Farm Bill Proposals Spread Less Butter on More Bread

While critics say farm support levels are too high and unfairly distributed, the reality is the agricultural programs support rural economies and loan deficiency payments are a necessary safety net both for producers and rural communities. Steve Ford

Published on: Aug 4, 2006

Debate over the 2007 farm bill has begun and the very justification of farm support has been challenged. Critics of farm programs often point out that they were designed for a time when more farmers and more rural communities depended on an agricultural economy devastated by The Depression.

Secretary of Agriculture Mike Johanns has said that current levels of support are too high and unfairly distributed. His goal is to reduce program payments and spread the remainder over more farmers.

Is farm support really needed?

A recent Food and Agricultural Policy Research Institute analysis of the United State's World Trade Organization proposal indicates world price increases for all commodities as a result of trade liberalization. However, the WTO proposal also would lead to U.S. production decreases for most crops, which would reduce farm revenue. Cotton especially would be hard hit because even though world price is expected to increase 2.5% (a low estimate in some sources), production is expected to decline 6%. Exceptions are corn, wheat, and livestock products which would see both price and production increases. Even so, estimated revenue increases for these “winning” crops would be far less than the reductions in government support.

In addition, commodity markets now are increasingly volatile, partially because of the increase in trading by speculative funds. Futures prices for corn, soybeans, wheat, and cotton have been on a roller coaster for much of this past spring, with price changes rarely the result of fundamental market forces. Market volatility will increase with increases in global production and demand as a result of trade liberalization.

The conclusion is that increasing global competition and volatility in commodity markets as a result of a reduction in government support also make the case for increased government support. Johanns also wants to spread any remaining support over more farmers, including livestock producers who will benefit the most from trade liberalization. None of this makes sense to me, but neither do many other arguments against farm support.

Loan deficiency payments are often a target of farm program critics. However, loan rates for corn, wheat, and cotton in the 2002 farm bill were set at only 92% of cost of production, exclusive of land costs. No farm is going to increase wealth from collecting LDPs, especially since they have been adjusted downward since 2002. They are truly a safety net, and one that is necessary for all program crops. There may, however, be other policy tools that can provide that safety net.

Often the fact that fewer rural communities are now agriculture-dependent is also used to support arguments against farm income supports. However, agriculture still has an important impact on local economies. If 60% of a 10-mile square around a small community is in program crops (five miles in each direction), that would equal 38,400 acres of cropland. If farm revenue declines just $50 per acre due to price decreases, that results in total lost revenue from that area of $1.92 million. Total lost economic activity for the community is at least double that, resulting in an economic impact of about $4 million. That is a significant amount even if the community has most of its employment in non-agricultural enterprises.

Clearly there is a need for a good farm revenue safety net. Farm policy-makers need to be aware that gains from trade liberalization will not be sufficient to offset lost government support, nor will they remove the need for a safety net. Further, cutting the agriculture budget and spreading the remainder among more participants will destabilize farm and rural community incomes and have significant economic impacts that have not been acknowledged by farm policy critics.

Ford is a northern Alabama farmer who earned his doctorate in agricultural and applied economics from the University of Minnesota.