AgDM newsletter article, November 1998
By Neil E. Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, 515.294.6354, email@example.com
The 1996 Farm Bill represents a significant departure from traditional federal farm legislation. While the transition away from government programs will likely produce a more rational system of resource allocation, several important implications of the shift deserve mention.
Loss of safety net
The loss of the so called safety net as protection against low prices is proving to be a serious problem, as we had feared. While some sectors of U.S. agriculture have recently enjoyed favorable prices, low prices have returned.
U.S. farmers are the world’s best economic citizens. Give them half of an economic incentive and they will increase output. The result is the disproportionate drop in price and profitability. This means that consumers are in a very favorable position. Over the long term, they are assured of an ample supply of food and fiber at a relatively low cost. However, it also means that producers periodically endure periods of low prices.
Less economic buoyancy
Elimination of the federal farm programs will mean less economic buoyancy from government. While the proportion of farm income coming from government programs has dropped from the relatively high levels of the mid 80s, elimination of the farm programs will, of course, remove whatever buoyancy comes from government benefits. After a period of adjustment, the economic returns to labor and capital will likely return to an equilibrium level.
Another significant feature of the elimination of federal farm programs is the shift in land use patterns that will occur over time. Shifts in land use will be dramatic and felt across the agricultural sector, but the greatest shift will occur in areas of marginal land.
Traditional government farm programs attempted to help balance demand and supply by idling land. Depending upon the year, the amount of idled land ranged from none to 70 to 80 million acres.
The land was idled in checkerboard fashion-some of the very best land was idled and some of the poorest. This was not economically rational but it spread the burden of adjustment over the entire country and it did not squeeze producers economically as adjusted were made in the productive base.
Under the 1996 legislation, production decisions are left to the market. In addition, the market doesn’t adjust production in the same way as government programs. The market squeezes out the thinner soils and steeper slopes-the higher per-unit cost of production areas.
With no land idled, production increases cause crop prices to fall and land values come under pressure until there is less profitability for crop production in the least productive land than for the next most profitable use for that land. The least productive land than transitions out of inter-tilled crops to a less intensive use or to another crop or grazing land. Depending upon the area, some might transition to wasteland.
Rather than having 70 to 80 million acres of farmland out of production on a checkerboard pattern; there could be that many acres that would transition to a lower valued use. The transition would tend to be concentrated in areas with lower productivity land that has thinner soils and lower rainfall.
This movement of land to a less intensive use would spell economic pain for producers. The adjustment pain would be felt, not just by those at a periphery of the core producing areas, but by producers everywhere. So, while the market is doing its job, the squeeze is felt even by those on the most productive soils. The production of major crops shrinks into a more compact area of the best land.
Beyond that, those geared up to sell inputs to or purchase outputs from a crop-based agriculture also would have to adjust. Indeed, the transition for farmers would be shielded in part by the Conservation Reserve Program. However, little or no adjustment assistance is expected for those who dry, store, or ship grain or oilseeds or who sell seed, fertilizer, chemicals and equipment for a row-crop based agriculture as the area transitions to grazing.
That zone of thinner soils and steeper slopes at the periphery of the major crop producing area becomes a swing factor in production. In times of good prices, it swings back into intensive production. When prices fall, it’s squeezed out again. This is why the most intensive resistance to the 1996 Farm Bill is currently in those swing areas where the next best use represents an economic jolt for producers and other involved.
For each major crop, there will be a core area of production and a swing zone at the periphery.
These land use shifts aren’t likely to be one-time events. As exports rise (or fall), domestic demand rises (or falls) and changes in supply from technology and weather occur, the zone of swing acreage at the periphery of the core areas will see shifts in land use.
All of this is rational economically, but it adds enormous uncertainty for producers, input, suppliers, storage and marketing firms, and shippers.
The agricultural sector, in terms of policy, is characterized by two important features:
First, the number of producers is so great that no single producer can influence price with his/her output decisions. Therefore, producers may not cut back on production until price drops below variable costs or they are able to shift to a more profitable alternative crop. This feature makes it difficult for the sector to reduce supply without government assistance.
Second, although we have become very clever in developing more effective chemicals, better seed varieties, larger and more efficient equipment, and improved management, our cleverness still hasn't give us much influence over weather. Weather is the big factor influencing the supply of the major crops in this country. Given the enormous capacity to produce, a series of years with favorable weather puts downward pressure on price. In addition, it was expected that farm commodity prices would be more volatile than during the era of farm programs. This is important to consumers as well as producers.