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Will Farm Financial Problems Bring Back “Old” Farm Policies

With the farm economy in recession, the goal of “getting the government out of agricultural markets” seems a little more distant.

Recent sharp drops in U.S. farm income could spur at least a temporary return to the types of programs that were in place before the 1996 Farm Bill, suggests William Dobson, University of Wisconsin-Madison agricultural economist, who directs the university”s Renk Agribusiness Institute.

That legislation was nicknamed the “Freedom to Farm Act” because it did away with programs geared toward controlling the supply of farm commodities. This was a sharp departure from a decades-old policy of making payments to farmers who were willing to limit their crop production.

“Congressional support for the 1996 Farm Bill reflected beliefs that strong export markets would reduce the need for government payments to farmers and supply control programs,” Dobson says. “The Congress and the Administration are now rethinking this point.

“The 1996 Farm Bill was passed with the belief that high export markets would prevail into the indefinite future,” he says. But those markets didn”t prevail. U.S. agricultural exports dropped from $60 billion in 1996 to an estimated $49 billion in 1999.

Analysts blame the turnabout on economic failures in key export markets, including Asia, Latin America and Russia. They also blame excellent weather in many crop production areas and stepped-up production fueled by the high 1996 prices.

The U.S. Department of Agriculture expects 1999 farm income to be about 7 percent below year-ago levels and down 16.5 percent from 1996.

That forecast was followed by more bad news: The key U.S. milk-price indicator – the Basic Formula Price – dropped a record $6 per hundredweight (about 38 percent) in February. That was double the previous biggest one-month price drop.

“The drop in milk prices could shave another $1 billion from the 1999 farm income estimate,” Dobson says.

Some sectors are being hit much worse than others. Hog producers are a prime example. Unless they had contracts that cushioned price declines, producers who marketed hogs in late 1998 received prices similar to those of the Great Depression, Dobson notes.

Congress has already stepped in with emergency legislation prior to the 1998 election. That included $5.9 billion in special disaster and market loan assistance.

Dobson says that action shows that Congress and the Administration are willing to spend substantial sums to help farmers through the recession.

“It is likely is that there will be more support of some kind,” he says.

The action taken will depend heavily on how long it takes the farm economy to recover, he points out.

How the situation might play out

Near-term strategies. Congress and the Administration will be reluctant to abandon the Freedom to Farm provisions of the 1996 farm bill in the near term, Dobson says. So for the next year or so, if the farm economy continues to weaken and exports remain under $50 billion, the government will probably make more supplemental payments to farmers of the type announced prior to the 1998 elections.

The 1996 Farm Bill terminates the dairy price support program at year”s end, but Dobson thinks a modified version of the program could continue after that. Under the current program the government buys surplus nonfat dry milk, butter and cheese. Due to a considerable surplus of nonfat dry milk, Congress and the Administration have been encouraged to adopt a special, limited price support program for dry milk. Butter prices could also weaken substantially, Dobson points out. So policymakers may opt to extend the present price support program until the Farm Bill expires in 2002.

Looking toward next year</strong. If no significant improvement is in sight as the 2000 election approaches, Congress might consider at least temporarily going back to a program more like that in place before the 1996 Farm Bill. Such a program would allow higher price supports for farmers willing to participate in acreage reduction programs.

Prolonged farm recession. If there is no substantial farm recovery before the provisions of the 1996 farm bill expire in 2002, we could see a more permanent return to pre-1996-type supply control and price support programs. Decisions on the 2002 legislation will take into account findings of the Commission on 21st Century Agriculture, a panel established by Congress to evaluate the impact of the 1996 Farm Bill. Any support offered to farmers by the new legislation would also limited somewhat by commitments made by U.S. trade negotiators in the latest round of the General Agreement on Tariff and Trade (an ongoing effort to reduce international trade barriers).

Protecting gains in trade policies. As Congress reviews its farm policy options, it will feel pressure from the Administration to avoid jeopardizing hard-won gains in overseas trade. Veteran policy analysts remember the early 1980s, when price supports made U.S. grain uncompetitive in foreign markets, Dobson points out.

“It took several years to get grain loan rates down to levels that made U.S. grains fully competitive,” he recalls.

The same concern holds for dairy, he adds.

“While a strong case can be made for continuing the present dairy price support program until 2002, it will be noted that doing so will reduce incentives to expand U.S. dairy exports,” he says.

“The challenge facing farmers and farm organizations will be to craft requests to the Congress that will be most effective for reducing farm financial stress while retaining desirable features of the 1996 Farm Bill.”

There are similarities. In both cases farm exports declined sharply as the U.S. dollar strengthened, although the dollar”s value increased more in the mid-1980s than it has in the late ”90s.

But there”s a major difference, Dobson points out. So far there”s no evidence of the kind of farm credit crisis that brought on the highly visible foreclosures of the mid-1980s. Farmers are carrying less debt, and farmland prices are holding up better.

Still, farm lenders are becoming more cautious about extending credit. The Farm Credit System forecasts an increase in the share of its loans that won”t be repaid in full with interest. These “nonaccrual” loans represented 1.77 percent of Farm Credit”s portfolio at the end of 1998, compared with .93 percent a year earlier.

Why the farm economy is down while the U.S. economy is up.
The farm economy is not the U.S. economy, and vice versa. While the farm economy is mired in recession, in the last quarter of 1998 the nation”s Real Gross Domestic Product grew 6.1 percent. The increasingly service-based economy U.S. economy isn”t as export dependent as agriculture, or as vulnerable to commodity price changes. One-quarter of U.S. farm input is exported, compared with about one-tenth of the aggregate Gross National Product.

Get a copy of Dobson”s briefing paper
William Dobson”s analysis of the current farm policy situation is available in a briefing paper, The U.S. Farm Recession – Implications for Farm and Agricultural Trade Policies. For copies contact Dobson by mail (Dept. of Agricultural & Applied Economics, UW-Madison, 427 Lorch St., Madison, WI 53706), phone (608) 262-8965, or email dobson@aae.wisc.edu