2006 Legislative Agriculture Chairs Summitt

Why Are We Where We Are Today in Agricultural Policy?

January 2006

Otto Doering, Purdue University

Background

The Jeffersonian notion of agricultural fundamentalism was more of a rationale for a kind of democratic society rather than a rationale for government involvement in Agriculture. This prescribed the maintenance of a population of yeoman farmers who would be the backbone of democracy as small independent propertied individuals. The Louisiana Purchase extended the opportunity for the expansion (geographically and in numbers) of this citizenry while shutting out the British and the Spanish from the center of the country. Government’s involvement in agriculture for the first hundred years was largely land policy (Northwest Territories Act, Lewis & Clark expedition, etc.) to create a property measurement and rights system and settle the central expanse of the country and the land west of the Mississippi. The creation of the extensive public domain through expansion also required moving these lands into private hands through such policies as land for veteran’s and homestead acts.

State and federal government also helped create infrastructure – the most notable early example being the Erie Canal which opened up the middle of the country to export markets in Europe and set the future for New York as the commercial center of the nation. This also coincided with the Cumberland Road project. Agricultural interests agitated for public infrastructure that would ease the transport of its goods to market. This extended later to support for railroads and ultimately to the regulation of rail rates to prevent monopoly charges for transport of agricultural inputs and commodities.

The Civil War was to some extent fought over policy that related to agriculture. This included protection for the infant industry of the north, at the expense of the south, and the challenge to slavery that was seen by the south as essential to its cotton economy.

In the 1860s the Department of Agriculture was established, the Homestead Act was passed, and the Morrill Act was passed. All three were critical to the development of agriculture and all three were indirect to enhance the farmer’s environment, providing resources and infrastructure, but not proscribing production or marketing. The rationale for these actions was one of helping agriculture prosper and with it the economic development of the country. However, agricultural interests were also concerned with such issues as monetary policy and trade. The latter reflected the continuing agricultural surpluses which the U.S. has had from the Civil War to today. The populist campaign for silver in the late 1800s and the interest in lowering tariffs on goods farmers might buy were an important political focus for agricultural groups. Here agricultural interests in the last half of the 19^th Century fought for specific policies to ease farm debt burdens and lower costs (Benedict).

Initially, one major role of the Department of Agriculture had been seed distribution. However, under Tamma Jim Wilson in the early 1900s, it’s goal was to become a scientific establishment capable of modern agricultural research. The early 1900s were a golden age for agriculture. From the Civil War on, agriculture had suffered through both the nation’s business cycles and the extension of agricultural lands and increases in production that constantly drove down prices. In the early 1900s the frontier closed and industrialization and immigrant population growth occurred to increase net demand for agricultural commodities. It is no accident that farmers chose 1909 to 1914 as the base period for the calculation of parity prices. These were good times in rural America.

Yet, agriculture was still a disadvantaged sector relative to the urban areas. Teddy Roosevelt’s Country Life Commission (1908) was charged with looking into the deficiencies of agriculture and country life and the means by which they might be remedied. From this report came rural free delivery by the postal service, the Smith Lever Act and the state experiment stations, and improvements in rural health and education. Whatever the rationale, the tradition of government involvement in agriculture was still indirect, helping stimulate settlement, defining boundaries/property rights, building transportation and infrastructure, improving communications, technology, and the rural environment. It was not until the great agricultural collapse in 1920, after the First World War, that government, with a rationale born of prolonged agricultural depression, began to enter directly into agricultural markets and the direct production activities of farmers.

Agricultural commodity prices collapsed around the world in the summer of 1920. This was a quick end to the bubble of land prices and input costs that had been occurring since the beginning of the First World War. A national agricultural conference assembled in 1923 called for economic equality for agriculture (a fair share of the national income) and adjustment of farm production to demand. From 1923 on, farm groups lobbied for government action to relieve rural distress. The McNary-Haugen bill became the central vehicle for a policy to help agriculture. This policy would allocate only a portion of the crop to domestic demand and thus raise domestic prices while the “surplus” would go to the export market. For the first time, government would have played a price and supply determining role had the act passed. The Agricultural Marketing Act of 1929 actually put the government in the role of influencing markets with a Federal Farm Board administering a revolving fund of 500 million dollars to loan to cooperatives to store and withhold commodities. This proved to be a futile effort (Benedict).

Between 1929 and 1933 agricultural fortunes declined even more. The exchange value of farm products to industrial goods had fallen to 50% of the pre war average (Davis, p.313). The cash economy in rural areas had ground to a halt. When the Roosevelt administration came to Washington there was a real fear that there would be revolution in the countryside if something was not done. The National Guard had to be called out in Iowa to put down violence at farm sales.

With the New Deal came a new role for government involving direct intervention into markets and individual production decisions by farmers. Rural America had descended to a subsistence/barter economy. Rural incomes were forty percent of urban incomes, and this was when one out of three urban workers was unemployed (Gardner, 1993). Much of the discussion of the period was about raising rural standards of living to be more comparable to urban standards. (This is not the same as parity for agriculture, which a different rationale for increasing commodity prices.)

It is during the New Deal that the basic structure of our agricultural programs was established. A major part of this was the non-recourse loan, linked to what was called the “Ever Normal Granary” This notion was described favorably to farmers and the public by then Secretary of Agriculture, Henry A. Wallace. His sales pitch in many parts of the country was biblical. He would talk first about Joseph, the Pharaoh, seven years of famine, and seven years of plenty. The basic notion was using a storage system to even out the ups and downs of crop production and the seasonal nature of supply and prices.

Wallace’s tale would start with a farmer in the spring who borrowed money from the banker to plant his crop. The crop would be successful and the farmer would harvest it in the fall. At that point the banker would demand repayment and the farmer would have to sell the grain to the grain merchant at seasonally depressed prices because all the harvested grain was coming on the market. The grain merchant would then store the grain until spring when prices were high and make the profit that might have been the farmer’s. Then the cycle would start all over again. Thus, only the banker and the grain merchant made out well. What Wallace proposed was that in the fall the farmer would be able to take a low interest loan on his crop from the government. The crop would be the security on the loan and could be in sealed storage on the farm. This would allow the farmer to pay back the banker with the loan without having to sell the crop at a low harvest price. The farmer could wait until spring and sell the crop for a higher seasonal price, pay back the loan with interest to the government, and keep the profit. If the price stayed low, the farmer could walk away from the loan, the government would take the crop (as collateral) and the farmer would effectively get the “loan price” for the crop.

The key to how this worked out overall was the level of the loan price. If the loan price was set somewhere near average prices over a period of time, the government would not end up accumulating too much grain in any one year and would be able to sell eventually whatever amount might accumulate in high price years. Congress and administrations generally, however, could not resist raising the loan price to get more money into farmer’s hands, and this is how the federal government ended up with big stockpiles of grains in the 1950s and 1960s when the loan price was set above the average market price and farmers turned over their grain to the government to walk away from the loan. Under current programs the government does not take title to the grain and thus have to store it. The government pays the farmer the difference between some specified price and the market price if the market price is lower. The farmer then markets the grain at will.

The other vehicle used in the 1930s was the conservation program. Wallace recognized the great fiscal danger in trying to increase crop prices without also successfully decreasing supply in some way. When the original Agricultural Adjustment Act of 1933 was declared unconstitutional in 1936, the soil conservation acts of the late 1930s played an important role in getting cash to rural areas. Land was set aside for conserving uses (the forefather of the Eisenhower Soil Bank and the ultimately the Conservation Reserve Program) and farmers were paid to do things on their land like build terraces and waterways. This financial assistance became the primary vehicle for getting cash directly into rural areas. If we compare conservation expenditures from USDA in 1937 with those in 1999, financial assistance (adjusted for inflation) was over 5 billion dollars in 1937 and only 231 million in 1999. Today, the main financial support to farmers is in the form of commodity program payments.

Government Impact on Agriculture Is Not Just Farm Bills

We need to remember that agricultural programs and policies are not the only thing that affects farmers. There is an important caution in considering the importance of agricultural policy set forth by Chester Davis in the 1940 Agricultural Yearbook.

“A nation’s agricultural policy is not set forth in a single law, or even in a system of laws dealing directly with current farm problems. It is expressed in a complexity of laws and attitudes which, in the importance of their influence on agriculture, shade off from direct measures like the Agricultural Adjustment Act through the almost infinite fields of taxation, tariffs, international trade, and labor, money, credit, and banking policy”(Davis, p.325).

To this we can add environmental policy, food safety, and more. These are the things that set the larger environment for agriculture, and like Paul Volker’s decision to stop inflation in the early 1980’s, can be the overriding government influence on the agricultural sector.

What is the import of this? Policies that are not thought of as agricultural can have a determining impact on agriculture. In addition, what are thought of as agricultural policies (the “farm bill”) can exert strong influence on areas beyond the narrow scope of agriculture. As such, even the broad policy initiatives instituted outside of agriculture become part of the rationale for agricultural policy and help determine what actually occurs within agriculture.

Asking Questions about the Rationale for Agricultural Programs

The public sometimes ask why we support farmers and the agricultural sector generally with programs well beyond those available to other sectors. There has only been one attempt recently to undertake serious inquiry about some national rationale for agricultural policy. In 1994 the staff of the Senate Committee on Agriculture, Nutrition and Forestry (note the breadth of title) prepared for Senator Richard Lugar a set of questions on prospective farm policy that were circulated around the country (Schertz and Doering). A summary of these is indicative of the attempt that was made to ask the question, why do we have farm the policy we do, i.e. what is the rationale and, also, are the programs effective in terms of what they purport to do? What follows is a summary of some of the key questions that were asked by the Committee.

For Commodity Programs:

How would one allocate across the broad program areas (commodities to food assistance, food safety, and conservation)?
One rationale is price stability, could this be done in private markets? Are such government programs necessary?
Are acreage reduction programs sound public or fiscal policy?
Have farm programs successfully kept farmers on the land as intended?
Do price supports go primarily to full time or part time farmers?
Would we loose our abundant food supply without programs?
What would the elimination of farm programs do to land values?
Do farm programs encourage production on marginal land (hurting conservation)?
Why are we subsidizing some crops and not others?
Why is subsidized crop insurance and disaster relief appropriate for agriculture and subsidized insurance not appropriate for other sectors of the economy?
Why should sugar production be protected?
Do the current milk, peanut and cotton programs make sense?
Do the indirect aspects of farm programs, like sugar policy supporting high fructose corn sweetener, make sense?

For Conservation:

Is there a need for “swamp-buster” given section 404 of the Clean Water Act?
Should CRP be continued?
Would elimination of conservation compliance have a negative impact on conservation?
What is the most cost effective strategy for ensuring agriculture’s sustainability?

For Export Programs:

Here there were a whole series of questions on the impacts and effectiveness of the export enhancement program, the efficacy of subsidies for exports, P.L 480, and market development.

For Nutrition Programs:

Should the programs be consolidated or block granted?
How much waste and fraud is involved?
Should food stamps be cashed out?
How do we link other objectives like employment, training, welfare reform, etc. with the food stamp programs?
Should there be a more rigorous means test for food stamps?

For Rural Development, FMHA and REA Programs:

Is FHA needed to facilitate the replacement of retiring farmers?
To what extent has rural development been successful?
Is there a need to continue to subsidize REA borrowers?
Should the federal government provide support to any supplier of electricity?
For borrowers in financial distress, FMHA tries to ensure that borrowers remain in farming. Do historic rates of return justify this?
Is adequate credit available in rural America without the Farm Credit System?
Farmer Mac has been less active than expected. Is it necessary in its current role?

Sometimes these questions were the mirror image of common rationale for a particular aspect of agricultural policy. For example, the questions on the FMHA and Farmer Mac reflect a policy of providing credit to agriculture on the rationale that credit was limited to the agricultural sector and needs to be encouraged.

The Broad Rationale for Involvement in Agriculture

When asked about the rationale for US Government involvement in agriculture, the response in the 1950s might have been to bring farm incomes up to the levels of urban incomes. Admitting the complication of off farm incomes, on a direct comparison basis this objective has been achieved. In addition “farmers” have more accumulated wealth than their urban cousins, usually in the form of land.

Another response to why we support agriculture might be a strategic one, i.e., that the nation needs to be self- sufficient in food. The question raised in 1994 (number 6 under Commodities) addresses this. Without government involvement would there still be an abundant food supply? Less acres might be cultivated, agricultural exports might drop, but few seem to be concerned that not enough food would be grown for domestic consumption at this point. However, government involvement of some sort might be continued if this were a national concern, in spite of the fact we wish other countries to be willing to abandon self-sufficiency so we can increase our exports to them.

There is a strong rationale for government involvement to reduce risk from natural causes – drought and flood. We accomplish this partially through subsidized insurance and the predilection of Congress to provide disaster payments in spite of subsidized insurance. There is a rationale here and we do appear to be doing it, though probably less cost effectively than we might.

One broad rationale for government involvement under the “reducing risk” heading is the desire to have a stable industry over time. Investments in machinery, buildings and human capital are relatively large in US agriculture. It would be costly to the sector and ultimately to the public if we were forced to pay through the price of food for cycles of capitalization and de-capitalization of these assets over time. This is different from increases and decreases in land values which the land owner, and indirectly the producer, bears today. Farm organizations are explicit in their support for maintaining land values. The banking community also has a large stake in this stability rationale, especially during times when loans have been based on asset values rather than on the ability to repay as occurred and helped exacerbate the farm financial crisis of the late 1980s.

Price stability is another leg of the “reducing risk”/ industry stability rationale. What happened in the traditional programs after the 1930s was the use of “price stability” arguments and policy instruments to boost farm incomes by setting loan and later target prices above long term average prices (contrary to the original “Ever Normal Granary” concept). After World War II, USDA’s chief economist became concerned with the use of price stability arguments as an excuse for increasing price supports and farm incomes. The potential treasury exposure led him to write an article attempting to show that price stability was not always the best thing for the consumer (Waugh).

The protection from risk, whether through price supports, direct payments, or insurance for natural disasters involves a number of rationale for government involvement depending upon where one’s interests are, be it helping beginning farmers, ensuring an inexpensive food supply, or keeping farmers on the land. Most reasons have some credence as being in the national interest.

In some ways, agricultural policy and the rationale for it today is more closely tied to conservation on the land and the sustainability of agriculture than it has been since the 1930s. Conservation during the dust bowls of the 1930s was a rationale that everyone understood and it could stand alone. It also became the vehicle for moving cash into rural areas to meet the income parity rationale through payments to farmers for adopting conserving practices and setting land aside. Today, conservation has become a major stand alone rationale for agricultural policy independent of income support or sector financial stability. The notion of cross compliance in the 1985 farm bill was to enforce basic national conservation standards on all those farmers wishing to obtain the risk and income protection of commodity programs. Since conservation compliance standards have been reduced and enforcement has proved a political liability, this device has less impact. Thus, we see the newer programs for conservation on working lands, EQIP, CSP, etc. that reflect a public concern that conservation be a leading rationale for agricultural policy where government is directly involved with supporting producers.

Nutrition programs are still out of the inner circle of what is considered part of government’s involvement in agriculture. However, if these programs remain within the Department of Agriculture, they have to increasingly become a more important part of the rationale for even the traditional agricultural programs – if for no other reason than their political importance. The photos in most Congressional offices are ones showing the Congressman involved in the school lunch program, not in production agriculture. Food safety is in the same political situation. While nutrition and food safety stand on their own, export enhancement and trade policy have the rationale of increasing and/or stabilizing incomes of farmers confronted by continuing overproduction.

While rural development and things like the FMHA programs remain part of government’s involvement, they have not been of major importance since the Great Society. Given the current availability of credit today from a variety of sources, there is less argument today than ever before that a government role is essential as it was in the 1930s. Farmer Mac has also not played or had to play the role that was envisioned for it and does not appear to be a least-cost way to provide a function that may not even be necessary.

Conclusion

The rationale for government involvement in agriculture in the 1930s has been met to some extent. Such things as income parity, the availability of credit, and relative stability in the sector have vastly improved since those times. The issues that remain central are issues like the maintenance of farm income levels and a reduced risk environment for the sector and the public’s willingness to continue to provide this. The questions asked by Senator Lugar focus on whether the public needs to continue to be involved, and what is the most cost effective way to be involved if that is required. Few are willing to do today what Senator Lugar did in 1994 – ask whether government involvement is needed, what is the rationale, and then ask what is the least-cost way to provide it?

References and Background Sources

Davis, Chester C., “The Development of Agricultural Policy since the End of the World War,” Farmers in a Changing World; The Yearbook of Agriculture, 1940, GPO, Washington, 1940, P.325.

Benedict, Murray R., Farm Policies of the United States, 1790-1950, Twentieth Century Fund, New York, 1953.

Gardner, Bruce, “Demythologizing Farm Income,” Choices, First Quarter 1993, pp. 22-23, Ames, 1993.

Schertz, Lyle and Otto. Doering, The Making of the 1996 Farm Act, Appendix 1, Iowa State University Press, Ames, 1999.

Waugh, Frederick., “Does the Consumer Benefit from Price Instability?,” The Quarterly Journal of Economics, 58: 602-614. August 1944.

From a talk to the Legislative Agricultural Chairs Summit, Jan. 22^nd, Tempe, AZ.

Revised 2/11/06.