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Backgrounder #1523 on Agriculture

March 8, 2002

The Erosion of Freedom to Farm

By

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.

The 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referred to as the "freedom to farm" reforms, that provided a long-overdue step toward reforming counterproductive, outdated agriculture programs that had originated in the Depression era.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.

This 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, high-income farms.

The 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 FAILURE

For 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.

This 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.

Not 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

The 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 following changes:

  • 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 expected.

    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 percent.1

  • Eliminated 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. producers.

    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. farmland.

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.2 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 price.

    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 American workers.

  • 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 severely restricted.

    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.3

    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 wealthiest farmers.

  • Conservation 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 million acres.

  • 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 supply-control programs.4

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 other year.5

In 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.6

But 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.

The 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.

The 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."7 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.8

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.9

The 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 authority10 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 FARM

In 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 believe.)

In 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 increasing supplies.

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.

In 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.

Even 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.

The "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.

Over 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 nation's farmers.

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.

On 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 well.

The 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, D.C.


1. See "Freedom to Farm: The Record and Outlook," Sparks Companies, Inc., June 1999.

2. For a complete discussion of shortcomings in the Freedom to Farm Act as considered by the 104th Congress, see John E. Frydenlund, "The Freedom to Farm Act (H.R. 2195): Key Changes Will Improve Potential for Serious Agriculture Reform," Heritage Foundation Issue Bulletin No. 211, September 5, 1995.

3. See John E. Frydenlund, "How the Proposed Dairy 'Reform' Will Impose Heavy Costs on Americans," Heritage Foundation Executive Memorandum No. 448, February 26, 1996.

4. During the debate on the 1996 farm bill, The Heritage Foundation warned of this in John E. Frydenlund, "Agriculture Reform: Can House Succeed Where Senate Failed?" Heritage Foundation Issue Bulletin No. 221, February 28, 1996.

5. "Freedom to Farm: The Record and Outlook."

6. Ibid .

7. Ibid .

8. Bruce L. Gardner, "International Trade and the Future of American Agriculture," speech presented to National Symposium on the Future of American Agriculture, Athens, Georgia, August 1999.

9. Ibid .

10. Now known as trade promotion authority (TPA).

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