Food and Agricultural Policy—Old Wine in New Bottles

One year after enactment of four-year legislation, U.S. agriculture and agricultural policies are in turmoil. Federal outlays to support farm commodity prices and income ballooned to $12 billion in the fiscal year ending October 1982—the highest in more than a decade. Aggregate net real farm income for 1982 was the lowest since the Great Depression. For the first time in thirteen years, last year's value and volume of U.S. agricultural exports declined, and a further decrease is forecast for 1983. Charges and countercharges of unfair trade practices reverberate across the Atlantic. American farmers, squeezed by high fixed production costs and low commodity prices, increasingly are restless and critical of the adequacy of current policies to cope with their income and resource adjustment problems. The Congress and the Reagan administration have reacted by taking or proposing a series of "emergency" legislative and administrative actions, some of which strain the very fabric of the 1981 Food and Agriculture Act and reverse the recent market-orientation of agriculture.

Only a few years ago concern was widespread about the ability of U.S. agriculture to respond to rising global demand for food and fiber. Some, in the euphoria of seemingly insatiable export markets of the 1970s, proclaimed a new era for American agriculture—one of relative scarcity of resources, upward trends in commodity and food prices, and more passive, less intrusive intervention by government to manage agricultural production. What went awry? Were the events of the 1970s unique, illusory, and unsustainable? Or are the back-to-back record-breaking crops and low commodity prices of the last two years merely short-term aberrations in a long-run trend of relative scarcity of food supply?

As in medicine, a proper policy prescription for agriculture's current malady depends on expert diagnosis of the problem in which symptoms are differentiated clearly from the disease. And as in medicine, care must be taken lest the prescription worsen the problem or produce unintended side effects.

Diagnosis and prescriptions

The immediate source of U.S. agriculture's economic problems seems clear enough—record-breaking crop production coupled with recession-weakened demand at home and abroad. The predictable weakness in crop prices fell heavily on operators whose production costs had been ratcheted upward in preceding years by inflation and investments in assets priced in expectation of much higher economic returns. As supplies mounted and prices fell, government outlays soared for commodity storage and deficiency payments to meet legislated target prices.

Despite mounting political pressure for much more drastic action, the policy prescriptions have been moderate. Of course, stimulating demand for farm products (except by direct subsidies to foreign or domestic consumers) largely is beyond the reach of agricultural policy. And despite a good deal of rhetorical brinksmanship with the European Community, gestures in the form of loosened export credit terms, and disposal abroad of some surplus products, the administration has refrained so far from actions that might trigger an all-out trade war. Thus, corrective prescriptions mostly have centered on policies to adjust domestic supply of commodities.

Two major objectives have driven domestic supply adjustment policies—constrain production to enhance market prices, and reduce government budget exposure in 1983-84—and a two-pronged program has been mounted to achieve them. The first encourages diversion of 20 percent of the cropland base for cotton and for food and feed grains, for which farmers will receive payment on 5 to 10 percent of the base and eligibility for other program benefits for commodities produced on the unrestricted portion of their base.

The second establishes payments-in-kind (PIK), whereby farmers complying with the cropland diversion program may retire as much as an additional 30 percent of their base and receive payments in the form of surplus commodities at the rate of 80 to 95 percent of the normal yield in PIK acreage.

In theory, this administration sleight-of-hand should produce several results: 1983 production is reduced and market prices are increased from otherwise prevailing levels; current large stocks (government-owned or farmer-owned under government programs), stock management costs, and government budget exposure in 1983-84 are reduced; the farmer's out-of-pocket costs are reduced by not producing on as much as 50 percent of his cropland (or possibly his whole farm) while receiving cash and commodities to dispose of as the farmer sees fit. The administration estimates that as many as 30 million acres might be removed from production in 1983. Budget savings of about $3 billion are estimated in 1983-84 from the PIK alone.

To implement the PIK program, a vast web of administrative rules and regulations governing release of stocks, certification of diverted acreage and its use in approved conservation practices, and the resale of PIK commodities will be required. To avoid geographic concentration, land diversions will be limited to not more than 50 percent of the cropland base in any single county. Although the estimated 30 million acres to be held out of production is far short of the 60 million acres withheld in the 1960s, the program could have substantial secondary effects on industries supplying production inputs to agriculture. And the program raises various equity problems related to the value of stocks released and the distribution of program benefits between land-lords and tenants and among farms by size.

Payments-in-kind have been cast as an emergency one- to two-year program in the hope that resulting supply reduction coupled with strengthened demand from economic recovery at home and abroad will improve agricultural prices and incomes in the immediate years ahead. But prospects for economic recovery themselves are elusive and uncertain both in the United States and in foreign markets on which U.S. agriculture has become highly dependent. A combination of weak economic recovery and less than the hoped-for results from 1983 supply management schemes could well be precursors of even more intrusive government agricultural policies in 1984.

Short-run vision, long-run needs

The atmosphere of crisis now permeating farm policy discussion reflects the disarray that for some time has plagued economic policy in general and agricultural policy in particular. Despite fundamental changes in the structure and economics of agriculture in recent decades, farm policy continues to be largely bound by the concepts and legislation of the 1930s: in an increasingly complex, globally interdependent economy, economic policies and policymaking are partial, fragmented, and frequently predicated on outdated concepts. Expediency and the quest for immediate solutions to long-range economic adjustment problems too often prevail in the formulation of public policy.

Contemporary U.S. agriculture is highly diverse in its economic organization. Although some 2.4 million farms still exist by official definition, 12 percent account for 68 percent of annual sales. A mere 5 percent of the farms—large in scale, highly capitalized, science-oriented, and boasting sophisticated management—account for 50 percent of annual sales. These farms have been growing both in number and in economic significance.

At the other extreme are nearly 1.5 million relatively small farms, many owned and managed by part-time operators whose household income mostly is derived from off-farm employment. These farms contribute only 6 percent of national production of food and fiber. In between are 674,000 largely full-time farmers who work moderate-scale farms. Many in this group also have substantial off-farm household income.

Each of these subsets faces different circumstances concerning resource endowments and management. Some are economically more affected by industrial employment opportunities and macro-economic policies than by agricultural prices and policies. Some receive benefits of agricultural price and income policies highly disproportionate to their numbers. The mix of public policies, if any, appropriate to deal with such disparate circumstances is quite different. Yet many agricultural policies, particularly the price and income policies that currently command the bulk of federal agricultural outlays, implicitly regard the sector as if it were homogeneous. The income distribution effects of such policies are much different than espoused policy objectives.

Interdependence and instability

One of the evolutionary changes of fundamental importance is that U.S. agriculture has developed closer, more immediate links with other sectors of the domestic economy. The most obvious example is the close linkage which has been forged in the capital and labor markets. Consider also the importance of food prices in the Consumer Price Index and the role that indicator plays in macroeconomic policy decisions. But mutual interdependence by no means is confined to the domestic economy. The United States dominates world trade in cereals, feed grains, and oil seeds. Disturbances and instability are transmitted quickly and directly in both directions, with agricultural market and macroeconomic repercussions. Moreover, the terms of trade in world agricultural markets are not related only to supply and demand for commodities: they are powerfully influenced by exchange rates, other aspects of international monetary policies, and trade and foreign policy. Market distortions resulting from national policies—be they agricultural, macroeconomic, or foreign policies—are readily transformed into international market distortions. Yet U.S. policies and policymaking processes have been slow to adjust to such realities and to achieve that nexus of coordination appropriate to complex, interdependent economic systems.

In 1945, Nobel laureate Theodore W. Schultz published his classic Agriculture in an Unstable Economy. If a reminder is needed of the validity of Schultz's thesis concerning the instability of agriculture, the 1970s and the early 1980s should suffice. In the course of but ten years the world has experienced a major shortfall in food production and seen lesser shortages and surpluses in several countries capped by current large U.S. surpluses that rival the 1960s' chronic surpluses. Future fluctuations in world food production are inevitable. Only their timing and magnitude are in doubt.

For all of the advances made in agricultural science, food production continues to be powerfully influenced by weather, climate, pestilence, and disease. Although current U.S. commodity stocks are large, global stocks—at 17 percent of annual use—are not out of line by historic standards and indeed probably are minimal. A food security policy—preferably coordinated international food security policies—would view U.S. abundance as an opportunity to build valuable reserves against future production shortfalls. In the absence of an adequate food security policy in the United States and internationally, politics tends to take over. Thus, the inclination is to short future markets and manage domestic stocks to enhance farm prices and incomes in the immediate future, to incur opportunity costs by shutting-down the productive capacity of millions of acres, and to run substantial risk of future weather-induced shortages and instability in an inherently unstable world agriculture. The lessons of the 1960s and 1970s should not so quickly be forgotten.

Although experience has shown that internationally linked food security policies are fraught with difficulty and frequently negated by nationalistic motives, global interdependence and the instability of agriculture argue for continued efforts to develop such institutions before the next major world food shortfall. Within the United States, that means higher priority must be given to longer-run food security and that policy objectives concerning the management of commodity stocks must be clarified and disentangled. The current attempt is simultaneously to provide short-term support of farm prices and income and, secondarily, to meet the quite different objective of food supply security.

Through a glass, darkly

No one can be certain of how the future will unfold. Whether today's record-setting crops and low commodity prices are aberrations about a longer-run trend of relative food scarcity can be determined only in retrospect. The economic and political events of the last decade may well turn out to have been unique and provide only an illusory and unsustainable vantage point from which to approach the 1980s and 1990s.

The experience of the last three decades is clear: given adequate economic incentives, improved managerial capabilities, and access to science-based technology, global food productive capacity is resilient and elastic. Just as clearly, effective global demand for food will expand substantially in the next two decades if the projected growth of population to some 6 billion in 2000 is accompanied by economic growth. Of course, the capacity to sustain economic growth at rates of recent decades is now in question.

So what can we expect from the future? Rather than the abrupt turning point proclaimed for agriculture in the 1970s and the cataclysmic shortages projected by some by the year 2000, we might anticipate continued growth in food production along a highly irregular path, one characterized by shortages and surpluses within countries and occasionally on a global basis. Also likely are gradually increasing real prices to induce adjustments and investments. Whatever the course, it will be marked by continued uncertainty and instability.

But the fact that the future is unknowable does not mean that its outlines cannot be influenced. Indeed, public policies undoubtedly will shape the course of future agricultural development. The critical need is to reexamine the precepts that under-gird current policies and to develop and evaluate policy alternatives in the context of the realities—not the myths—of contemporary agriculture. The 1930s, after all, were a half-century ago.