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September 2000 Farm supports should be revised, not abandonedWEST LAFAYETTE, Ind. – U.S. farm policy is in flux, but farm supports shouldn't be abandoned, says a Purdue University expert. Wallace Tyner, head of the Department of Agricultural Economics, says the current make-it-up-as-we-go farm policy will be difficult to sustain economically, but we can't go back to the old target-price system, either. The nation also can't afford to turn farmers loose to sink or swim in the free market. Tyner specializes in policy analysis related to agriculture has worked with institutions such as the U.S. Department of Agriculture, the World Bank, and the Hudson Institute on policy issues. "It is imperative that Congress move toward a new agricultural policy as quickly as possible to get us out of the ad hoc policy that has been in place for the past two years," Tyner says. "Otherwise, in 2002, we revert to the previous status quo, which would be prohibitively expensive." In 1996 Congress passed legislation popularly known as the "Freedom to Farm" bill, which was designed to wean farmers and the agricultural sector from government support. Unlike the previous economic support bills for farmers, in "Freedom to Farm," payments were at fixed levels. Ag economists labeled the previous farm support payments "counter-cyclical" because when the commodity markets dropped, farm support payments rose. However, under "Freedom to Farm," payments were designed to provide a steady, predictable support level and to gradually decline each year until 2002, when federal support payments to farmers would stop. At the time the bill passed, commodity prices and farm incomes were at historic highs. Then the bottom fell out of the farm market. "Loan-deficiency payments were established in the 1996 bill to be triggered at such low levels that most analysts thought they would be generally irrelevant," Tyner says. "However, commodity prices have plummeted, so instead of watching market prices to decide what and how much to plant, farm decisions have instead been driven by the direction of the federal subsidies." Also, to help farmers during the times of nose-diving commodity prices and low farm incomes, Congress responded over the past two years by increasing farm support payments, which was counter to the goals of the "Freedom to Farm" legislation. The amount of federal support is significant. In 1999, direct payments to farmers amounted to $22 billion. In Indiana, for example, that means that about two-thirds of net farm income came from payments from the federal government. "So what was intended to be steady support aimed at weaning farmers from government programs has turned back into counter-cyclical support tied to land, plus market-distorting loan-deficiency payments tied to commodity production levels," Tyner says. Tyner says it is unlikely that Congress will continue farm support at these high levels. "It was agricultural support costs near this level in the mid-1980s that drove the United States and Europe to the bargaining table in the last GATT round," Tyner says. "With tight budgets today and many competing demands for government support, the status quo is unlikely to be continued." On the other hand, just stopping the subsidies, and letting the chips fall where they may in the free market, is problematic, too. "Those chips are pretty heavy, and the number of farmers that would be driven out of farming would be massive," Tyner says. "In the past couple of years, Congress has demonstrated that it is not willing to accept the political and economic consequences of a farm sector totally dependent on market forces." Before the "Freedom to Farm" bill, the federal government used a complex system of commodity target prices, guaranteed loan rates and farmland set-asides to provide assistance to farmers. But many people, both in Washington and on the nation's farms, weren't happy with the old system. "These programs do control government costs. However, they induce market distortions, which allows other countries to capture markets that we give up," Tyner says. "They are also unpredictable in terms of budget expenditures for the federal government, and they are not popular with the farming community. While going back to this approach is possible, I believe it is unlikely." Instead of throwing out the current farm policy and starting over, Tyner recommends three modifications: • First, federal support should be targeted to individual farmers as much as possible instead of the farmland acreage. "This allows some form of revenue insurance for the farmer instead of payments tied to land or specific commodities," he says. • Second, the program should offer incentives for farmers to handle part of the risk management themselves. "During the bad years, farmers shouldn't rely totally on government payments," Tyner says. • Finally, the federal farm policy should look for some way to reduce farm acreage and convert the land to a conservation reserve. "Some form of acreage-reduction mechanism like the Conservation Reserve Program needs to be in place to reduce government costs. It would be a program that would provide environmental benefits as well," Tyner says. Source: Wallace Tyner, (765) 494-4205; tyner@agecon.purdue.edu Writer: Steve Tally, (765) 494-9809; tally@aes.purdue.edu Purdue News Service: (765) 494-2096; purduenews@purdue.edu
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