Farmers Should be Protected During the Long Periods of Low Prices

This post is by Daryll E. Ray and Harwood D. Schaffer of the Agricultural Policy Analysis Center, University of Tennessee, in Knoxville. They write Policy Pennings, and I use their excellent analysis on this site from time to time.

Today’s writing by Harwood and Schaffer tells us that long periods of low prices which don’t cover crop inputs historically can last a very long time and thus they need greater policy support. (My impression is that the latest farm bill supports farmers better during periods of low prices – readers in the know are encouraged to weigh in to help enlighten us.) Beyond that issue we should perhaps be asking ourselves instead why our policy covers these monoculture crops so heavily in the first place, when the end result is always overproduction.—Kay M.

Commodity policy choice: Treat the symptoms or address the cause of low crop prices

When it comes to developing policy prescriptions to deal with the dynamic of long periods of low prices interrupted by much shorter periods of high prices, two approaches are possible: one approach provides symptomatic relief and the other treats the cause of low crop prices. One must choose one approach or the other.

If policy analysts develop and policymakers adopt public policies that treat the proximate cause of low prices—the presence of a supply that exceeds demand—there is no need for symptomatic relief. On the other hand, providing symptomatic relief (to short term price disturbances when prices are high and little relief when prices are low) ultimately becomes very expensive and risks losing public support for agricultural programs when farmers need them the most.

For many years, agricultural economists understood that agriculture was different from many other sectors of the economy in that an oversupply of grain and oilseeds and the ensuing low prices did not bring about a timely self-correction in agricultural markets. Low crop prices did not cure low crop prices within a reasonable time frame.

In other sectors of the economy, low prices cause suppliers to reduce their production of the item in excess supply and consumers to increase their purchases. The result is that supply and demand come back into balance at a profitable price level quite quickly. This timely self-correction does not occur in agricultural commodity markets.

Because they understood the dynamics of the market, policy analysts worked to develop policies that would isolate a portion of the supply from the marketplace, bringing about a balance between supply and demand and the return of prices that kept producers in business. To keep from accumulating ever-larger isolated stocks, policies were also developed to reduce production to allow demand to catch up with production.

Understandably, farmers were often frustrated with these policies. And from the perspective of an individual farm operation this made sense. If they had been allowed to produce more they could have earned more, they reasoned. And that is true for an individual farm. But when all farms seek to increase production, the result is an oversupply that drives prices downward for everyone, and the size of the decline in prices is greater than the increase in production.

In recent years, policy makers and many agricultural economists have simply chosen to ignore these dynamics and instead argue against policies that manage supply. In place of traditional supply management policies, they have advocated for policies that use crop insurance to protect farmers against variations in prices—symptomatic relief.

The problem is that these policies only work well when prices are at or above the cost of production. If prices remain low for an extended period of time, farmers end up paying premiums for policies that do not even cover the cost of production.

We understand that farmers do not want to hear this kind of analysis; they would rather hear about booming export demand, a growing ethanol demand, and a new “price floor.” When we are invited to speak to farm groups, producers come up afterwards and emphatically say, “I don’t like what you are telling me!” and then they continue, “But I needed to hear that.” When prices were high, many economists were telling farmers that there was a new price floor undergirded by increased input costs.

During this period, we continued to tell farmers about the low prices that would come when the yearly increases in ethanol demand began to stagnate and supply continued to increase. We cautioned farmers to put some of the increased profits in the bank instead of buying lots of new machinery and driving up the price of land. Today, some of those who talked only about high prices and a new plateau are saying to farmers, “I hope you put some money away during the good times.” Good advice, but a couple years late.

The trend in recent decades is toward policies that tend to provide producers with little income support when prices are low for an extended period of time. As a result, the associated costs of maintaining a vibrant agriculture can actually be more costly to U.S. taxpayers through emergency programs/payments. Failing that the results could be devastating to a large swath of farmers. For farmers in less developed countries, lower prices have severe consequences. When prices are low in countries where agriculture is a large portion of the economy, the impact on the economy is severe.

The challenge of policy analysis is not to design public policies that make the good times even better; rather it is to have policies in place to help protect farmers during the long periods of low prices. Over the last century, the periods of low prices have been much longer than the boom times.

Photo: FlickrCC by Rae Allen, c.1958.

New Iowa Study Points to Greater Need for Policy Support of Cover Crops

Study of Iowa Farmers Finds 23% Using Cover Crops

Researchers examine ways to speed up economic return

Conservation agriculture can create far-reaching environmental and economic benefits, but farmers may require help bearing short-term risks and costs, according to a new study released today by global consulting firm Datu Research.

The study found that 23% of Iowa respondents were using cover crops, mostly on fewer than 100 acres, suggesting that farmers may be trying them out before committing to adoption on a larger scale.

Almost half (47%) reported using no-till—a practice in which seeds are drilled into undisturbed soil—but only 21% had continued the practice over many years. Only 4% used strip till (tilling and planting in only a narrow band).

The study, “Adoption of Conservation Agriculture: Economic Incentives in the Iowa Corn Value Chain,” was prepared for the Walton Family Foundation.

The authors flag an important obstacle to wider adoption: the time lag farmers face before their yields increase, which in some cases could take years.

“We set out to find the economic win not just for farmers, but for the businesses they deal with,” said Sarah Mine, lead author. “The idea is to find other actors who are willing to share the short-term costs and risks, to gain a greater return in the long run.”

Since 55% of farmland in Iowa is rented, Datu analyzed the potential economic gain for landowners who rent to farmers using conservation agriculture. Until adequate data on yield increases are available, the practices are unlikely to increase land value. However, certain landowners could see an economic benefit from reductions in input costs.

In Iowa, 14% of farmland leases are crop share or custom arrangements, in which the landowner supplies some or all inputs. These landowners could indeed benefit economically from farmer adoption of conservation agriculture, which reduces, to varying degrees, use of fertilizer, pesticides, fuel, equipment, or labor.

Another potential opportunity lies in providers of crop insurance. In light of evidence that conservation agriculture can increase crop resilience to threats such as droughts and floods, insurers could in theory reduce their risk by incentivizing conservation agriculture.

Tapping the insurance opportunity would require bold changes in federal policy and much more data on yield impacts. Yet farmers do have existing insurance-related options. One is Prevented Planting Payments (PPP), a common mechanism that covers farmers who cannot plant an insured crop by the required planting date—due to, say, sustained rainfall.

Of the Iowa farmers in the Datu study who had received a PPP, 66% had chosen to plant cover crops on their prevented planting acres.

Another insurance option is Whole-Farm Revenue Protection (WFRP), a new pilot program required by the 2014 farm bill. WFRP will allow producers to insure their entire operation under a single policy. By offering a premium subsidy to farmers who produce two or more commodities on one farm, WFRP could incentivize crop rotation.

In Iowa, where corn-soybean rotation is already very common, WFRP could encourage third-crop rotations.

To further develop economic incentives for farmers, the study recommends systematic research on the yield effects of conservation agriculture.

Yield effects are likely the most critical piece of information a farmer, landowner, or crop insurer can have about a management practice.

“Conservation agriculture translates into economic value and environmental sustainability for future generations,” says Mine. “A fair share of the economic benefit really should accrue to farmers.”

Photo: Photo by Lynn Betts, USDA Natural Resources Conservation Service. OCT 2011. Cover crops on a field in Black Hawk County, Iowa.