Competition Comes to the U.S. Farm Sector Term Paper

Competition Comes to the U.S. Farm Sector

The United States has always supported its farmers through a number of different policies. This policy has included programs designed to distribute the nation's land in an equitable fashion, increase productivity, raising the standard of living of American farmers and helping them to market their products (Westcott and Price, 2001). U.S. farm policy since the 1930s focused on price and income supports. Until the introduction of the 1996 Farm Bill, the price support system relied on a series of acreage limits and storage programs (Westcott and Price, 2001).

The basis of the current farm policy began during the Great Depression. The focus of the original farm policy was limited; however, the past 15-20 years have seen a broadening of this policy to include many other things other than price support. (Westcott and Price, 2001). In 1985 policy changes were instituted that moved the farm industry towards a market orientation that reduced the government involvement in farm subsidy programs (Westcott and Price, 2001). This made the farm sector more closely resemble other sectors of the economy. This was a big change for farmers who were used to simply growing their product and selling it to a committed customer, the U.S. government, at a set price. Farm prices would now be market driven and subject to the laws of supply and demand rather than subject to government policy.

Farm prices over the next several years are expected to be below to slightly above commodity loan rates (Westcott and Price, 2001). Therefore loan deficiency payments, marketing loans, and the commodity loan program are expected to remain large (Westcott and Price, 2001). Analysts project that this will result in more acreage being planted while at the same time, it will significantly lower crop prices. Increased personal incomes in the United States have increased the domestic demand for farm products and there has been a greater interest in the preservation or rural landscapes (Westcott and Price, 2001).

There are many persons who have a considerable stake in farm policy decisions. The needs of small farmers (annual sales under $100,000) is vastly different than that of large farmers (sales of $250,000-$499,000). Small farmers may engage in farming as a part time activity and may be employed elsewhere. However, large farmers usually engage in farming as their only source of income. Under the new marketing program some small farmers may be forced out of business due to the fact that they simply do not have the resources to compete with large farmers. Large farmers will undoubtedly feel the impact of the marketing system as prices fall and the costs of operation continue to rise.

A study of the impact of farm policy from the years 1975-1999 revealed that in that period, farm prices have dropped. Domestic use rose over that time period. In the mean time, prices were subject to a number of global conditions such as currency risk, trade policy and price support policy. Increases in domestic demand have not been due to larger net exports of value added products containing domestically produced raw materials (Dittrich, 2002). During the period of the study, Dittrich concluded that in spite of very high government payments to farmers coupled with increased yields, the real gross income per acre is still now at record lows and was approximately 1/3 less than it was in the 1980s. This would lead us to believe that the current system is not working and producing the results that were intended.

Contrary to popular belief and media hype, the 1996 Farm bill did not eliminate government price control and price support. It does not end price support but simply reduces it for a period of seven years, after which time Congress would have to act again (Riley, 2003). Under the bill subsidies close to 4-5 billion dollars were still allocated to fulfill contracts. Of these contract the largest amount was allocated for corn at 46.22%, second was wheat at 26.26%. while oats received the lowest allocation at 0.155 (1996 Farm Bill, HR 2854).

A policy briefing regarding the effects of the current farm policy revealed that the 1996 Farm Act did improve the well being of farm families as far as income, wealth, consumption, and a balance between labor and leisure activities (Young, et. al., 2003). Land values for farmers have risen, but this has had little impact on production or trade. The 2002 Farm Act is expected to have little impact on the market as well (Young, et. al., 2003).Net Farm income is expected to be higher than under a continuation of the 1996 Farm Act.

A simulation of the 2002 Farm Act indicate that plantings will initially increase for the eight major program crops (Westcott, et. al., 2002). Westcott and associates also expects farm income to increase due to higher government payments. When prices are low the government issues market loans to supplement returns from the marketplace for the total units of production. This has the effect of raising producer incentive price that in turn affects planting decisions (Westcott, et. al., 2002).

Congressman Farr of California found the 1996 Freedom to Farm Act to be a disappointment. He states that the original intention of the bill was to dismantle the six-decade-old subsidy program that essentially amounted to a welfare system for farmers. He pointed out that the California market has survived for many years as a free market and that they do not produce subsidized crops as a staple. Instead they produce wine products, nursery products, and other crops. These markets survive or fail according to the economic principles of supply and demand (Farr, 2002).

Critiques of the Freedom to Farm Act point out that the act rewards inefficient farmers and takes valuable funding away from more profitable and better managed programs in other parts of the country. The program was supposed to wean Midwestern and southern farmers from relying on government subsidies. However, bill sponsors buckled under pressure from farmers who feared the need to learn better management techniques and how to market their products in an open market setting (Farr, 2002). Congressman Farr states, "In these times of tight fiscal constraints, we should not support farmers that are better at farming "the system" than growing crops" (Farr, 2002). Johnson criticizes the bill pointing out that it favors some crops over others and that it rewards rich and poor landowners alike, more than working farmers who produce efficiently (Johnson, 2001). Johnson states, "The nation can't afford a farm policy that pays growers for crops that aren't needed" (Johnson, 2001).

From a managerial standpoint, the Freedom to Farm Act has failed miserably to reduce farmer's dependency on subsidies. It has doesn't little to educate them as to better and more efficient production methods and makes no effort to teach them to farm sustainably. In any other market in the world, the individual entrepreneur has to find a creative way to market their product and is subject to the laws of supply and demand. They must account for market risk, inflationary risk, and currency risk in their decisions. The Midwestern farmer does not have to do this, nor do they get rewarded for good work. They get paid by the government no matter whether they do it well, or do it poorly. This is an inefficient system and the costs of the program outweigh the benefits.

The current Freedom to Farm Act has resulted in many unwanted consequences, namely the overproduction of crops, over inflated land prices, and the inflation of production costs. These programs benefit only 40% of the nations farmers (Johnson, 2001). The other sixty- percent must compete on the open market, just like everyone else. From a managerial standpoint, the money spent to prop up inefficient farmers could be better spent teaching them to compete on the open market and to employ better management techniques in their farm practices.

When the Freedom to Farm Act was first introduced, farmers converged on the White House to protest. These farmers were undoubtedly the ones who had the most to lose. But we must remember that the majority of farmers in the United States do not depend on subsidies. These farmers were loud and looked large on the television screen, but they did not represent the other sixty- percent that effectively competes in an open market system. Furthermore, these protestors made it sound as if the Freedom to Farm Act would end government subsidies. The original intent was to slowly wean these farmers from the subsidy program and to give them the tools to compete. However, as it turned out, this crowd, that looked impressive on the television screen, convinced Congress to continue the subsidy program.

So in the final analysis, we ask the question if the Freedom to Farm Act has had a positive or negative effect on farmers and the agricultural sector. The only answer can be "no" because the act.....