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Innovative Agr-Food Policies: Are They Out There?

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Global Agri-Food Forum 2009Mexico City, MexicoSeptember 17, 2009

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U.S. Farm Policy• Historically there have been two major

components of farm/commodity policy– Policy of Plenty: Ongoing public support to

expand agricultural productive capacity through research, extension, and other means

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U.S. Ag Policy Did Not Start in 1932• Historic policy of plenty

– Land distribution mechanisms – 1620 onward– Canals, railroads, farm-to-market roads– Land Grant Colleges – 1862, 1890, 1994– Experiment Stations – 1887– Cooperative Extension Service – 1914– Federal Farm Credit Act - 1916

• This policy of plenty often resulted in production outstripping demand

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U.S. Farm Policy• Historically there have been two major

components of farm/commodity policy– Policy of Plenty: Ongoing public support to

expand agricultural productive capacity through research, extension, and other means

– Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

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We have dropped the “Managing Plenty” Part

• In the past farm policies included– Floor Price– Supply management tools– Price stabilization and reserves

• Over the years and especially since 1996– All three were eliminated– Replaced with payment programs:

• Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments)

• Partially funded insurance schemes• In 2008 added another revenue based insurance scheme

(ACRE)

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Why Do We Have Chronic Price and Income Problems?

The Logic is Straight Forward•Over time, increasing amounts of land have come into production (Just a matter of where)

•Technology expands output faster than population and incomes expand demand•Market failure: lower prices do not solve the problem

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Why Do We Have Chronic Price and Income Problems?

The Logic is Straight Forward•Little self-correction on the demand side

– People will pay anything when food is short– Low prices do not induce people to eat more

•Little self-correction on the supply side– Farmers tend to produce on all their acreage– Few alternate uses for most cropland that will

allow it to come back into production when needed

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Current U.S. Policy Can CauseEconomic Crisis

When supply outruns demand:– U.S. Commodity prices plummet– U.S. grain farmers become wards of the state– U.S. livestock producers, other grain users and

farm input suppliers are subsidized– Low grain prices are triggered internationally– Many countries, especially developing countries,

are unable to neutralize impacts of low prices– U.S. accused of dumping

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Current U.S. Policy Can CauseEconomic Crisis

When demand outstrips supply:– Short-Run

• Prices explode• Livestock producers go bankrupt• Food prices increase at alarming rates• Countries hoard rather than export• Additional millions become

undernourished/starve in developing countries– Long-Run

• High prices bring big resources into ag production worldwide

• Prices crash again

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Food Is Different• From caveman to present

– First things first: Secure food to survive (also water)• Last summer we relearned that:

– “FOOD RULES”: Countries quickly take drastic measures to protect/secure food supplies

– REMEMBER:• With total free trade—same would be true• With increased use of decoupled payments—

same would be true• With increased widespread use of insurance—

same would be true

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Food Is Different• National security issue—just like military

security is to countries like the U.S. So …– Countries want to produce domestically as

much of their food as possible– Political considerations:

• Need to feed the population• Need an orderly exit of workers out of

agriculture (eventually)– Not pushed out of agriculture but– Pulled out of agriculture as opportunities arise in the

nonfarm sector

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Policy for the Future• All Countries

– Agricultural and food policy should be driven by the domestic needs of the country

– Trade is secondary• Developed Countries

– Create system of storable agricultural commodity reserves (provides price floor and makes food available when supply is thin)

– Unilateral and multilateral supply management agreements

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Policy for the Future• Developing Countries

– Invest in agriculture• Labor investment on the part of peasants and

small holder agriculturalists• Research, collaborative work between

agriculturalists and researchers• Provide production incentives

– Design policies that favor feeding the populace

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Summary of Unhelpful and Helpful Policies (From a Global Perspective)

• Unhelpful:– Relying on payments (when output > demand)

• Makes grain farmers wards of state• Shifts price and income problems to farmers in

other countries• Subsidizes users of grains (grain prices are

pushed below the cost of production)• Subsidizes input suppliers and services of

nonfarm agribusinesses ( because “too much” output being produced)

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Summary of Unhelpful and Helpful Policies (From a Global Perspective)

• Unhelpful:– Relying on payments (when demand > output)

• Prices skyrocket• Hoarding all around• Paralyzes trade• Causes additional (excess) resources to be brought into

agriculture which wring out slowly – Relying on Insurance

• Makes no sense for systemic price and income problems• Ditto all the unhelpful “relying on payments” statements

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Summary of Unhelpful and Helpful Policies (From a Global Perspective)

• Helpful:– Must be driven by domestic needs– Take into account (as opposed to work against or

ignore) the nature of food and agriculture– Invest in agriculture; help farmers become as

productive as possible– Provide price stabilization via price bands, food

reserves and crop rotations or fallow as needed– Promote and participate in multinational food and

price stabilization efforts

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A Final Thought• WTO…

– Rules suggest that maximizing agricultural trade should be countries’ primary goal

– Seems to ignore countries’ overriding need to adequately feed their people

• Trade is only one of several means to help secure ample food supplies at reasonable prices

• WTO… – Should levy sanctions for dumping on international markets– Encourage—not interfere with—countries’ policies to

produce for themselves– Recognize that reserves facilitate—not impede—trade

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank You

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