newsletter article, April 1999
The policy dilemma of the current
By Robert Jolly, Professor
of Economics, 515.294.6267, firstname.lastname@example.org, and Alan Vontalge, Livestock
Economist,, 515.294.6311, email@example.com
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
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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