
therefore prices, such payments do not influence quantities
traded internationally. Or, to use trade negotiations lingo,
decoupled payments are said to be “non trade distorting”.
This type of payment, the direct decoupled payment, is a
recent policy innovation. They came into being as the result
of a Congressional deal during the debate on the 1996 Farm
Bill. That deal allowed spending during the tenure of the
1996 Farm Bill to be based on “baseline” computations
that were made more than a year earlier when farm prices were
relatively low. Had the computations been made using the higher
prices that existed during the later stages of the debate
on the 1996 FB, agriculture would have been budgeted much
less money over the life of the bill. The tactic of using
the earlier, more generous, set of payment computations as
the basis for determining the 1996 FB budget came to be known
as “capturing the baseline.”
At the time, farmgate prices were expected to remain high
for the foreseeable future, so the additional “captured”
money was channeled to farmers as decoupled payments, allowing
farmers to get gradually diminished payments even under high-price
conditions. They were called AMTA payments because the title
of the 1996 Farm Bill that created them was called the “Agricultural
Market Transition Act”. Given that title, many believed
- and some said - that the goal was to wean farmers off of
federal subsidies and allow them to receive their income from
an export-driven marketplace. The idea was that the payment
levels would transition down to zero at some point in the
future.
Guess what? Export-driven prosperity did not arrive with
the implementation of the 1996 Farm Bill. Instead, total crop
exports remained at the level they had been for the previous
15 years, farmgate prices fell, and federal farm subsidies
more than doubled through the use of “emergency payments.”
By 1999, many farmers received more than 100 percent of their
net farm income from government payments. AMTA payments in
the 1996 Farm Bill were maintained and renamed direct payments
in the 2002 Farm Bill.
In evaluating the AMTA/direct payments, we want to ask two
questions: (1) Who has ultimately benefited from these payments?
and (2) Do they solve or ameliorate a market failure in crop
agriculture?
The AMTA/direct payments have been a boon for country bankers
and landlords. On owned ground, the banker can encumber the
guaranteed payment as a condition of making an operating loan
for a farmer. With this payment, the banker knows that this
year’s payment on the loan will get paid no matter what
the price or crop condition. For the landlord, most often
the AMTA/direct payment gets bid into the cash rent rate.
Farmers bid cash rent rates up because they know they can
pay part of an increase in rental rate from the AMTA/direct
payment. Land-owning farmers have benefited to the extent
that they: (1) have access to credit, (2) can quit farming
and make more off the land by renting it than if they farmed
it themselves, or (3) are planning on selling the land in
preparation for retirement because the payments are bid into
the price of land.
While farmers benefit from the increased availability of
credit made possible because of the direct payments, there
are far less expensive ways of achieving that goal. One might
even be tempted to call the direct payments the “Bankers
Guaranteed Annual Loan Payment Program.”
One of the negative consequences of assured direct payments
is that it makes it more difficult for those seeking to enter
farming to rent or purchase ground. They face higher land
prices because much of the value of the direct payments is
bid into the cost of land and annual rent payments. They must
face these higher land costs at the same time that they are
in the process of building up their inventory of machinery.
Precisely because the payments are decoupled from production
and occur whether prices are high or low, AMTA/direct payments
do not address the basic market failure in agriculture - inability
to self-correct in a timely manner when faced with persistently
low prices. In 1996, the direct payments were conceived as
a way to use government money (that may have been forfeited
otherwise) to induce farmers into accepting market reforms,
and not as a corrective measure for any market failures that
might be experienced by crop agriculture.
Clearly, if given the task, separate from all other considerations,
credible arguments can be made for eliminating AMTA/direct
payments. Next week we will consider arguments for eliminating
Loan Deficiency Payments/Marketing Loan Gains, again without
regard to probability of occurrence or considering other complications.
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.
|
