AGRICULTURAL PRICE SUPPORTS
Since the 1930s the United States and Canada have operated agricultural price-support programs. The intent has been multifaceted, but primarily the purpose has been to manage agricultural output levels in order to increase the price per unit and thereby raise the net income of farmers.
In the United States, the Agricultural Adjustment Administration was formed in 1933, after commodity prices fell by more than 50 percent from 1929 to 1932. Farmers were experiencing negative net farm income year after year, trying desperately, and often unsuccessfully, to avoid bank foreclosure. Farmers continued producing even though there were no markets for what was already in hand.
This desperate situation of chronic overproduction by U.S. producers led to the Agricultural Adjustment Act of 1933, which established government supply management for, initially, seven major farm commodities: wheat, corn, cotton, rice, tobacco, milk, and hogs. The arguments for establishing these programs and continuing them since have largely centered upon the farmer's poor bargaining power in the marketplace, the belief that agriculture has a constant propensity to overproduce, and the need for price stability.
Commodity programs in the United States have not been without critics, who have argued that artificially high prices have weakened the competitiveness of the United States in the world market. They have also argued that the programs have contributed to the trend toward fewer and larger farms since payment flows have tended to be directly proportional to production volume. Thus, critics believe the programs have led to impractical and unsustainable solutions.
While the intent was similar, Canadian efforts to support prices have taken a much different strategy. Canada historically has not restricted the production of individual grains and has not idled cropland. Instead it has relied on the Canadian Wheat Board (CWB) to set the marketing and export policy for its major agricultural grains. Using this single-seller agency and heavily regulated producer quotas, it has accomplished a price support system for Canadian producers in its three Prairie Provinces.
A second means by which Canada has influenced the income of agriculture producers has been through heavily subsidized rail transportation services for grain movement. In essence, the rates are in relation to the distance from the Prairie Provinces to the key ports, thus equalizing the terms for producers across the entire grain-producing region. In so doing, Canadian crop production took on a geographic configuration far different from what it would have been without graduated transportation subsidies.
Farm commodity programs have had a major impact in the Great Plains, wherever wheat, corn, and other feed grains are dominant crops. Program participation by Plains farmers has been relatively high, which has led to a major income transfer into the economies of rural counties. In fact, in many years U.S. farm price-support programs have constituted from one-third to one-half of net farm income in many Plains states. These payments reached record highs in 2000, when direct government payments represented $28 billion– 61 percent–of the U.S. total net farm income of $46 billion. And in several of the Plains states, the government payment component was 75 percent or more of the total state net farm income. Canadian programs have had similar impacts on producer income levels in the Prairie Provinces. Moreover, the layers of regulatory and compliance detail attached to program participation in the United States and Canada have significantly shaped cropping patterns and land-use practices. Conservation management practices have been instituted over time using the economic incentive of farm program participation.
Over the course of the last two U.S. farm programs of 1996 and 2002, substantial changes in strategy have taken place. In contrast to earlier efforts to manage supply levels and therefore increase commodity prices, the intent has now shifted to allow more farmer freedom of production levels and to rely on a market clearing system driven heavily by global forces of international trade. The result has been more volatile and generally lower commodity price levels for those crops covered by the programs. In turn, direct and price deficiency payments are now being made to farmer producers relative to their production volume to maintain income levels. The level of these payments has been substantial in recent years, and dependency upon them among producers is very high. In fact, crop producers across the U.S. Great Plains could be said to be on "economic life support" via these programs as market prices of major commodities have fallen below unit cost of production.
Because the current 2002 U.S. farm program is scheduled to continue for at least the next five years, the economic safety net legislation is in place for the near-term future. However, given the larger economic and political uncertainties facing this nation, there is no guarantee that future funding will be at the initial levels proposed. If budget constraints force cutbacks, this safety net could begin to unravel.
For the Plains economy, which remains heavily tied to production agriculture, the implications of this change could be profound. If U.S. federal farm transfer payments drop significantly in the face of low commodity prices, farm income variability from year to year and from one producer to the next will magnify. Canadian producers may well face similar challenges from these economic forces. Those producers with expertise in risk management and astute marketing will be able to survive economically and perhaps even thrive, while others without these skills and resources will likely exit production agriculture at accelerating rates. There will also be some others who will focus more on agricultural products (i.e., organic products marketed direct from the farm) than agricultural commodities and find economically viable niches, but their numbers are likely to be modest in the context of the entire agricultural sector. In sum, entire farming communities and regions within the Plains may be economic winners or losers depending upon the adjustments they are willing and able to make as the history of agricultural farm programs transitions and the structure of the agricultural sector evolves.
University of Nebraska-Lincoln
Cramer, Gail L., and Eric J. Wailes. Grain Marketing. Boulder co: Westview Press, 1993.
Paarlberg, Don. Farm and Food Policy: Issues of the 1980s. Lincoln: University of Nebraska Press, 1980.