AFPC Policy Issue Paper 95-1

Ronald D. Knutson
James B. Johnson
Barry Flinchbaugh

Agricultural and Food Policy Center
Department of Agricultural Economics
Texas Agricultural Experiment Station
Texas Agricultural Extension Service
Texas A&M University

June 1995

College Station, Texas 77843-2124
Telephone: (409) 845-5913


Ronald D. Knutson, James B. Johnson and Barry Flinchbaugh

*The authors are professors and extension economists, respectively, at Texas A&M, Montana State and Kansas State Universities.

Farm policy has always been an important and controversial political and economic issue in the Great Plains. This results from the fact that most of the United States' farm dependent counties earning over 20 percent of their income from agriculture are located in the Great Plains. Moreover, government subsidies to agriculture have been capitalized into increased land prices on the Great Plains. If subsidies were to be discontinued, agricultural land prices would be expected to fall by a larger percentage in the Great Plains than in most other regions. This is the case because a higher proportion of the region's crop production is composed of production adjustment and price support crops than the share of such crops in most other regions.

Based on these considerations and the higher level of crop production risk in the Great Plains, it is not surprising that the region has been the origin of several populist movements in support of farm programs. Put differently, it is easier for most Oregon or New York farmers to be in favor of eliminating farm commodity programs than for Texas, Kansas or Montana farmers.

Many questions have been raised concerning the future of the farm program. These questions have special significance for the Great Plains. The purpose of this paper is to explore the farm bill issues, options, and consequences that are most important to the Great Plains. The concluding section will then reflect on the alternative roles and strategies that Great Plains agricultural interests can play in developing the coalitions needed to enact a farm bill that is in their interest.

Will There Be Farm Policy?

The answer to this question is obviously yes. No farm program is a policy. The recent policy emphasis has been on a much freer market policy than has existed since the Great Depression. Of course, the New Deal farm programs, the legacy of which lives in current programs, were precipitated by the Great Depression. Additionally, the farm bill is more than production adjustment crop subsidies and price supports. The farm bill is truly omnibus in that, in addition to income subsidies and price supports, it contains environmental, food assistance, nutrition, international trade, forestry, agricultural research and extension provisions.

What Would Happen on the Great Plains if There Were No Farm Programs?

The unilateral elimination of U.S. production adjustment, income transfer and price support provisions would reduce farm incomes, lower cropland prices, increase wind and water erosion, and increase beef cattle production. Given low current set-aside levels and assuming no more than half of Conservation Reserve Program (CRP) land was kept out of production for environmental reasons, the elimination of commodity programs would lead to lower commodity prices. The prices of wheat and cotton could fall sufficiently that land having capabilities to produce alternative crops, such as corn, soybeans, or sorghum, would convert to them. Some of the more marginal CRP lands would be maintained in grass for haying and/or grazing and never return to production. Some wheat and cotton land with no cropping alternatives could become unprofitable and be converted to grassland for cattle production. Cropland conversion combined with release of CRP lands would lead to increased beef production and lower beef prices. There is no doubt that Great Plains farm income would decline without a farm program.

Perhaps as important as the potential decline in farm income, is the inevitable increase in crop income volatility as price supports are removed, prices floors for program commodity prices are eliminated and the deficiency payments awarded on historical yield levels come to an end. Is increased price variability likely even though current price support levels are generally below market levels? The answer is yes. The nonrecourse loan encourages storage at harvest by putting the commodity under loan and marketing it later. Usually price premiums above prices at harvest are realized. Without the loan more commodities would be marketed at harvest, although there are private sector opportunities to price commodities if such opportunities are pursued. Average annual prices for program commodities would be expected to decline. Deficiency payments, awarded on historical yield levels, often offset otherwise large swings in gross farm income when there is crop failure in a particular area and/or when there is extreme downward pressures on commodity prices. These deficiency payments would no longer be available to producers to moderate and offset downward swings in farm income.

Lower farm income and increased price volatility would lead to lower cropland prices, thereby eroding the equity position of land owners, including many owner/operators, retired farmers who are landlords, and other investors who are landlords. The amount of the decline would be affected by the magnitude of the risk premium banks would place on agricultural loans and the amount of decline in net farm income. Economists differ on how fast the decline will occur and how rapidly it would recover. All of these factors will affect the economic health of agricultural lenders, including the Farm Credit System.

Some argue that potential increases in export demand can completely replace deficiency payments in agriculture's income stream. However, the potential for substantially increased exports is uncertain, at best. A compromise could involve the elimination of acreage controls (set asides) and more nonpaid flex acres (NFA) from the current 15 percent to 20 or 25 percent. Such a strategy lowers the level of income support to producers while allowing farmers additional flexibility in responding to global demand. The cost of this greater cropping flexibility would be greater price volatility as farmers switch from crop to crop in search of the most profitable alternative. The ultimate in flexibility involves the whole farm base whereby farmers would be allowed to plant any program crop but still receive deficiency payments on their historical base acres.

What Will Happen to the Conservation Reserve Program (CRP)?

Next to the issue of whether there will be commodity programs, the most important policy question for the Great Plains involves the future of CRP. Some argue that it is the most important issue. This is the case for two major reasons:

While the current administration has indicated an intent to allow farmers to re- enroll CRP lands, the target quantity of land to be re-enrolled, the terms under which these lands are re-enrolled, and the types of lands to be re-enrolled will remain important farm bill issues. The magnitude of what is at stake is indicated by the extremes, which indicate that in the year 2000 the price of wheat could be $2.90 (in 1994 dollars) per bushel if CRP is eliminated compared with $3.65 per bushel if all CRP land were allowed to be re-enrolled. Some analyses indicate that about 80 percent of the cropland currently enrolled in CRP would realize its greatest net returns if re-enrolled at current CRP rental rates.

The Great Plains stands as a net economic beneficiary of CRP in that producer benefits are greater than costs to consumers and taxpayers who are residents of the Great Plains. This is the case because of the Plains' sparse population compared with the importance of agriculture. It is the case without even considering the favorable environmental and wildlife benefits of CRP.

Should Set-Aside Acreage be Continued?

It has been proposed that set-aside (acreage reduction) authority be eliminated in the 1995 farm bill. Set-aside has provided a year-to-year means by which the accumulation of surplus production of commodity program crops can be controlled. These acreage conservation reserves provide government cost control through reduced stock accumulations and reduced Commodity Credit Corporation expenditures. Additionally, the set-aside acres are ineligible for the production of program crops and, thus, both price support and deficiency payments. However, if price supports and deficiency payments are eliminated, there would be no incentives for securing set-aside participation.

Set-aside is not a particularly efficient means of controlling production, in that farmers in continuous cropping areas tend to set aside their least productive lands. In the crop-fallow areas of the Great Plains, set-asides are usually satisfied by the designation of a portion of the acres in fallow as set-aside acres--so few acres that would have otherwise produced a crop are actually idled. Additionally, if set-asides are utilized too vigorously, export competitiveness and export levels are reduced.

Does Our Stocks Policy Ensure Food and Trade Security?

Most of the commodity program crops produced in the Great Plains are export dependent in that about half or more of the average annual production has normally been exported. Importing countries will only rely on the United States as a source of supply if they are assured that it can deliver. Trade security involves the ability to consistently supply export markets. This requires willingness to hold stocks. The result is food security for our customers, especially for export customers.

From a U.S. consumer perspective, food security is less problematic. It is unlikely that we are going to run short of food to feed our own population. Yet as was seen in the early 1970s, unless we are willing to impose politically unpopular embargoes, strong export demand can short domestic markets and drastically increase domestic prices.

The Great Plains has been subject to the impacts of embargoes more than other regions. This results from the importance of wheat as a food grain from a world perspective. Running short on wheat, like rice, creates serious political repercussions. Even sharp increases in the price of wheat creates adverse political reactions.

How is the Environment to be Protected?

Environmental protection is a lightning rod issue on the Great Plains. The combination of CRP and conservation compliance achieved the combined environmental objectives of curbing wind erosion and creating wildlife habitat.

Maintenance of conservation compliance as the "stick" for environmental improvements requires that farm program benefits be used as a "carrot" to secure program participation. Without sufficient commodity and other USDA benefits, and in the absence of set-aside provisions, a return to a more full production posture with the attendant environmental impacts can be anticipated.

Release of CRP lands can be expected to result in increased erosion and reduced wildlife habitat. Maintaining CRP is also complementary with endangered species concerns. Moreover, the potential for injecting economic considerations into the reauthorization of the Endangered Species Act creates a potential for political horse trading between the endangered species and CRP interest groups.

Where Does Rural Development Fit?

The Great Plains has a greater stake in rural development than other regions because it is more rural. Its development problems are unique because of distance and sparse population. Because of this uniqueness, the region does not stand to benefit from general economic programs to the same degree as urban areas. Arguably, the Great Plains have been left behind because its rural problems were never specifically targeted.

The only constituency in the U.S. Congress for rural issues are the Agriculture Committees. Both the House and Senate Agriculture Committees designate specific subcommittees to address rural development issues. Considering the breadth of the rural development agenda, the resources available within the Great Plains, the magnitude of budget pressures, and the jurisdictional issues that exist within the Congress, the Agriculture Committees can be expected to focus on a limited number of concerns, including business development, rural telecommunication, rural electrification, extension education and infrastructure developments such as domestic water and sewer systems for small rural towns and villages. Other important issues, such as rural health care, rural education and job training, have other committee jurisdictions.

What Food Programs Does USDA Need to Survive?

Food programs in USDA began with the dual objectives of:

Since the 1960s, the nature and magnitude of USDA food programs changed markedly with:

The combined forces of welfare reform, food stamp program fraud, and the desire for greater freedom in purchasing could lead to a decision to turn management of food stamp programs over to the states. States could receive a block grant with substantial freedom in the allocation of monies. The greatest impact of such a program change on the Great Plains could be in terms of support for the farm bill on the part of Congresspersons and Senators located outside the Great Plains.

Food stamp recipients within the Great Plains states totaled about 4.0 million in November 1994. This constitutes 11.8 percent of the region's population, while 10.3 percent of the U.S. population is on food stamps. These state totals are heavily influenced by Texas, where most food stamp recipients are located in Dallas, Houston, Austin, San Antonio and other areas of South Texas, all of which are located outside the Great Plains. Absent Texas, the remaining Great Plains states have 8.7 percent of their population on food stamps.

Can a farm bill be enacted without food stamps? Available information suggests that about 50 Congresspersons represent districts that are agricultural sensitive. Most of these member are either on the Agriculture Committee or the Agriculture Appropriations Subcommittee. It takes 218 votes to enact a farm bill. A farm bill without food stamps could be a tough sell politically -- a topic that will be returned to at the end of this paper.

How Do We Assure A Safer Food Supply?

Concern about the safety of the food supply became a major policy issue following a January 1993 food poisoning incident in which a fast food chain served hamburgers contaminated by a virulent strain of E. Coli bacteria that led to several deaths and more than 500 illnesses. Available data suggest that as many as 7 million cases of food-borne illness and 6,500 deaths occur annually with about half of these being meat and poultry related. Over half of the meat and poultry illnesses and deaths are beef (hamburger) related. USDA's, Food Safety Inspection Service (FSIS) has responsibility for ensuring a safe meat and poultry supply. The laws under which FSIS operates were enacted in an era when transmission of animal disease to humans was a primary concern -- not pathogens (bacteria and parasites). Inspection systems therefore rely on the inspectors senses of sight, smell and touch, not microbial tests.

Proposals for modernizing inspection systems are highly controversial in an era where the emphasis is to reduce regulation -- not increase it. While FSIS has taken steps to improve the inspection system, there is only so much they can do within the bounds of the existing law. Changed inspection procedures, perhaps extending to farms and ranches, require changes in the law. These changes could become part of the 1995 farm bill debate. This has significance for the Great Plains in two respects:

What Does All This Mean for the Great Plains?

The 1995 farm bill has more potential implications for the Great Plains than previous legislation both because of the political uncertainty that surrounds it and because of the economic conditions facing its producers -- particularly its wheat producers. In the past, the issues surrounding farm program decisions tended to involve fine tuning existing programs -- tinkering around the edges with loan rates, set-aside, conservation requirements, and target price levels. This time is different, major changes including program elimination are being considered.

In the past, it was fairly easy for the Agriculture Committees to count the votes needed to enact a farm bill as including urban Congresspersons having significant numbers of food stamp recipients and those representing agriculture related environmental concerns. These votes are not nearly as easy to count on in 1995. What is done with food stamps as a part of the welfare package, which could come before the farm bill debate, will have an impact on the outcome. How agriculture treats the environmental interest could likely influence a number of urban Democrat votes needed to enact a farm bill.

Great Plains farmers, their organizations, and their elected representatives will clearly need to practice the politics of a minority if they are to enact a farm bill. This involves:

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