A A P P C C A A Agricultural Economic and Agricultural Economic and Policy Uncertainty: Policy Uncertainty: The U.S. Case The U.S. Case Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Agricultural Forum Sponsored by the Mexican Senate Mexico City, Mexico August 2, 2011
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APCA Agricultural Economic and Policy Uncertainty: The U.S. Case Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Agricultural.
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AAPPCCAA
Agricultural Economic and Agricultural Economic and Policy Uncertainty:Policy Uncertainty:
The U.S. CaseThe U.S. Case
Daryll E. RayUniversity of Tennessee
Agricultural Policy Analysis Center
Agricultural Forum Sponsored by the Mexican SenateMexico City, Mexico
August 2, 2011
AAPPCCAA
Lost Our Policy BearingsLost Our Policy Bearings• We in the U.S. have forgotten why we
have commodity programs– Don’t know the problem– Let alone the objective
• Many say: U.S. agriculture has the power to “milk” the government, so it does!
• Thus, the consensus among many is:– Do away with them; they are a waste– Move the money to some other use
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Why Commodity Policy?Why Commodity Policy?• Agriculture does not behave like our
Econ 101 teachers said it would– Inherent variability – weather and pests are
not problem in non-farm/non-food industries – The total food/agricultural market lacks
quick response to even sharp declines in prices
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The Root of the Ag Problem: Lack The Root of the Ag Problem: Lack of Price Responsiveness of Price Responsiveness
• Lower prices cause markets to automatically correct, right? Right!– Consumers buy more– Producers produce less– Prices recover—problem solved!
• But in agriculture, lower prices do not cause the same degree of reaction– Little self-correction on the demand side
• People do not consume significantly more food– Little self-correction on the supply side
• Farmers do not produce significantly less output– With little correction prices do not recover
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Once Upon a Time in the U.S.Once Upon a Time in the U.S.
• There were farm policies that provided– Floor Prices– Supply management tools– Price stabilization and reserves
• Over the years and especially since 1996– All three were eliminated– Replaced with payment programs:
• Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments)
• Partially government-funded insurance schemes• The 2008 FB added another revenue based insurance
scheme (ACRE)
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Current U.S. Policy Can, Current U.S. Policy Can, and Doesand Does, , Cause Economic CrisesCause Economic Crises
When supply outruns demand:– U.S. Commodity prices plummet
– U.S. grain farmers become wards of the state
– U.S. livestock producers, other grain users and farm input suppliers are subsidized
– Low grain prices are triggered internationally
– Many countries, especially developing countries, are unable to neutralize impacts of low prices
– U.S. accused of dumping
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Current U.S. Policy Can, Current U.S. Policy Can, and Doesand Does, , Cause Economic CrisesCause Economic Crises
When demand outstrips supply:– Short-Run
• Crop prices explode• Livestock/dairy producers go bankrupt• Food prices increase at alarming rates• Countries hoard rather than export• Additional millions become
undernourished/starve in developing countries– Long-Run
• High prices bring big resources into ag production worldwide
• Prices crash again
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Export Growth Will Make US Ag Export Growth Will Make US Ag Prosperous??Prosperous??
• The largest U.S. farm organization and commodity groups say so (again)
– All that is needed is complete access to growing world markets (all would be great “only if”…)
• Import customers would import more and we could better compete with our export competitors
• Result for the US: Exports will grow at accelerating rates providing a permanent source of farm prosperity
• U.S. crop price and income programs could be eliminated
• But historical experience is not encouraging
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Historical ResultsHistorical Results
Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops
1979=1.0
US Population
US Exports
US Domestic Demand
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Post-70s: Developing-Country Post-70s: Developing-Country Competitors Did WellCompetitors Did Well
Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam