The Next Farm Bill:
Will it Look Backward or Forward?
Robbin S. Johnson*
C. Ford Runge**
Prepared for the Woodrow Wilson Center for Scholars, Washington, D.C. with support from the Hewlitt Foundation. We gratefully acknowledge the research assistance and support of Kari Heerman.
* Robbin S. Johnson is a Teaching Fellow at the Hubert H. Humphrey Institute of Public Affairs, University of Minnesota and formerly Senior Vice President, Cargill, Inc., Minnetonka, Minnesota.
** C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota and Director, Center for International Food and Agricultural Policy (CIFAP).
Overview
U.S. Agricultural Policy: Looking Backward[1]
This paper will focus on what are traditionally called the “commodity programs”: the main subsidy provisions which underwrite U.S. agriculture. In addition to dairy supports, the commodity programs are aimed primarily at five field crops: corn, wheat, soybeans, cotton and rice. In fact, these five crops today account for over 90 percent of all farm subsidies. While other programs cover crops such as sugar, tobacco, peanuts and a host of fruits and vegetables subject to “marketing orders,” the five main field crops plus dairy receive the main share of subsidies under Title I of U.S. agricultural legislation, the “Commodity Title.” It is this aspect of farm policy on which our analysis will concentrate. In other papers, we will consider biofuels, agricultural trade, and rural development. As Congress prepares to authorize a new farm bill, we have sought to sketch a case for reform.
The origin of commodity price supports may be traced to attempts during the farm depression of the 1920s to establish “parity” prices for farmers based on a 1910-1914 index, when farm prices were especially attractive. The first serious attempt to achieve parity prices for farmers involved the division of the market for a commodity like wheat into a domestic market and a foreign market. Supplies in the domestic market would be limited to an amount that would drive up domestic farm prices to the parity level; the remainder, or the surplus, would be dumped on the foreign market for whatever it would bring. The plan was introduced into the Congress in 1924, and in each succeeding year through 1928. Although vetoed by President Coolidge, it laid the groundwork for subsequent efforts to raise farm prices through government intervention.
Between the stock market crash of 1929 and 1932, farm prices continued to decline, falling over 50 percent in three years. In the face of this near total collapse, President Hoover attempted to stem the tide with a Federal Farm Board, making loans to stabilization corporations and acquiring surpluses in an effort to hold them off the market. The Farm Board and its stabilization corporations did not have the financial capacity to stem the decline in world prices of staple commodities.
In April 1929, President Hoover recommended to Congress a limited upward revision of tariffs as a means of protecting domestic agricultural markets. In response to the presidential recommendation, Congress passed the Smoot-Hawley Tariff Act of 1930, raising tariff duties to an all-time high. This action set off a wave of protectionism around the world, serving to shut off foreign trade of all kinds and exports of American farm products in particular.
After these policy failures, agricultural economists devised an alternative, the Domestic Allotment Plan, in which each farmer would receive an allotment, or “right to produce,” based on farm production history. The sum total of such rights was to coincide with domestic consumption levels. The allotment would thus provide a subsidy only on domestic production; the remaining surplus would enter export markets at world prices. This “two-price” scheme, while never enacted, resurfaced in the famous Agricultural Adjustment Acts of the New Deal.
The Agricultural Adjustment Act (AAA), adopted May 12, 1933, was established as part of a tripartite New Deal “emergency” agricultural policy. Title I, the AAA, dealt with price and income supports. Title II provided for debt relief and farm credit, while Title III authorized the president to manipulate the exchange value of the currency. Title I contained elements of the proposals of the 1920s as well as provisions to control production through acreage reduction on individual farms, the authority to purchase and store commodities, and the authority to regulate the marketing of specialty crops through the employment of marketing agreements and orders. To implement these tools as “base acres” on individual farms,[2] the parity concept and “nonrecourse loans”[3] were forged.
The centerpiece of the AAA was the reduction of production through the control of crop acreages on individual farms. For complying with the approved reduction in crop acreage, farmers received a benefit payment. The money to make these benefit payments was to be raised through excise or processing taxes on the commodities involved.
This essential feature—acreage control in return for government payments—remained at the heart of all subsequent policies until the mid-1980s. But appraisals of the AAA in 1933-36 reached two conclusions. First, the production control features of the AAA were largely unsuccessful. Farmers in the 1930s found ways to circumvent the acreage control programs by “renting” their poorest acres to the government and by raising noncontrolled crops on the controlled acreage so that the total production of each farm was reduced little if at all. This came to be known as “slippage.” (The droughts of 1934 and 1936 did, however, reduce total agricultural production.) On the positive side, the benefit payments to farmers succeeded in bolstering the farm economy, helping farmers to purchase food, feed and supplies, and pay taxes. Thus, all but a handful of farmers supported the AAA, as did their farm organizations.
The Supreme Court found the AAA unconstitutional in early 1936 on grounds that processing taxes on commodities used to finance the control of their production was illegal. New farm legislation was enacted in 1938, eliminating the processing tax. The Agricultural Adjustment Act of 1938 for the first time provided comprehensive price support and production control based on the constitutional authority of Congress to regulate interstate and foreign commerce.
World War II did for the U.S. economy what the New Deal could not do; it brought full employment and pulled surplus labor on farms out of agriculture and into industries. Farm prices and incomes began to rise substantially. Whatever discontent had formed to the farm programs of the New Deal was forgotten as farmers reveled in their prosperity.
Yet worry was widespread over the prospect of a farm depression immediately following the end of the war. In the event, farm prices did not collapse as so many people expected. Because of the destruction in Europe and Asia, and the strong demand for food stocks and supplies among the victorious and occupying powers to feed the hungry, food stocks remained short and supplies inadequate. As a result, farm and retail food prices soared between 1945 and 1948. They dipped modestly in 1949 and moved upward again in 1950 and 1951 in response to the Korean War.
When wartime price support legislation expired at the end of 1948, the policy debate anticipated conflicts over commodity programs down to the present day. Two camps were identifiable. The principal policy goal of the first camp was to lower the level of price support on farm commodities and thereby reduce the extent of government intervention in the farm economy. In this camp were to be found most, but not all, Republican party leaders, businessmen from the agribusiness complex, and most economists. The overriding goal of the second camp was to maintain a high level of farm price support as a means of protecting farm incomes. They would accept whatever government intervention was required to implement the price support objective. Here were to be found Democratic party leaders from the South and the Plains, most, but by no means all, farm organization leaders (the president of the Farm Bureau was no longer supportive of high price supports) and some government economists and union leaders.
In 1952, Dwight D. Eisenhower appointed Ezra Taft Benson Secretary of Agriculture. Benson believed that government intervention in the economy was wrong and determined, with the support of the American Farm Bureau, to move to a system of flexible and market-oriented price supports. Yet farm prices began to sag in 1952, and by 1953 were falling badly. At the same time, productivity in agriculture due to technological advance was increasing rapidly.
To deal with the growing problem of surpluses, the “soil bank” concept was enacted into law in the Agricultural Act of 1956. It had two main parts. One was the Acreage Reduction Program (ARP) which operated in 1956, 1957 and 1958. Under this program, some 21 million acres were “banked,” so that no crop could be harvested and livestock could not be pastured. The second was the Conservation Reserve Program (CRP), designed to assist farmers to reduce the production of crops by shifting below-average cropland into long-range conservation uses.
Another policy idea developed in this period was to dispose of surplus agricultural products abroad, primarily in the less-developed world, through sales for nonconvertible foreign currency and other “soft” or concessional terms. This idea was enacted into law in the Agricultural Trade Development and Assistance Act of 1954, better known as P.L. 480 or “Food for Peace.”
The 1960s brought a new administration to Washington, convinced that farm prices could be increased and government costs could be reduced through a combination of demand expansion and mandatory production controls. Wheat farmers voted down mandatory production controls in referendum on May 21, 1963, ending all efforts by the Kennedy-Johnson administration to deal with the farm price and income problem in this manner. Congress then passed the Agricultural Act of 1964, which gave farmers participating in the acreage control program price support at $2.00 per bushel on their domestic share of the market, plus a voluntary acreage control program in which farmers were paid to retire their wheat base acres from production. This “paid diversion” added yet another twist to the basic quid pro quo of dollars for reduced production. To make cotton and wheat more competitive in international markets, the administration concocted programs which lowered the domestic price support of these commodities down to the export (or world market) price while guaranteeing producers that they would be paid the 1963 support value for their domestic share—$2.00 per bushel for wheat and 30 cents per pound for cotton. Once again, a “two-price” plan prevailed.
This export-oriented strategy, which prevailed through the 1970s, was not unanimously praised. Export-oriented agriculture in general received especially bad publicity as a result of the infamous Soviet grain deal, valued at 750 million dollars, in the summer of 1972. This drove grain prices sky high in 1973-74. Yet the Agricultural and Consumer Protection Act of 1973 was a direct extension of the acts of 1965 and 1970, with one new concept: a “target price”—a “what-ought-to-be price”—for measuring the size of the income support, or “deficiency payments” to farmers.
In 1976, Jimmy Carter appointed Bob Bergland, a farmer from northern Minnesota, to be his secretary of agriculture. The Food and Agricultural Act of 1977 carried farm policies and programs forward largely as they had emerged in the acts of 1965, 1970 and 1973. The contribution of the Carter administration was a frank recognition of the growing concentration of production among fewer large farmers, and the decline of the small and medium-sized farm. Farms in the United States declined from 6.7 million in 1934 to 2.7 million in 1978. Some 64,000 farmers in 1978 with sales valued at $200,000 or more accounted for nearly 40 percent of the total sales from farming.
The election of Ronald Reagan in November 1980, with landslide support in farm districts reacting to the Carter embargo on grain sales to the Soviet Union following its invasion of Afghanistan in 1979, brought what many felt would be a hard-edged conservatism back to agricultural policy. Few predicted that after decrying Carter’s excessive spending on commodity programs, which reached an annual high of $3 billion, Reagan would go on to spend nearly $26 billion in 1986.
The Agriculture and Food Act of 1981 was passed by the Congress and signed by Reagan in December 1981. It contained 17 titles ranging from floral research to dairy price supports. It also contained all the major elements of the farm programs of the 1970s. A combination of good weather and weak production controls in 1982 produced record breaking crops. Grain exports, given a mounting world recession, also declined. These developments caused USDA-controlled inventories and loans outstanding to soar in 1982-83 to heights never experienced, leading to the Payment-In-Kind (PIK) program. Under PIK, the Office of Management and Budget hoped to keep farm program payments “off-budget” by paying for massive land retirements with grain stocks already owned by the government. But as the emergency PIK program attempted to cut into surpluses, the forces of nature intervened unexpectedly—a major drought hit the corn belt in 1983, reinforcing the effects of PIK and driving down surplus stocks. However, even more powerful events were conspiring to drive agriculture into a true crisis. Falling export demand was coupled with rising real interest rates, as the inflationary period of the 1970s was forced to an end. The Federal Reserve Bank under Chairman Paul Volcker concluded that the pain of deflation was to be endured in the name of slaying inflation. The result was an extraordinary turn-around in real interest rates. These rates, which had actually been negative in 1979, at the height of the Carter inflation, were allowed to rise by 1983 into double digits, and actually exceeded 20 percent in real terms for a time, as the Fed hit the money supply brakes.