The 1985 Farm Bill

The debate is on over legislation to succeed the Agriculture and Food Act of 1981. Its outcome is uncertain. Some are predicting reincarnation of the 1981 Act with a few new whistles and bells to make it appear a new bottle, if not new wine. Others foresee major changes in 1985. A third group argues that the Congress, the Executive Branch, farm and other interest groups are so badly split that 1981 legislation simply will be extended for a year while acceptable common ground is sought for omnibus legislation in 1986 or later. And a few predict outright legislative failure and reversion to the outdated basic laws of the late 1940s.

Whatever the outcome, the legislative process is likely to be protracted, rancorous, and divisive. For better or for worse, the choices made this year will set the tone, if not the details, of U.S. agricultural policy for the remainder of the 1980s. What basic forces brought us to this point, and what are some of the specific issues likely to be prominent in the debate?

Forces shaping policy

Since the early 1930s, when government first began to play a major role in agriculture, agricultural policy has been evolutionary. Each major bill has been built on the legislation that preceded it, modified to reflect changing circumstances. The basic goals and methods of government intervention changed very little.

The patchwork of policies emerging from this process has become increasingly antiquated. Agriculture now is so vastly different in structure and in its relationship to the domestic and world economies that some of the very premises and objectives of long-standing agricultural policy are at issue. If not in 1985, the clash between current policies and economic and political realities will force basic reappraisal and realignment of current policies in the near future. Five underlying forces are especially significant.

An expanding productive capacity

During the past thirty years, U.S. agricultural output has expanded at an average annual rate of nearly 2.5 percent, and there are no inherent technical reasons why that rate could not be maintained well into the twenty-first century. The sources of that growth will be essentially the same as those of the past several decades—technology, more intensive use of resources, more effective management, interregional shifts in production patterns, and, if necessary, a modest net increase in harvested cropland. Importantly, the technical production frontier can be expanded substantially for both crops and livestock with "off-the-shelf' technology. We are only beginning to glimpse the productivity-enhancing effects of biotechnologies applicable after the turn of the century. Larger public and private investments will be needed, natural resource and environmental externalities must be reckoned with, and growth will be uneven over time and among regions and commodities. But, on balance, little evidence suggests that U.S. agriculture has approached what 1970s prophets called an "era of limits."

The growth in productive capacity in the United States and in other countries in the next decade or two may well perpetuate the long-term decline in real prices of agricultural commodities. If declining prices generate strong pressures for government intervention, as can be expected, what are the most efficient and equitable instruments to employ? Or, as some suggest, should government gradually withdraw from supply management and leave resource allocation to the market?

Interdependence at home and abroad

Agriculture has lost much of its economic insularity. In the domestic economy the markets for labor and capital are tightly linked between the agricultural and non-agricultural sectors. Macroeconomic policies, through their effects on demand, the cost of investment and operating capital, and the availability of off-farm employment opportunities, have more to do with the economic welfare of farmers and rural people than does agricultural policy per se.

For decades, the export market was regarded as a residual or secondary market for many U.S. agricultural commodities, and policies were designed to dispose of surpluses overseas. An array of protectionist policies effectively insulated domestic markets from imported, competitive agricultural products. But that situation now has been turned on its head: much of the expansion in productive capacity in the past decade was stimulated by growth in export demand; much of the current excess capacity results from the decline in that demand since 1981. Even with prospects for slower growth in global demand, U.S. agriculture will become further dependent on sales abroad since growth in domestic consumption of major commodities is unlikely to be much more than 1.5 to 2 percent annually in the remainder of the 1980s, and perhaps close to 1 percent by 2000.

The policy implications are fundamental. The determinants of agriculture's growth and economic performance increasingly will reside beyond the sector itself and beyond the purview of traditional agricultural policies and the committees in Congress responsible for them. Monetary and fiscal policies—our own and other countries; the exchange rate and the operation of international monetary terms; the flow of public and private investment capital to the developing countries—and trade policies will be increasingly critical to U.S. agriculture.

Perhaps the most basic policy implication is the need to discipline domestic agricultural policies to the realities of an open agricultural sector. That may require more flexible agricultural policies—policies that permit instruments to be adjusted readily to changing conditions in domestic and world economies and that allow agriculture to be more fully competitive in world markets.

Budget costs and the deficit

The long-term consequences of huge federal budget deficits are difficult to exaggerate, among them that spending on agricultural programs will be under severe pressure for years to come. Projections for the forthcoming five fiscal years are for costs of roughly $11 billion annually under current farm programs. These amount to a small share of the total federal budget (2.8 percent in 1983), but they are highly visible and likely to be attractive targets in any serious effort to reduce the deficit.

Even under the most farsighted political leadership, correction of chronic deficits is years away. No quick-fix, politically acceptable solutions are in sight, and agriculture will not—nor should it—escape the budget-cutting process. Indeed, agriculture stands to benefit from overall deficit reductions to the extent that lower interest rates would reduce production costs, ease financial stress, and result in a cheaper dollar that would promote exports.

Organization

The economic organization of agriculture has changed so radically in recent years as to undermine the premises and political sustainability of farm commodity programs. When the forerunners of today's commodity programs began in the 1930s, farms were numerous and relatively small, with not much difference between the smallest and largest farms. Farmers were almost entirely dependent on farming for their livelihood.

Of the the 2.4 million farms in 1982, nearly 60 percent were very small operations (gross sales of less than $20,000 a year) accounting for only about 10 percent of total production. On balance, these farms lost money from farming and depended entirely on income from nonfarm sources. In the main, these farms are owned by people who wish to live in rural settings, but who do not depend on agriculture for their livelihood. Most of them do not need and do not participate in commodity programs.

At the other end of the scale, less than 5 percent of the farms (those with gross sales of $200,000 or more a year) produce more than 45 percent of total output. In 1982 these farms, on average, had a net family income of $184,000 and a net worth of more than $1.6 million. They are the major beneficiaries of farm programs; whether they require these programs to survive and prosper is debatable.

In the middle (farms with gross sales of 20,000 to $200,000) are about 35 percent of all farms accounting for 44 percent of production—operations that more nearly fit the traditional label of "family farms." These are the farmers who most need commodity programs; many of them probably would have a hard time surviving without these benefits. While this category represents a wide range, the average net farm income and equity value per farm in 1982 were about $7,100 and $524,000, respectively.

Thus, very small farmers do not need or use commodity programs, while large farmers—well off by almost any measure—reap the lion's share of government program benefits. Equity considerations therefore will loom large in policy discussions about these programs, and sentiment is growing to target at least a portion of program benefits to those who qualify on some basis of need, often defined as small-to-medium-sized farms, or new entrants to farming with limited resources. Programs that fail to recognize the heterogeneity and structural characteristics of agriculture are likely to prove increasingly inadequate for all concerned—farmers, consumers, taxpayers, and policymakers.

Waning political power

In the late 1960s, Don Paarlberg, now professor emeritus at Purdue University, concluded that agriculture had lost control of its policy agenda. He was referring to the many diverse groups other than traditional farm interests involved in the policy process, the result being a gradual erosion of the political power of farmers to secure favorable legislation. Indeed, conservation, environmental, consumer, and international interest groups have become effective players in the policy process, and the widespread dissatisfaction with current policies, their high costs, and the highly skewed distribution of program benefits are likely to attract several new groups to this year's legislative debate. These groups are likely to broaden the agenda of issues and options and thus dilute policies designed narrowly for farm interests.

In addition, the alliance among general farm organizations, commodity groups, and the confederation of North-South political interests that once sustained the "farm bloc" are weak. The effective coupling of food assistance and agricultural program interests that contributed to relatively favorable legislative treatment of agriculture in an increasingly urban-oriented Congress is becoming even more strained.

Agriculture's political power will not disappear overnight, if for no other reason than that the committee structure of Congress makes it vulnerable to well-organized commodity and farm organization pressure. But the advent of new interest groups and the pressure that will come inevitably from the changing economic environment of agriculture seem likely to continue to induce gradual change in the political climate of agricultural policy making.

The 1985 farm bill

To what extent are these pressures likely to lead to change via the 1985 farm bill? In my judgment, the outcome will be a series of incremental—not major—adjustments in current policy, for two main reasons.

The first is current economic stress. Although net farm income in 1984 was substantially improved from 1983's very low level, many farmers are experiencing severe cash-flow problems and difficulty in servicing highly leveraged debt obligations. Asset values of land have declined sharply from their peaks of the early 1980s, bankruptcies have increased, and farmer discontent is high. An attempt to infuse large amounts of government assistance into the sector will run head on into tight budget constraints on spending for domestic programs, but any major effort to reduce current price supports would feel the political wrath of farmers.

Second is the recognition that in large part the solution to the current and prospective economic dilemmas in agriculture lies in macroeconomic policies. To attempt to compensate for sluggish demand abroad and the high value of the dollar through dramatic downward adjustments in loan rates or massive export subsidies would be impractical, costly, and politically infeasible, but adjustments in macroeconomic policies, and ultimately the effect of the huge U.S. trade deficit, may moderate the current historically high real interest rates and reduce the value of the U.S. dollar in foreign exchange in 1985. In any event, economic unrest in agriculture is likely to persist through the period in which the farm bill is being written.

For these reasons, I believe 1985 will be another year of incremental adjustments along the path to larger policy changes. But even under these circumstances, some significant marginal modifications in policy principles and directions could be made. I see six major issues serving as the primary arenas for debate.

Loan rates and target prices

Some attempt may be made to eliminate target prices, but for reasons discussed previously this seems an unlikely outcome. At issue will be whether loan rates and target prices should be lowered to stimulate exports and bring about resource adjustments to cope with the current 3 to 5 percent excess capacity at prevailing prices. Also at issue will be means of adjusting future loan rates and target prices. Sentiment appears to be moving away from specifying those variables by congressional fiat and cost of production indexes as in the 1981 Act, to some type of market price adjustor, such as a moving average of domestic or world prices or both, possibly linked to domestic interest rates and the exchange rate for the U.S. dollar.

Grain reserves

A grain reserve doubtless will continue as a component of agricultural policy beyond 1985, but there is no consensus on its size, operating rules, or whether it should continue as a farmer-owned or government-owned reserve. In recent years, the reserve has been managed principally as an adjunct to farm price and income objectives rather than to reduce supply instability. Some contend that overly complicated rules and "triggers" have contributed to increased instability.

Targeting program benefits

One hears a lot about targeting deficiency payments, credit, and other program benefits to those deemed most in need of such assistance—the middle-sized farms with sales of $20,000 to $200,000, and new entrants. However, it is unclear just what means tests should be applied for such purposes or how effectively such a program could be administered. Targeting eventually might be incorporated in agricultural policy, but the more likely device for the next several years is farm payment limitations, probably at a level lower than the current $50,000.

Natural resources and commodity programs

Soil and water issues are seeing rekindled interest. This takes many forms, including linking the idling of acreage to manage surpluses with improved soil-conservation practices, and the more rational pricing of irrigation water in the West, driven in part by a concern over subsidies that add to the budget deficit. Although the precise forms of linkage are not widely agreed upon, eligibility for commodity program benefits probably will be conditioned by objectives of controlling soil erosion.

Capping costs

Some are predicting that budget constraints will override all other considerations. The possibility of an outright cap on annual expenditures has been discussed, leaving to the secretary of agriculture decisions on how such expenditures would be distributed among various program functions. Other indirect methods of limiting budget exposure seem likely, including adjustments in loan rates, target prices, and deficiency payments and modification of program eligibility criteria. But until there is an indication of a serious commitment to reduce budget deficits, it is difficult to foresee how stringent the control of farm program expenditures will be. Real evidence will not appear until the first congressional budget resolutions are advanced.

Expanding exports

Measures to enhance U.S. competitiveness in world markets and expand exports seem certain to be featured prominently. Obviously, decisions on commodity loan rates, target prices, and grain reserves will have important trade implications, and I expect the trade title of the 1985 Act to contain strong language concerning perceived obstacles to U.S. access to foreign markets and the use of subsidies by foreign governments that erode U.S. competitiveness in third-country markets. At the same time, I anticipate authorization for expanded use of intermediate term export credit and Public Law 480 concessionary sales.

Other issues

Many other issues will be addressed in the next few months. Among these, the dairy price-support program would seem a prime candidate for modification. Sugar, peanut, and tobacco programs also will be under scrutiny, although sweeping change seems unlikely. Research and education programs will be examined, but here, too, major change is probably is not in the cards.

Federal expenditures for food-assistance programs currently approximate $17 billion annually—by far the largest single component of the agriculture budget. As noted, a symbiotic relationship has existed between farm and food-assistance interests in the Congress since the early 1960s, but this coalition of interests will be tested now. Food program expenditures generally have been restrained over the past three or four years (despite high rates of unemployment and rising poverty), while expenditures for price-support programs soared to record levels. This has not gone unnoticed among food program supporters, and they have already announced intentions to achieve a "fairer" division of funding. They can be expected to pay particularly close attention to certain commodities, including dairy and sugar.

The picture that emerges from this overview is that of a diverse, science-driven, highly productive agriculture—a sector marked by increasing economic concentration, ever-closer links to other sectors of the domestic economy, and growing dependency on export markets to absorb its products. Moreover, it remains, as agriculture always has been, an industry marked by short-term and cyclical instability as a result of the vagaries of weather, the biological process, and economic policies at home and abroad.

Overlaying the sector is a mosaic of market-intervention policies derived from a different era, policies that induce rigidities in resource use and distribute benefits in a highly skewed manner, with the major beneficiaries being large-scale operators and landowners. Dissatisfaction with current policies and their administration is pervasive and growing as a result of past failures, high Treasury costs, uneven distributive effects, and growing recognition that resolution of economic problems in the sector rests less with agricultural policies than on macroeconomic and international trade and development policies. In combination, these circumstances are leading inexorably to reorientation of current agricultural policies, if not now, then later.