Weather And Market Disasters
Were Acid Test For Farm Bill

By Jose G. Peña
Extension Economist

When Congress passed the Freedom to Farm Act during midsummer 1996, little did they or farm supporters know or realize that an acid test of that concept began that same year and that the concept would start to unravel by early fall of 1998.

The concept behind Farm Bill '96 was that the government's role to stabilize prices and help manage production risk through deficiency payments and planting controls would decrease substantially and allow the capitalistic market system to influence farmers' decisions. The idea was that if left to take production signals from the market, farmers wouldn't plant hundreds of acres of a crop that was already in surplus just because of an artificial, government-supported price, or because the farmer had to comply to stay eligible for future farm subsidy payments.

Most production controls were removed starting in 1996. Farmers were provided payments, which started in 1996 and are scheduled to terminate in 2002, amounting to about 85 percent of their historic farm subsidy payments as part of a "transition" to a free market system. The thinking was that during the transition period, and especially after Farm Bill '96 was fully implemented, farmers would either adjust — by finding something else to grow that was profitable — or go out of business.

While the drouth of 1996 had a severe impact on ranchers in the south central part of the U.S. as a result of a cattle market collapse, prices for most farm commodities were high and the U.S. farm economy survived the first year's test relatively unscathed. The following year, 1997, was one of the most productive years of the last 20 for agriculture, with relatively good commodity prices and the cattle market showing signs of recovery. The adjustment seemed to be on course.

Then came 1998, which will go down in history as one of the most economically difficult years in Texas agriculture. A severe drouth during the first half of the year caused lost production, livestock liquidations and a host of other problems, such as aflatoxin contamination in corn, which are still haunting the agriculture sector. The drouth was followed by excessive rains, causing flooding which, in turn, caused additional losses to livestock, property and the rural infrastructure.

These problems were intensified significantly by a meltdown of agriculture markets. Prices for corn, for example, are about 40 percent of the price levels of 1996 when Farm Bill '96 passed. Prices for sorghum, wheat and soybeans followed similar patterns. Drouth-induced livestock liquidation caused a downturn of cattle, sheep and goat markets, not to mention wool and mohair markets which remain at record lows.

The collapse of U.S. farm commodity prices has been fueled by a bumper crop in the rest of the U.S. and substantially lower exports due to the economic crisis in Southeast Asia and Russia. The U.S. annually depends on exports to market about one-third of its agriculture production. U.S. corn and soybean production in 1998 were the second and highest, respectively, crops on record.

The agricultural commodity market collapse indicates that the prices the world markets will pay for U.S. agricultural commodities will likely remain low as long as there are ample supplies. U.S. farmers' skills under modern production systems indicate that production will continue at a high level. A recent survey of seed suppliers, for example, indicates that based on seed orders for the coming year, U.S. plantings and planting mixes will approximate 1998 levels.

While the general feeling among livestock producers is that government subsidies did not apply to them, farm program activities had a big impact on livestock prices. Although the government has never supported livestock prices directly, in the past it supported the livestock industry with grain supply management activities which kept feed prices from swinging widely. When a grain glut threatened to collapse the market, USDA would curb production through set-aside provisions in the old farm bill. Farm Bill '96 eliminated all supply management activities, consequently farm commodities as well as livestock prices are swinging more widely.

As a result, after much heated negotiations between the Democrats and Republicans, the 1999 Omnibus Appropriation Act, signed into law on October 21, 1998, began to undo some of the rigorous transition to a complete free market system in agriculture. The $5.9 billion package of emergency aid will help farmers hit by low prices as well as farmers who suffered weather problems.

While a large portion of the Freedom to Farm concept was left in place, the bill increased the transition payments by 50 percent for 1998 only. And, while the farm aid package is temporary, it is clearly sparing farmers some of the discipline of transitioning to a total free market system.

In addition, Congress softened some of its get-tough policies included in Farm Bill '96, especially in areas concerning insurance. Through Farm Bill '96, Congress had ruled that if a farmer refused to buy crop insurance, he or she waived the right to any disaster aid in case of drouth or other crop failure. The bill reverses that position by giving the agriculture secretary discretion to grant crop-failure aid even to the uninsured.

The deregulatory process could be further compromised if special interest groups press for another farm aid package next year.