Government payments to blame for low prices?

That’s how a Texas A&M agricultural economist views the current state of agriculture in Texas. And, he says, if government continues to back away from farm support, producers could suffer increasingly hard times as they make a transition from a government safety net to a high wire act with nothing but thin air between them and disaster.

That’s the plight Ron Knutson sees for farmers as the U.S. Congress debates the next farm bill. Knutson and Luther Tweeten, agricultural economist from Ohio State, took that debate to Texas farmers recently at the Texas Agricultural Policy Summit in Lubbock.

The two disagreed on the role government should continue to play in agricultural policy.

Knutson argued that without adequate government support, farmers, especially in Texas, will be forced to cut production costs and productivity to stay in business.

Tweeten contended that farmers outside the purview of government support manage just as well or better than farmers covered under U.S. farm legislation.

“The unkept promises of the 1996 Freedom to Farm Act got us where we are today,” Knutson said. “In 1996 farmers were promised higher levels of exports, higher commodity prices and higher incomes. They got none of those things.”

He said the WTO promised lower European Union subsidies, fewer trade barriers and streamlined procedures for trade dispute resolution.

“Farmers may have gotten one, possibly two of those. We still have no concessions from the EU.”

Knutson said policy currently under debate would allow farmers to react to agricultural issues as they exist and “adjust production accordingly.”

He said bases have been eliminated and counter-cyclical marketing loans added. He also said affordable crop insurance is part of the package. “But we still have the ability to step in when needed with direct payments. The ability to provide emergency AMTA payments when necessary is important,” he said.

He expressed concern over continuation of EU farm subsidies.

“As the United States pursues a market-oriented farm program, the EU continues with commodity supports sufficiently high to maintain prices for farmers.”

He said changes in EU economics “are masked to get around WTO regulations. Our policies are more logical.”

Knutson said “the Promised Land” for farmers is 1940s era agricultural policy, which set parity prices and production controls. ‘I don’t think that’s politically feasible any longer,” he said. “The plus side of the 1996 law was flexibility for farmers.”

He said the 1980 program supported by then Secretary of Agriculture Earl Butz, the fencerow-to-fencerow program “led to economic bust much worse than today.”

Knutson said trade agreements also have fallen short of their lofty goals. “In WTO, we didn’t get the kind of program we had hoped to get and until we do, we have to maintain flexibility in government policy to provide needed subsidies to farmers.”

He said he had no problem with a free market system. “And I believe we can get there with a long period of adjustment, if we could work in a system where no one subsidized agriculture. The problem would be the adjustments required until we get to that point.”

He said prices, in the short run, would fall as farmers depended on export markets. Lower incomes also would result as government payments are withdrawn. “Farmers would experience even more price and income instability.”

The bottom line would be a higher level of production and marketing risks. “For Texas, the potential to return to a system of dryland agriculture would be significant because the cost of irrigation would be prohibitive.”

Tweeten favors “a quantum change in farm policy. Do we really want to get half of our net income from taxpayers?” he asked. “Do we want bureaucrats in Washington, D.C. telling us what market decisions should be? Do we want the U.S. Senate telling us what our incomes will be?”

He contends that the theory that farmers have to have help because commodity prices are too low is wrong.

“Prices are low because of government programs,” he said. “About half of the agricultural sector relies totally on the market for income. That sector has no greater variation in income than the sector that is covered by farm programs. The rate of return on investment is about the same as for the covered commodities.”

Tweeten said figures showing the deflated state of farm income often are misleading. “Most farmers in this country are part-time and have another occupation that provides the bulk of their incomes.”

Commercial farmers, he said, do much better, even though they get a substantial part of their income off-the farm. “That’s a trend that will grow,” he said.

Tweeten said markets work. “If we go to agricultural supports and supply controls, we take a step backward. If we idle resources, we lose markets and taxpayers lose.”

He said government payments to farmers “are like a drug habit. In time payments produce less of a high because benefits are capitalized into land costs. Higher government outlays, he said, end up in the hands of landowners through elevated rental rates.

“We set ourselves up to get hooked on payments but the benefits pass on to the landlords.”

Tweeten said too few farmers are leaving the industry. Technology has improved productivity so much, he said, that farmer attrition is not enough to reduce supply.

“Technology in agriculture has improved labor productivity by 4 percent a year,” he said. But only 2 percent of the nation’s farmers are leaving, either through death or retirement. Nothing is being done to adjust to that change, he said. “We need more out-movement.”

Tweeten said farm commodity programs “are no longer economically justified.”

They exist, he said, because of politics. “Republicans and Democrats engage in a bidding war for votes and farm states tend to attract a lot of attention. It’s cheaper for politicians to go after votes in agricultural states (than in urban ones). Consequently, farmers still have political clout.”

Tweeten said Congress “will provide farm support but should find a reasonable compromise, including changes to support farm income while keeping costs down.”

He said direct payments could be compatible with WTO regulations. “Market loans and deficiency payments, however, need to be adjusted and there should be a limit above a specified level.”

Tweeten also recommends changes in the way crop insurance is subsidized. “It’s not good for taxpayers,” he said, “to subsidize 50 percent to 60 percent of the cost. They should cover only administrative costs.”

He also recommended a support program funded by farmers. “They contribute funds into the program in good years and withdraw it in bad years. The government supplements can then be spread out much further with these matching funds.”

Knutson said that policy does not consider multiple years of poor crops and low prices.

“In Texas, we’ve had four years in a row of bad prices and bad crops. The biggest challenge for Texas is dealing with high risks and high production costs.”

e-mail: [email protected]

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