Economist Predicts Farm Bill
Debate To Hit Heart Of Issue

AMARILLO — Dr. Edward Smith, Extension economist for marketing and policy, says he expects to see emergency appropriations again this year for the farm sector if parts of the country are hit by floods, drouths or natural disasters.

As the 107th Congress begins work, Senate and House agriculture committees are holding hearings on what worked and what didn't with Freedom to Farm legislation.

Smith is expected to testify this week on Capitol Hill with regard to his research in various facets of agriculture.

The basic question, he says, is the reason for a farm bill. Based on his observations and historical data, the reasoning is simple — to guarantee a cheap food supply.

One government study says that if the farm program is to maintain farmers' income, then it is a failure. It rewards people of higher incomes and doesn't reward people of lower incomes; therefore, if the objective of the farm program is welfare, any of the mechanisms being discussed are not sufficient.

"I've not lived long enough to be around for all government policy, but I have studied economics and ag policy, basically beginning with the Land Grant Act and probably even before," Smith says, "and I would say half the political rhetoric has been that we have to protect farm income."

But he says his observations have not supported a welfare context.

"Our programs have been designed to push research, technology and competitiveness," he says. "Our subsidies to the agricultural industry have been focused on the producer because it's kind of like an hourglass; all the inputs have to come through the producer. That's the most effective point in the food and fiber system if you're going to get government involved in agriculture."

All U.S. farm programs have basically been to expand research, expand technology and deliver it to the people. The farm programs have been to encourage producers to adopt such programs and grow the country's agricultural base.

"Couple that with the market-distorting decisions made by the U.S. Government to expand agriculture throughout the 48 continental states," Smith says. "We didn't want agriculture to be confined to the Cornbelt, where Mother Nature has naturally blessed the resources of growing without irrigation. Programs were put in place to bring crop agriculture into Texas, to bring crop agriculture to the South and East, to bring crop agriculture to the deserts of California and Arizona. All of those were planned government programs. They were done for a reason."

That reason was not producer welfare. It was done to diversify agriculture in the United States, he says.

"They wanted to make sure we had our risks covered," he says. "We didn't want our productive capability defined by the Midwest. We spread it across the U.S. It was never set up with market signals in mind. It was set up, in my mind, for only one thing, a cheap food policy for the U.S."

The American public since the mid-1800s has wanted cheap food.

"In one of the most prosperous nations in the world," Smith says, "if we're going to err, we're going to err on the side of surplus food. We want cheap food."

When polls were done of consumers in urban markets during the last emergency appropriation by Congress, 70 to 80 percent responded that they wanted money spent on agriculture.

"Our actions and the actions of the Republican-led Congress in appropriating these funds is that we continue to want cheap food in the U.S.," Smith says. To do that, we've got to focus on the common denominator of the producer. Since we're forcing them effectively through the economic incentive to over-produce the market, they're going to have to be paid by the taxpayer."

Smith says he can't find any evidence other than political rhetoric that the major reasoning driving farm policy is welfare of the producer.

"The major goal, I think the evidence will show, has to be cheap food."

As the debate begins, many will ask if indeed there is an agriculture problem.

"If you look at 1996, farm income fell but there were record prices in 1996," Smith says.

From 1996 to 1999, the income was higher than it was for the previous farm bill, according to U.S. Department of Agriculture numbers.

"The average income is as high today as it was in the previous bill," Smith says. "Why are we having problems in the sector?"

The answer is in the numbers. They are averages.

"When you look at an average of anything, what does an average tell you?" Smith says. "Basically, nothing."

Distribution is what's important.

"If we look at rainfall in Texas over the last four or five years, it's been average," he says by way of example.

But Smith notes that he liquidated his cattle last July because he didn't have any pasture.

"The suckers are ducks today," he says. "It came 20 inches of rain in about two weeks."

On average, he has plenty of moisture.

"In the pastures in the cow-calf business and with stockers, we've been murdered."

At first, he says, ranchers couldn't keep them because of a drouth. Now, they can't get them out of the mud.

"That's a major issue here," he says. "Yes, the cattle industry is on the upside. Our prices have turned up. There are profits in the cattle industry."

Prices for fruits and vegetables are looking good.

"If all of us had one big farm in the United States," Smith says, "and I owned all the diary, fruits and vegetables, horticulture products, livestock, wheat, feed grains, cotton, rice, oil seeds, sunflowers, I'd be in fairly decent shape."

But it's the distribution that's important, he insists.

"If we broke out the crop sectors, their incomes are basically negative," Smith explains. "Especially if we take out those government payments."

The big thing holding these sectors up is $20 billion of inputs into a group that makes up about 35 percent of the whole sector.

Numbers are being used inside the Beltway of Washington, D.C., to say there is no problem.

The economic outlook that Smith will present to the U.S. Congress this week is that prospects for improvement in many agricultural market conditions are not good.

When the Freedom to Farm Bill was passed, U.S. producers were enjoying relatively high domestic crop prices.

A lot of free market analysts were telling the leadership in Congress that the prices of 1995, 1996 and 1997 were not an aberration, Smith says. A new world equilibrium had been reached because the Soviet Union had collapsed and was introducing capitalism into that area. The scenario was that it would mean a big boom to the world economy and that Russia would be a big market for U.S. commodities. The same analysts said the markets in Southeast Asia and the Pacific Rim would grow.

The fear at the time was that the United States didn't have the supply capability, the production capability, to keep up with the growing standard of living throughout the world.

"In hindsight," Smith says, "obviously, that was wrong."

U.S. agriculture had the productivity to meet such growing needs, and a change from 75 years of communism to capitalism overnight takes time for adjustment.

Capitalism can be harsh, Smith notes.

"It rewards some and punishes the heck out of others," he says.

With the fall of communism, there was a massive punishment for Russian producers not used to competing.

"That market has not rebounded and probably will not rebound for 10 or 15 years," Smith says. "In effect, you've got to train a new generation to deal with a market-driven economy."

Meanwhile, the boom and bust of the Pacific Rim with sagging U.S. exports to that area coupled with fairly strong world production around the globe.

"We had enhanced supply coupled with stagnant export demand," Smith says.

There are mixed signals now about how much the U.S. is going to spend on agriculture.

"We spent record levels," Smith says. "The downside risk, the lack of a downside safety net, has been made up by the U.S. Congress the last three years with record expenditures. We'll probably see the same thing happen this year."

Smith expects spending levels to stay at a constant level over the next 10 years.

The average the government will spend on agriculture programs including marketing loans would be roughly seven billion dollars over the next 10 years.

"That's substantially below what we've obviously spent," Smith says.

Congress will have to choose one of two routes, in Smith's opinion. The question is whether they will face future price actions as emergency actions or try to craft them into the budget as part of the baseline.

There's a lot of pressure on Congress not to do anything in the basic Act until they debate the entire program, he says.

"Do they try to raise the baseline and take the emergency expenditures that have been paid in the last three or four calendar years and build that into the baseline so that when the Act has to be debated — it has to be passed in 2002 — we'll have that higher expenditure in the baseline for the ag committees in Congress to deal with?" he asks.

Right now there is a $7 billion expectation in the bill. It may be raised.

"The question is how much." Smith says. "How much is needed to give producers the safety net to meet the bad years rather than wait for Congress to appropriate emergency funding?"

Smith sees room for increases without threatening any trade agreements.

"The key will be how it is done," he explains. "If you did it in a contract payment, the way it's been done the last five or six years, then I don't think you've got World Trade Organization issues. It is theoretically de-coupled from production decisions. Now the marketing loans and others are coupled, but we're sufficiently below our targets so that's not an issue."

One of the questions that will have to be answered is what level of safety net is necessary.

There have been times, he says, where Congress has spent a considerable amount of money to provide such a safety net.

"About 60 percent of the time, we wouldn't have to spend as much money, but about 40 percent of the time, it's critical," Smith says. "That's what you see when you look back over time. If you take the 1985 Farm Bill, which put the parameters on what we have today, we've averaged about $12 billion over that period, so we're about $5 billion short given our out projections."

Both the size of the pie and how it is cut will be important to maintain the liquidity and solvency positions of U.S. producers.

"Does every single commodity in the U.S. have a right to that pie?" Smith asks.

If everybody comes to the trough, he says, there's not going to be enough money.

"Not only do we have to worry about the size of the pie, but who shares in it," he points out. "That means targeting benefits."

Targeted benefits, therefore, is a big issue, he says of next year's farm bill.

"If you say we're going to target benefits to those individuals who are in the poverty category, the litmus test doesn't fit," he says.

To compare agriculture producers to the general population, the salaried worker, is an unfair comparison.

"These programs are a failure in a welfare context because our commercial agricultural producer's family income is higher than the nation's average income and their net worth is many times higher," Smith says. "But I have yet to see the press or any other group say let's compare commercial agribusiness that have invested a million dollars in their businesses to the incomes of other businesses in our economy that have a million dollars invested in their businesses. They're acting like it's all a family deal and not a business investment.

"We've got to watch, in my mind, these targeting issues."

Critics of farm legislation see the massive payments of the past few years as welfare for farmers and ranchers.

"There are some who say the sole reason for farm programs is welfare to the family farmer," Smith says. "I can't find any evidence in history. That was the objective for some farmers, but most of it we subsidize volume because we want a strong agribusiness sector in this country, and we want to err on the surplus side, which means cheap food."

If Congress decides to give farmers additional payments, there is the concern that the direct payments will go to producers who don't need them. Smith says good weather and good luck have given some farmers excellent yields at times of high prices, but these same farmers have gotten disaster and emergency payments on top of these good yields. Still, he insists, that is not the norm.

Congress has chosen direct payments, he says, because they are quick and there is no problem with international trade agreements.

"Those checks can be written, and if you've got a liquidity problem, you can get the money out fast," he says.

Smith says the consortium to which Texas A&M belongs and through which it works monitors 82 farming, ranching and diary operations throughout the United States.

Forty-three of those operations raise either feed grain, wheat, cotton or rice.

"Out of those 43, when we look at their liquidity positions, 37 or so of those 43 farms have better than a one-in-two chance of not being able to cover cash expenditures," Smith says. "When we expose those farms to risk and look at the probability, the vast majority, above 80 percent, have more than a one-in-two chance that they're going to have to go to a banker or go to their personal wealth or get off-farm income to bolster the farm's liquidity position."

The liquidity position is extreme for the crop sector, he says, particularly when fuel and fertilizer costs are included.

"Not only are low prices hitting them, but their input costs are going up as well," he points out.

Thirty of those 43 farms are not going to be able to maintain their net worth over the period, he adds.

"Those liquidity pressures will exacerbate rising debt," Smith says. "Their net worth will fall. We've basically got 75 percent of the operations that we monitor on the crop side not being able to maintain their wealth."

He says only three of the 43 are in good enough condition to weather the storm in good shape without rising prices or government payments.

"Only three of the 43 farms are capable of weathering the next five years economically and financially without additional assistance," Smith says.

Two of those farms are in northeast Colorado. The other is in south central Nebraska. They raise wheat and feed grains.

"They are three of our most efficient farms in terms of their cost of production relative to receipts," Smith says. "They spend about 60 cents of cash expenses on a dollar of receipts. They are very, very efficient operations, but that in itself is not enough."

It was pure luck, he admits, that they are in such good shape.

"In 1999, for some reason, the rainfall patterns came to their advantage, and they had exceptional yields," Smith explains.

They had yields some 120 percent of normal, he says, that year. They also got government payments that year because the payments were de-coupled from production.

Smith figures there was only one chance in 20 that they would ever achieve that income again.

Without that buffer, he says, they would be like each of the other farms.

"That's kept them from having to refinance," Smith emphasizes.

The economist says exports will not push up prices in the short run.

"The demand side of the curve doesn't shift out that fast," he says. "We don't have just all of a sudden prosperity."

The programs that grow exports are fine, he continues, but they're slow.

The risk is going to come from the supply side.

U.S. producers are capable of producing enough that crop prices will remain low.

Smith predicts $5 soybeans, $2 to $2.25 corn and $2.80 to $3 wheat, and these prices are likely to remain for several years to come.

"In the crop sector, we don't see any major returns," Smith says.

Prices may rise, however, because existing stocks are low.

"Do we have potential?" he asks. "Yes, because we don't have stocks, but it will take a weather shock in our minds to get there."

The livestock sector looks good for at least another couple of years.

"On the livestock side," he says, "we're in the upward movement of the cattle cycle. We see the feeders and the feds topping out in about 2003, and that cycle breaking over. If you're in the livestock sector, we've got increasing prices projected with sustained low feed costs. The livestock industry is looking pretty good."

If the objective of farm policy is welfare for the farmers, the U.S. is going to have to scrap farm programs, which means the country will have a massive transition in U.S. agriculture, but Smith doesn't think there will be such a transition.

Congress will try to protect their constituents.

"It's going to be very hard in my mind politically to really go market-oriented and say if you can't grow cotton and crops, you just go back to grass in Texas and the Dakotas," Smith says. "They'll have to pull water subsidies out of California and Arizona. I just don't think that's going to happen. Those are big voting blocs."

Besides that, the farm programs are needed in order to maintain a cheap food policy.

"It's a fundamental debate," Smith says. "Do we want a welfare objective or are we trying to maintain food security? That's the debate. I would argue for the last 150 years, food security has been the driving force. Obviously, farm income has been an issue, but food security is the driving force."

Fifteen to 20 percent of the country's economic output is linked to the food and fiber system.

"We have put that in place," Smith says. "We're likely not to dismantle it."

If there were a change in the basic cheap food policy, agriculture would not be as widespread. There would be an exodus from agriculture. Economics would demand larger operations, and there would be more corporate control.

Most important, new Congressmen would probably be elected.

"I just don't see it happening," Smith says. "I think food security is going to be the most important aspect of the question."

Smith says rep. Larry Combest, R-Lubbock, chairman of the House Agriculture Committee, has taken a bold stance this year, telling ag groups not to come to his hearings to tell Congress about producer problems, but to come with solutions to those problems. Combest, Smith says, has also told the various groups to keep in mind how their proposed solutions will impact all the stakeholders involved, including the environmentalists, the consumer, the taxpayer, rural communities and other commodities.

"I think it was a bold, nice challenge," Smith says, "because it told the groups that they can't think of just their parochial interests."

Combest indicated he wants the various interests to think beyond their immediate wants and needs.

"I see a continuation of food security objectives, which means our government programs are to maintain research, extension, technology development and promote those most efficient farmers," Smith says. "I don't see the government coming in and penalizing the most efficient farmers and say we're going to go to a European philosophy of we want a nice pastoral countryside for tourists. I don't see us doing that. We've a major agricultural complex and the economy is too dependent upon it."