July 5, 2001

Farm Policy Debate, Déjà vu

By Andrew Swenson, Farm and Family Economics Specialist
NDSU Extension Service

With debate opening on a new federal farm bill, producers, politicians and the public again search for a farm policy solution to low prices, high government expenditures, and a decline in farm numbers. Bryce Harlow, an aide to President Eisenhower, agonized over the 1958 farm bill and finally came to the following conclusion, "There is no solution to the farm problem, and once you accept that, you can get on with your life."

History underscores a few concepts that are important to remember during the debate. First, prices of agricultural commodities tend to be more volatile than those of other goods. Of course, this is not a desirable trait for something as important as food. A small percentage change in supply or demand will lead to a greater percent change in price. The reason is simple, we need food but can only eat so much. People will pay anything to stave off starvation, but food has little value when in overabundance and can literally be left in the field to rot because of low prices.

At the turn of the last century farm prices started to improve because settlement, which had brought about 15 million acres per year into production before 1900, had greatly slowed and demands for food and fiber for a rapidly growing industrial sector and urban population was strong. Demand also increased during World War I. Because of higher prices, the value of land increased nearly four-fold from 1900 to 1920 (another item to remember when considering current farm policy options is that profit, whether from sales or government payments, always results in higher land costs). Farm debt increased sharply as profitability and optimism spurred producer spending.

In July of 1920 the price of wheat in Minneapolis reached $2.96 per bushel. By December, it had collapsed to 92 cents per bushel. The good times were over.

Agriculture went into a depression 10 years before the rest of the economy did in the 1930’s. What happened? The U.S. and other countries such as Canada, Australia and Argentina competing for world agricultural markets increased production faster than demand. U.S agricultural exports dropped from $4 billion in 1919 to less than $2 billion in 1922.

Interestingly, current low prices are associated with a drop in exports from nearly $60 billion in 1996 to less than $50 billion in 1999. The importance of global markets and tough international competition is not a new story in agriculture. With the exception of the European Union, our main wheat export competition is the same as 80 years ago.

However, in 1920 there was no Farm Bill or emergency government legislation to provide aid to offset low prices. Gross farm income dropped 40 percent in one year.

The condition of the 1920s was a catalyst for farm policy discussion. Pressure mounted for government intervention, and consideration was given to many measures that we still debate, such as supply management and subsidized exports. Two bills passed congress but were vetoed by President Coolidge on the advice of then Secretary of Commerce Herbert Hoover. The bills would have subsidized wheat for export (essentially an Export Enhancement Program) to lower domestic supply and increase the price of wheat in the United States. A 40-cents-per-bushel wheat tariff was in place to keep foreign imports out of the domestic market.

Later, President Hoover recognized that reducing production would buoy prices, and in 1932 his Secretary of Agriculture pleaded with producers to voluntarily cut production, to help themselves. Producers responded with heavy plantings.

This is a still a conundrum for current policy makers. Because the action of an individual farmer cannot impact prices and because of the uncertainty of weather, producers do not immediately respond to low prices by adjusting their production to reduce inventories as is often the case in other industries. Instead they continue to plant, hoping for higher prices at harvest or for a good yield.

Broad government intervention did not occur until 1933. By this time something had to be done to alleviate the poverty and despair of rural America. The Agricultural Adjustment Act of 1933 provided voluntary programs that paid producers to reduce supply. For example, 6 million pigs were slaughtered and wheat farmers were paid to reduce acres. North Dakota had the highest enrollment in the wheat program, 94 percent, bringing in an average of over $15 million dollars of government payments to the state between 1933 and 1935.

The Commodity Credit Corporation (CCC), a government corporation that finances farm programs, was also created in 1933 and nonrecourse loans were made to corn and cotton producers. The CCC allows farmers to borrow money using their grain as collateral. Nonrecourse means that the government must accept the grain as payment if the farmer does not repay the loan. The loan rate is the amount the producer can borrow per bushel or pound. It is set by the government and is of extreme interest to producers because it essentially determines the minimum revenue per unit produced.

Nonrecourse loans, now available for all basic crops, and the CCC are still fixtures in farm policy. A market loan rate introduced in the 1990 farm bill gave producers the choice of a nonrecourse loan or receiving a loan deficiency payment (LDP) by the amount the loan rate is higher than the local cash price.

Although the 1930s are associated with federal involvement, government payments in agriculture the past two years have provided a greater proportion of cash farm income than at any time in the 1930s. The farm problem -- déjà vu.

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Source: Andrew Swenson, (701) 231-7379, aswenson@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu