Conventional wisdom versus learning from history
With the passage of the 1996 farm bill, it was argued that farmers needed to plant for the market instead of the farm program and so many of the traditional farm program mechanisms were made ineffective.
By the 1998 crop year, corn prices had dropped from a 1995 crop year season average price paid to farmers of $3.24 to $1.94. The next year the price fell to $1.82.
The year ending U.S. stock levels for corn had increased from 426 million bushels (five percent of usage) in 1995 to 1.7 billion bushels (18% of usage) in 1999.
The conventional wisdom during the 1998-2001 crop years suggested that the low prices were the result of over production on the part of U.S. farmers. Even with government payments factored in, the value that farmers received was still below the full cost of production and, in many grain growing areas, government payments were more than 100% of net farm income. Farmers were using government payments to help pay production costs.
In that atmosphere, farmers were left with two choices. First, they could have reduced production. But, with land rents, land mortgage payments, and taxes, not to mention ongoing machinery costs, planting seemed like the best course of action as long as the price was above the variable cost of production. That way if there were a crop failure somewhere else in the world they would have something to sell.
Second, instead of reducing supply, farmers could work to increase the demand for their productâ€”cheap corn. Some promoted the direct burning of corn in corn furnaces as a means of heating homes. Others worked on the extraction of chemical chains from the corn kernel that could be used in the spinning of fibers that could be used to make shirts and other clothing items.
By far, the most popular way of increasing demand for corn involved the establishment of farmer-owned ethanol cooperatives. Farmers promoted ethanol with state and federal legislators as a means of achieving three goals. First, using corn to make ethanol would reduce the corn "surplus" and increase corn prices. Second, the production of ethanol would reduce the U.S.'s dependence on imported crude oil. And, third, the ethanol plants would fit in with a larger rural development strategy by providing industrial-type jobs in a rural setting.
It should be noted that in 2000 and 2001, the world consumption of grains was greater than the production of grains by the farmers of the world. While some analysts made note of that fact, the conventional wisdom still asserted that farmers were producing too much and the blame for overproduction was placed squarely on the shoulders of the U.S. farm program.
During this period, with world production levels falling below consumption and with U.S. government stocks of corn sitting at one-tenth of one percent of annual utilization, farmers were being told they were overproducing.
Only now when prices are high, does conventional wisdom recognize that grain demand has exceeded production in seven of the last nine years.