As the House and Senate meet in conference to
determine the final shape of the farm bill, a benchmark for
measuring the value of the proposed legislation can be found in the
farm bill of 1996. A survey of the trends in agriculture before the
passage of the 1996 legislation, the impact of the bill, and the
effects of moving away from its basic tenets reveals the principles
that will be most likely to benefit both America's agricultural
industry and its consumers.
1996 farm bill included provisions, commonly referred to as the
"freedom to farm" reforms, that provided a long-overdue step toward
reforming counterproductive, outdated agriculture programs that had
originated in the Depression era. But the legislation had barely
gone into effect when the opponents of reform began their efforts
to repeal the changes it brought, or at least to lay the groundwork
for a return to the status quo.
Although opponents of the reform
legislation were disgruntled because it reduced the level of
government control over the nation's agriculture industry, once the
bill was passed, most farmers supported the flexibility it
provided. Within two years, however, the bill's benefits were
dimmed by worldwide economic problems and weather-related disasters
in the United States.
provided the opening that opponents of reform had been seeking--an
economic downturn in the farm economy that they could pin on
freedom to farm. A return to subsidy-laden government
micromanagement of agriculture quickly followed. Since 1998,
congressional efforts to gut the farm reforms have resulted in
massive annual multibillion-dollar "emergency relief" packages for
U.S. farmers, the lion's share of which have gone to large,
greatest opportunity for America's farmers to increase their income
potential and create wealth lies not in being recipients of relief
packages, but in participating in the expanding global marketplace.
America's farmers and policymakers should recognize that a return
to the policies that reigned before 1996 will only guarantee that
U.S. farmers will not be able to take advantage of an export market
that is growing steadily as a result of population growth and
rising standards of living worldwide.
FEDERALLY MANAGED AGRICULTURE: 60 YEARS OF
60 years, a significant share of the U.S. agriculture sector was
subject to the federal government's control. Washington tried to
manage U.S. agriculture through a combination of subsidies,
commodity supply and price controls, acreage allotments, production
quotas, restrictions on imports, and export subsidies. The
underlying assumption was always that this central planning would
provide a "safety net" to prevent farm income from falling below
what was considered to be an acceptable level.
central planning locked U.S. farmers into producing specific
commodities on specific acres or in prescribed amounts in order to
remain eligible for government income support. In fact, each year,
farmers had waited for instructions from Washington to learn what
they would be permitted to plant.
only was the government's relentless attempt to juggle supply and
demand a dismal failure, but its incessant attempt to control
supply also priced the U.S. agricultural industry out of the export
market and led to a significant loss in America's share of an
expanding world market. As a result, foreign production increased
to fill the void created by the U.S. policy of unilaterally idling
huge areas of farmland. As residual suppliers to the world market,
U.S. farmers saw prices for their crops permanently depressed.
WHAT THE 1996 FARM BILL ACCOMPLISHED
Federal Agricultural Improvement and Reform (FAIR) Act of 1996
represented an historic reversal of the federally managed
agriculture system. This long-overdue legislation fundamentally
reformed the major farm commodity programs (wheat, feed grains,
cotton, and rice), freeing American farmers who produced these
crops to plant for the world marketplace rather than for the
government. Instead of providing subsidies that required farmers to
produce certain crops in specific quantities or on specified acres,
the 1996 farm bill allowed American farmers to determine what crops
they would plant and provided fixed "market transition payments"
that would decline through the years, the implication being that
they would gradually phase out by 2002.
Under the old farm policy, the planting
history of a farm was used to determine subsidies. If, for example,
a farmer's history included 100 corn acres, he would be eligible to
receive subsidies on 100 corn acres--but only if he limited his
planting to those acres and agreed to reduce his cultivated acreage
if the government instructed him to so. Under the reform
legislation, the farmer could use those acres to plant soybeans,
sunflowers, wheat, or any other commodity he chose.
Specifically, the 1996 farm bill made the
- Ended acreage
reduction programs. The most important accomplishment of
the 1996 farm bill was to end the annual acreage reduction programs
(ARPs) that severely restricted the ability of U.S. farmers to
produce for the world marketplace. Under these programs, federal
bureaucrats would forecast each year whether more or less corn,
wheat, cotton, and rice would be needed in order to meet--but not
exceed--demand. They would then compute how much acreage of each
commodity should be planted in order to meet that theoretical need.
Projections would be used, for example, to determine by what
percentage plantings of a particular commodity should be reduced in
order to produce the projected desired supply. These restrictions
not only undermined U.S. agricultural competitiveness in world
markets, but also served to depress the rural economy.
Not surprisingly, the bureaucrats' track
record at anticipating such factors as the weather and U.S. and
global production and demand was woefully bad. As a result, the
federal government sometimes required ARPs when there would have
been worldwide demand for much greater production of a crop and, at
other times, lifted ARPs when demand ended up being much less than
Amid these fluctuations, the one constant
was that when U.S. farmers were required by federally mandated ARPs
to cut back crop production, foreign competitors increased their
production levels to fill the void. As a consequence, the U.S.
domination of the major world markets fell into decline. From 1980
to 1985, for example, the U.S. share of world trade in wheat, feed
grains, cotton, rice and soybeans fell from 50 percent to 33
target price/deficiency payments. The 1996 farm bill also
eliminated the target price/deficiency payment scheme, under which
farmers were paid the difference between a government-established
"target price" and the market price of their crops. In effect,
target prices established a minimum export price for U.S.
agricultural commodities. This worked to the detriment of American
farmers in competition in the global marketplace. The government's
dictates informed foreign producers and sellers of the prices they
should charge for their products in order to undersell U.S.
As a result of the 1996 farm bill, U.S.
producers were given the flexibility they needed to make planting
decisions based on the demands of consumers rather than on the
latest edicts from Washington, which traditionally imposed supply
controls that idled millions of acres of productive U.S.
WHERE FREEDOM TO FARM FELL SHORT
While the 1996 farm bill was a significant
step in the right direction, political dynamics left a number of
flawed agriculture programs essentially unchanged. These included:
- The sugar
program. The 1996 farm bill did not reform the sugar
program, which included an anti-competitive and tightly controlled
production system that allowed a cartel of large, wealthy sugar
producers to determine who had the right to produce sugar in the
United States. The sugar program still operates under a strict
import quota that limits the supply of sugar while supporting
prices for domestic production that are at least twice the world
These policies insulate sugar producers
from the demands of the market and impose a cost of over $1 billion
annually on U.S. consumers while driving many domestic sugar
refineries out of business, eliminating jobs and displacing
- The peanut
program. The 1996 farm bill maintained the peanut program,
under which a quota system restricts the right to grow and sell
peanuts to a limited few who have inherited, purchased, or rented
that right. Two-thirds of those who own the right to grow peanuts
lease that right to operating farmers. For these farmers, this
rental fee is the largest cost of peanut production. These "quota"
peanuts are supported at a much higher price than non-quota
peanuts. Only quota peanuts can be marketed in the United States,
while non-quota peanuts must be exported. To protect producers of
quota peanuts from the effects of competition, peanut imports are
This restrictive peanut program imposes a
cost of at least $300 million annually on U.S. consumers.
Ironically, the 2002 farm bill may provide more reform of this
archaic program than for any other by "buying out" the quotas, but
at great cost to taxpayers.
- The dairy
program. The 1996 farm bill provided only minimal reform
of the dairy program. Although it called for a phaseout of the
dairy price support program and mandated some reform of the federal
milk marketing order system, it also authorized the creation of the
Northeast Interstate Dairy Compact, a cartel of milk producers in
six New England states that is allowed to establish artificially
high milk prices and restrict the interstate commerce of milk. Any
milk sold within the compact states must be sold at a minimum price
that is established by the compact, regardless of what milk prices
may be in the rest of the country.
Making matters worse, even the minimal
reforms that had been included in the 1996 farm bill were reversed
in 1999 by Congress, which voted to extend the dairy price support
program, repeal even modest reforms of the milk marketing orders,
and extend authorization for the Northeast Compact. Although the
authorization for the compact was finally allowed to sunset on
October 31, 2001, the current Senate farm bill would create a
brand-new $2 billion dairy subsidy program.
- Loan Deficiency
Payments. The 1996 legislation retained the marketing loan
provisions for the four major crops (corn, wheat, cotton, and rice)
as well as soybeans. Under these provisions, producers are required
to repay the government only what they received for their crops. If
this is less than the amount of their loan, they can pocket the
difference. This has resulted in huge payments that circumvent
so-called payment limitations and have gone primarily to the
Reserve Program. The 1996 farm bill did not reduce the
size of the Conservation Reserve Program (CRP), which removes from
cultivation millions of valuable acres that are capable of
sustained productive use, but merely capped the program at 36.4
- Federal Crop
Insurance Program. The legislation also failed to expand
reforms of the
federal crop insurance program, which encourages farmers to
attempt to produce crops on higher-risk lands. Often, these are
marginal production areas that are the most environmentally
sensitive lands. Ironically, much of this land would be more
appropriate for inclusion in the CRP than at least 55 percent of
the land that is currently included in that program.
- Retention of
Permanent Law. One of the most serious, and largely
overlooked, failures of the 1996 farm bill was that it retained
permanent farm law. This means that, in the absence of new
legislation, farm programs would revert to the 1938 and 1949 Acts,
which are based on traditional subsidy and supply-control policies.
The failure to repeal permanent farm law provides a strategic
advantage for those who support a return to traditional subsidy and
ECONOMIC AND POLITICAL TRENDS SINCE
FREEDOM TO FARM
Following passage of the 1996 farm bill,
commodity prices in 1996 and 1997 were high enough that there would
have been no deficiency payments under the previous farm law. The
$11 billion in market transition payments that the bill provided to
farmers for those two years was pure "gravy." There were no losses
to counterbalance, and this was money that they would not have
received under the old program. Agricultural exports increased $5
billion from 1995 to 1996, and the 1996-1997 average was 33 percent
higher than the 1993-1994 average. In fact, 1996 set the
decade-high net farm income record, and 1997 was higher than any
response to the record-high prices of the mid-1990s, which were
generated primarily by expanding global (particularly Asian) demand
for food, there were significant increases in non-U.S. production
competing for these growing world markets. Although market prices
were high during this time, until they were allowed planting
flexibility by the 1996 farm bill, U.S. farmers could not produce
more crops to meet the growing demand. As a result, much acreage in
foreign countries was brought under cultivation to meet the demand
both for their own domestic consumption and for export.
Effect of the
Asian Economic Crisis on U.S. Exports.
In 1997, an international economic crisis that began in Thailand
spread to other Asian countries. This set off a downturn in the
economic and financial condition in Asia, the largest market for
U.S. agricultural and food products. It also caused a setback in
economic growth and trade in countries throughout the world,
including Russia and Brazil and other Latin American countries, all
of which were critically important markets for U.S. products.
production did not decrease correspondingly. Global increases in
world plantings and harvest are not easily turned around. There is
a natural time lag in response to market signals. In addition, once
an initial investment is made to bring new land areas, such as the
rainforest, into agricultural production, there is little that can
be done other than to continue cultivating and planting those
acres. These factors combined to further weaken agricultural
commodity prices and depress farm income.
financial turmoil and depressed global commodity prices reduced
U.S. agricultural exports. As a result, from the record-high level
of $59.8 billion in 1996, farm export sales levels dropped by $2.6
billion in 1997, by $4 billion more in 1998, and by nearly $5
billion more in 1999 before rebounding back over $50 billion in
2000 and 2001.
loss of farm export sales has had a direct impact on farm income.
According to an independent economic analysis done in June 1999,
the link between export sales and farm income is so strong that
"changes in exports are reflected almost directly and immediately
in farm income."
That study also contended that "swings in export sales values can
be clearly seen in farm returns and their impact on gross income is
virtually dollar for dollar," although Dr. Bruce Gardner of the
University of Maryland has estimated more conservatively that each
dollar of farm export sales is worth about 40 cents in additional
net farm income. In any event, the lost export sales of 1997-1999
cost U.S. farmers at least $8 billion in lost net farm income.
LOST TRADE OPPORTUNITIES
Considering how critical export sales of
agricultural and food products are to U.S. farmers' incomes, it is
unfortunate that throughout most of the past decade, the U.S.
government failed to pursue effective policies that would open up
international trading opportunities. The General Agreement on
Tariffs and Trade (GATT) negotiations, finally concluded in 1994,
provided a significant breakthrough that required World Trade
Organization (WTO) members to reduce agricultural export subsidies,
allow increased market access, and reduce specified
trade-distorting domestic policies. However, the agreement provided
so much leeway in implementing the various formulas used to monitor
these reforms that the changes accomplished to date are far less
than was anticipated.
1994 GATT agreement had called for another round of agriculture
negotiations to begin in 2000 to further open up world food and
agricultural trade. These negotiations were critical to continuing
on the path of trade liberalization, but they posed an uphill
battle for reform, given that most European countries preferred the
status quo of protectionism and did not see any advantage in
another round of talks.
Thus, the burden of leading the trade
reform agenda fell on the United States; but throughout the 1990s,
year after year, the United States failed to provide adequate
leadership. Had the Clinton Administration persisted, it could
easily have secured congressional approval of fast-track
negotiating authority before the beginning of WTO
negotiations in 1999. This would have sent a signal to the rest of
the world that the President was serious about making these
negotiations work. But this was not considered a priority. It was
not until the fall of 2001 that the House of Representatives, by a
narrow margin, voted to grant President George W. Bush trade
promotion authority, and the Senate has yet to do so.
CONGRESS'S EARLY RETREAT FROM FREEDOM TO
1998, weather-related disasters compounded the economic distress
American farmers were already experiencing. Seeking to exploit the
"farm crisis," opponents of farm policy reform blamed freedom to
farm for the nation's agricultural woes and sought to dismantle the
1996 farm bill's reforms. (In reality, because the 1996 farm bill
provided generous market transition payments, the U.S. farm economy
was much better off than reform opponents led people to
the waning days of the 105th Congress, Senator Thomas Daschle
(D-SD) convinced President Bill Clinton to join the effort to
derail farm freedom through the appropriations process. Opponents
of reform insisted that more money should be added to an emergency
relief package for farmers, thereby restoring their "safety net."
In fact, this was just another way of saying that they wanted to
return to the old command-and-control policies that had ended with
the 1996 farm bill.
Senate Agriculture Committee Chairman
Richard Lugar (R-IN) and Senator Pat Roberts (R-KS), who had
chaired the House Agriculture Committee during consideration of the
1996 legislation, pointed out that the long-term impact of raising
commodity loan rates would be to lower farm prices even further by
Regrettably, in order to hold back efforts
to reverse the hard-won agriculture program reforms, both
sides--Republicans as well as Democrats--wound up in a bidding war.
Although the actual economic loss due to 1998 weather-related
disasters was less than $1.5 billion, the Republicans proposed $4.2
billion in "emergency disaster relief." Ostensibly, part of the
reason for this generosity was to make up for lost export markets.
Eventually, to fend off Democrats' efforts to reopen the farm law
and return to the old supply-control policies, Republicans upped
the ante to nearly $7 billion.
1999, once again, weather-related disasters and lower commodity
prices led to the addition of emergency farm relief to the annual
agriculture appropriations act. And once again, there was a bidding
war. This time, the Republicans started the bidding at $6.5
billion, and the Democrats insisted on $11 billion. Ultimately,
both sides reached a "compromise" of $10 billion.
before this huge "emergency relief " package was approved, farmers
were already slated to receive $5 billion in market transition
payments in addition to $8.5 billion in loan deficiency payments
and marketing loan payments, which, when combined, was the largest
sum of annual payments ever made through commodity programs. An
overwhelming percentage of these benefits went to the wealthiest
farmers rather than to those who suffered most from weather-related
disasters or low commodity prices.
"emergency relief" package also doubled the current loan deficiency
payment limit from $75,000 to $150,000. However, the farms that
previously had reached the $75,000 limit were not small farms but
those with over 2,000 acres. Moreover, a producer who owned up to
50 percent shares in two other farming operations could qualify for
double the nominal payment limit and would be eligible for up to
$300,000 in marketing loan gains.
the past two years, Congress has continued to provide excessive
levels of "emergency relief" payments that have gone primarily to
some of the nation's wealthiest farmers. This strategy plays
perfectly into the long-term agenda of those who want to return to
a traditional managed agriculture system. They have continued to
blame freedom to farm not only for the depressed farm economy, but
also for these excessive payments. They argue that government
supply controls and targeted subsidies offer a much less costly,
and more effective, alternative to these giveaways to help the
WHAT SHOULD BE DONE
Trade promotion authority, which offers
prospects for increased export trade, after an uphill battle was
passed only in the fall of 2001 by the House of Representatives. If
the Senate wants to do something that would truly benefit America's
farmers, it can do so by approving TPA rather than returning the
nation to the failed policies of the 1930s.
the international level, if future trade negotiations are to
maximize the potential for a more open global food economy, it will
be important to ensure that no commodity sectors (including those
of the United States) are exempted from the negotiations; nor
should there be any product or policy exemptions. The forces
abroad, particularly in the European Union, that oppose freer trade
have much political clout, and this has made many of the foreign
negotiators intransigent in their opposition to opening their
markets further to outside food and agricultural products. However,
U.S. proponents of an open market face obstacles at home as
unwillingness of the most antiquated and archaic segments of the
U.S. agriculture sector--particularly the peanut and sugar
industries--to abandon protectionism for their products ultimately
undermines the credibility of U.S. negotiators who are trying to
push for greater international market access for other U.S.
agricultural commodities. For example, the peanut program is a
prime example of a dual-pricing system that could be considered an
export subsidy. The United States will find it difficult to make a
persuasive case for free trade in agriculture as long as it
maintains a program as restrictive as the peanut program, which
severely limits imports of the product. The U.S. sugar program,
which supports a domestic sugar price at a level far above the
world market price and controls the supply of sugar through
restrictive import quotas, also undermines the ability of U.S.
negotiators to push for greater access to the world marketplace for
other agricultural commodities.
Rather than retreating from the
accomplishments of the 1996 farm bill, Congress should keep freedom
to farm on track and open the way for even greater reform by
dealing with major unfinished agenda items. Instead of returning to
failed policies of the past, the U.S. government should focus its
attention on further opening up world trading opportunities for
American farmers and ensuring that they are positioned to take
advantage of the opportunities that are provided.
John E. Frydenlund is
Director of the Center for International Food and Agriculture
Policy at Citizens Against Government Waste in Washington,