The policy dilemma of the current farm downturn

By Robert Jolly, Professor of Economics, 515.294.6267, rjolly@iastate.edu, and Alan Vontalge, Livestock Economist,, 515.294.6311, vontalge@iastate.edu

Whenever commodity prices decline and farm income suffers, many farmers and agricultural lenders turn to the government for relief.  These cries for relief usually focus on requests for direct government payments to farmers.  In addition, charges of unfair business practices are often leveled against agribusinesses and non-traditional farm production businesses.

As happened in 1994, the pork industry ran headlong into a slaughter capacity constraint and for a few weeks late in 1998 experienced the lowest prices for its product in decades. 

The federal government responded in its usual fashion by increasing crop-related subsidies through its feed grain apparatus.  In addition, an obscure farm program provision (the loan deficiency payment) kicked in and pumped additional money into the checking accounts of some corn and soybean growers. 

The federal farm program payments, estimated to be around $1.2 billion for Iowa farmers in 1998, took the edge off the potential drop in farm income.  But increased subsidies did little to assuage farmers’ concerns about their ability to compete in a commodity market with prices averaging below those received over the past decade.

For farm leaders and public officials, the re-emergence of farm financial stress poses a number of policy dilemmas of how to resolve the current situation.

• Uneven financial conditions -- Financial conditions are highly variable from one farm to another.  So a single policy solution is unlikely to prove successful.  Further the dispersion in financial status among farmers will make it difficult to form a political consensus on the need for or direction of public intervention.
• Unclear policy objectives – The objectives of public policy during a financial downturn can become a little murky.  Elected officials often speak in terms of “keeping people on the land,” “saving the family farm,” or “protecting the independent operator.”  This usually implies increased levels of subsidization for everyone.  Unfortunately traditional output-based subsidies may do little to facilitate short-term financial restructuring, ease the departure of failing businesses, or reposition those operations which have a likely potential for future success in the agricultural sector.
• Unacceptable support programs -- On the other hand, policies that offer incentives and resources to manage the financial consequences of loss are often rejected by those who would most benefit.  For many farmers faced with an unexpected and sizable loss, a check in the mailbox is likely to be much more appealing than programs offering loan guarantees, interest rate subsidies, or financial intermediation and counseling. 
  Moreover, targeted financial restructuring policies are often opposed by ineligible farmers because the policies are seen as aiding “bad managers.”  Although targeting assistance to farm businesses in need makes sense from an efficiency perspective, the result in many cases is a general lack of support throughout the farm community.  If fragmentation is sufficient, no policy response is forthcoming.
• Natural tendency to delay action – Lending institutions serving agriculture are well capitalized and have been quite profitable over the past decade.  For the moment, many financially stressed farm businesses have sufficient resources to allow restructuring.  Unfortunately, when lenders and borrowers have the resources to manage loss and restructure affected businesses, the most common managerial response is to delay action.
• Long-term solutions are inadequate for a short-term problem – Long-term efforts to increase efficiency through research, market development, or improved market access are likely to be beneficial.  However, they hold little promise for resolving near-term financial stress.
• Inadequacy of risk-management tools – Much of the current policy debate centers around improved risk management instruments, institutions and markets.  These efforts to privatize and extend agriculture’s safety net are extremely important.  However, risk management and insurance schemes cannot in themselves resolve financial problems resulting from long-term structural price declines.  Under these conditions, restructuring and repositioning the business to increase revenues, reduce unit production costs, or capture margins is the only meaningful way to resolve financial stress.  Risk management can play an important supporting role in this process – but it’s not the main event.
• Reassessment of Freedom-to-Farm – The Freedom-to-Farm Act needs to be carefully assessed both in terms of its objectives and design.  More attention needs to be paid to the adequacy of this legislation to deal with price volatility, efficiency, food security and the cost of increased risk.
  Moreover, the concept of transition implicit in the bill needs to be broadened.  It needs to go beyond the transition from subsidies to the market to include the transition ofsome producers out of agriculture,and for others a transition to a highly-coordinated and competitive industry.
  
• Limited state resources – In Iowa, where agriculture is a significant part of the state’s economy, it is not really feasible to offer generous income transfers to financially troubled farmers.  The budget consequences quickly become unmanageable.
  However, one way the state can respond meaningfully is to offer support to individuals affected by financial stress.  Financial counseling, mediation, job placement, and mental health programs offer some of the most appropriate and cost effective options that the state budget can support.  Although programs of this sort may lack political resonance, they need to be carefully considered by elected official and agricultural leaders.

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