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Reform is in the eye of the beholder

Agriculture.com Staff 08/14/2007 @ 10:09am

Those expecting major reform in the shape of farm bill legislation are now turning their attention to the Senate. While the House legislation included an adjusted gross income cap, country-of-origin (COOL), extra money for fruit and vegetable growers, an alternate revenue-based program for counter-cyclical payments and some expansion of conservation programs, it fell short of the dismantling of the direct payment and marketing loan program that some were angling for.

That leaves the Senate as the last hope of those who are looking for significant changes in commodity policy. The target continues to be the direct payment, marketing loan, and counter-cyclical payment programs which deliver the bulk of the government payment dollars to farm producers. One central question is: How and why did commodity policy drift into such a heavy reliance on payments?

Several elements contributed to this payment trend in the 1980s that affected all major crops such as the target-price based deficiency payment program. Other changes during this time affected a few crops early on, but later were applied to all program crops.

The marketing loan program, including Loan Deficiency Payments and Marketing Loan Gains, (LDP/MLGs), also was initiated in the mid-1980s as a means of making U.S. cotton and rice prices more competitive in the world market. The theory at the time was that U.S. loan rates had been too high -- above world prices -- pricing U.S. commodities out of the world market and forcing the U.S. to become the residual supplier.

The LDP/MLG was established to allow the commodity to be sold at a price below the loan rate—the world price—with the U.S. government making up the difference. Over the years this program was extended to other program crops and was made fully functional for all crops in the 1996 farm bill.

It was the establishment of this program and the elimination of the effectiveness of the non-recourse loan rate that allowed US farm production to be sold into the world market -- as well as the U.S. domestic market -- at fire sale prices. These fire sale prices were well below the cost of production, opening up the US to charges of dumping.

Unrecognized with this policy change was the reality that the U.S. is the oligopoly price leader in most major crops. Under these conditions competitors who want to move their product, price it just under that of the oligopoly price leader and float their product out of their ports. Price-followers can successfully engage in this marketing strategy to clear their markets. If the price of corn is $2.80, the price followers sell their corn for $2.60 a bushel. Likewise, if the price of corn is $1.85 a bushel, the price followers have no choice but to sell their corn for $1.65 a bushel if they want to clear their markets and make room for next year's production.

Three things became apparent. One was the explicit or implicit assumption of U.S. policy makers that $1.65 corn would force others in the world to reduce production, allowing the price to increase. They didn't. Like farmers in the U.S., they planted in hopes that others would either make the acreage adjustment or experience a crop failure. When neither happened, crop prices remained in a sub-$2.00 trough for four years.

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