AgDM newsletter article, November 1998

Fine tuning Freedom to Farm

Neil HarlBy: Neil E. Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, 515/294-6354, harl@iastate.edu

In testimony in the U.S. Senate on September 15, I focused on what circumstances would turn crop prices around.  Four possibilities were identified:

The action by the Congress in October sent a fairly clear signal that the economic pain inherent in the fourth possibility (above) is unacceptable, politically.  The $5.975 package signed into law on October 21, when coupled with the advance of the Spring 1999 payment into the fall of 1998, the regular AMTA payment for 1998, and the cost of the LDP and marketing loans, will boost the subsidy level to nearly $20 billion.  That is reminiscent of the subsidy levels of the mid-1980s.  Even at this level, farm incomes will be down.

With no pick-up in exports and average or better weather in 1999, we could be in worse shape a year from now than we are this autumn.

The troubling scenario is that with no pick-up in exports (indeed further weakening appears to be the most likely possibility) and average or better weather in 1999, we could be in worse shape a year from now than we are this autumn.  Only half of the regular AMTA payment will be available and, with 1999 not being an election year, further Congressional assistance seems remote.

Fine tuning options

That's why it seems prudent to begin to ponder some "fine tuning" options on a contingency basis—if crop prices aren't boosted by bad weather or a pick up in exports. 

Here's a short list of five items to think about.  Many people, including some in the new Congress convening in January, will almost certainly be inclined to hope for bad weather - somewhere else - and a fast recovery from the economic malaise affecting a disturbingly large part of the world, but neither is a sure thing.

Farmer-owned storage program

Re-establishing a farmer-owned storage program for major commodities under carefully established rules for release could help to insulate some production from the market.  It would make the most sense if the low price problem were to last for only a year or two.

Long-term land idling

Long-term land idling (up to 20 years) in marginal production areas in the so-called periphery or "swing zones."  Those are the regions that are expected to be squeezed out of intensive crop production in times of low prices, but get back into the ball game when prices recover. 

Long-term land idling could help ease the economic and social costs of adjustment in those areas.  It would mean less sales of fertilizer, chemicals, seed and machinery and so it would impact the communities.  But those communities are hurting now and will suffer from the periodic market adjustments that will characterize their economic life from now on.

Discretionary short-term land idling

If prices of major crops were to remain for a specified period below a designated level (with both aspects determined within a legislative framework) standby authority could be given to the Secretary of Agriculture to implement an acreage set aside program.  This would be viewed as a last resort measure to cope with pressures on the supply side.  One thing we learned decades ago—it is less costly to prevent production than to compensate farmers for lost income once price and profitability have been driven down disproportionately.

Direct lending and loan guarantees

To deal with a possible credit crunch in the Spring of 1999, and (even more importantly) in the Spring of 2000, adequate funding for FSA direct lending and loan guarantees for limited resource borrowers is needed.

Marketing loans and LDPs

Finally, it seems prudent to continue LDP and marketing loans, possibly with a slightly higher loan rate, but not higher than the cost of production on marginal lands.  We certainly should not induce more production.  That would be perverse.

Call to action

It is important to note that any programs to ease the downside adjustment pressures (LDPs, marketing loans, AMTA payments, additional Congressional appropriations as in 1998, or any other effort) frustrates the market and prevents the market from doing its thing of squeezing out land and causing the land to shift to a less intensive use.

It's entirely possible that none of this will be necessary—this time.  With bad weather in South America, China, South Africa and Europe, we could see $3 corn and $8 soybeans in less than a year.  On the other hand, we could be scraping by with $1.60 corn and $4.80 soybeans.  We simply do not know which scenario will prevail.

The prudent approach would be to begin some contingency planning—just in case.  After all, any fine tuning will require several months of deliberations in Congress.  We can't very well wait until we're in the tank with no assistance forthcoming to begin thinking about options.

 

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