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Too much ag optimism?

Writing a farm bill during good times for agriculture could result in programs that won’t help farmers much if prices crash.

That’s the risk that University of Tennessee economist Daryll Ray laid out for members of the National Farmers Organization Tuesday during the group’s annual meeting in Des Moines, Iowa.

Ray didn’t try to predict which proposals will be a part of the 2012 farm bill, if Congress writes a new law this year.

“Most proposals of the farm bill have some element of revenue insurance in them,” Ray said.

That will work fine to smooth out bumps, if there isn’t a major decline in prices, but if prices go through a long bearish cycle,  “you’re going to be guaranteed a percentage of a low price,” he said.

Insurance works well to protect a few individuals against random events, but not very well when everyone is affected, he said.

Ray outlined some reasons why farmers should be skeptical of the view that prices are at a new plateau and any other support for commodity growers won’t be needed:

  •  The market for corn used for ethanol grew rapidly over the past decade, from about 1 billion bushels to 5 billion bushels. “We’re not going to get that kind of growth in the future,” Ray said.

  •  World population growth doesn’t guarantee that U.S. farmers will supply a bigger export market. The major growth in population will be in China, India and Africa, he said, where there is political pressure to be self sufficient in food. If local farms can be made more efficient, that’s also good economic development for regions of the world where 60% of the population till farms, he said.

  •  One more reason Ray is skeptical of benefits to U.S. farmers from exports is that for the past third of a century, U.S. exports have been flat. Global trade in the wheat, four major feed grains, including corn, and soybeans went from 217 million metric tons(MMT) in 1980 to 360 million metric tons in 2010, Ray said. U.S. exports remained at about 100 MMT during that time. U.S. market share fell, from 58% to 37% during those decades.

  • Historically, when commodity prices spike, global production increases and eventually the overcapacity lowers prices, about four to five years after the price increases.

In the 1970s, demand expanded and prices rose, leading to Japan’s development of soybean production in Brazil, Ray said. “We know what happened in the ‘80s.”

Ray said that one policy option Congress should consider would be a farmer-owned reserve that would set a floor on prices and a ceiling, but that would allow the market to operate within that band. He said he understands why farmers are reluctant to consider another reserve, since previous programs were badly administered. He’s like to see any future reserve run by a politically independent group.

Ray praised NFO and National Farmers Union for supporting that concept, even though it may not be popular with other farm groups.

He said he thought there might be more interest in a reserve after the 2008 increase in crop prices.

“There’s a tremendous interest in a reserve program when you get outside of the U.S.,” he said.

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