Agricultural Policy: High Commodity and Input Prices

Article excerpt

Because of high commodity prices, beginning in 2006, subsidies to farmers in the United States, the European Union, and Canada have been reduced significantly. However, significant losses have been experienced by the red meat sector, along with escalating food prices. Because of rising input costs, the "farm boom" may not be as great as first thought. Ethanol made from corn and country-of-origin labeling cloud the U.S. policy scene. Higher commodity prices have caused some countries to lower tariff and non-tariff barriers, resulting in freer commodity trade worldwide. Policymakers should attempt to make these trade-barrier cuts permanent and should rethink current policy legislation to deal with the possibility of a collapse of world commodity markets. Agricultural commodity prices have dropped significantly since early 2008.

Key Words: agricultural policy, high commodity prices, input prices

For many years, farmers worldwide, including in the United States, the European Union, and Canada, received large direct and indirect farm subsidies. This picture changed dramatically beginning in 2006. Prices for oil, grains, oilseeds, and pulses more than doubled. This paper discusses escalating commodity prices in the context of U.S., European Union, and Canadian agricultural programs and policies. These programs are likely to have little effect on world agriculture unless there is a significant drop in commodity prices. These policies should be redesigned to account for the possibility that prices could once again "hit the tank." Higher commodity prices translate into higher food prices worldwide. This, in turn, has motivated importers to lower tariff and non-tariff barriers. Some argue that high food prices have brought about a freer trade environment than would be possible under trade negotiations alone.

U.S. Farm Legislation

Agricultural commodity and conservation legislation in the United States has roots in the Agricultural Adjustment Act of 1933. Between 1929 and 1932, net cash farm income fell from US$5.2 billion to US$1.4 billion. With the introduction of new stabilization policies, the magnitude of government transfers to U.S. agricultural producers increased from zero dollars in 1933 to US$28 billion in 2000. As a result, U.S. farm income increased from approximately US$1.4 billion in 1932 to approximately US$56 billion in 2000.

The first U.S. farm bill was passed by Congress in 1933. Until 1970, U.S. farm bills dealt mainly with issues such as rural poverty, soil conservation, crop insurance, and farm credit. The 1970 U.S. Farm Bill introduced direct commodity price supports for the first time. Farm bills from 1970 to 1996 introduced a number of measures such as the Conservation Reserve Program (CRP), payment- in-kind (PIK), and the Export Enhancement Program (EEP). The reform act of 1996 introduced dramatic changes such as removing restrictions on acreage set-asides and replacing the target price and deficiency mechanisms with seven annual market transition payments.

There were large farm product surpluses between 1970 and 1996. Commodities such as milk and tree fruits had different programs aimed at raising producer incomes and prices. Marketing orders allowed for price discrimination between markets by setting limits on the quantity sold to the high-value market. These orders allowed producers to receive blended prices, which were higher than the competitive price level. They also allowed producers to control quality by specifying minimum grades and sizes. In addition, checkoffs were available for research and development and for advertising.

Key elements of the 2008 U.S. farm program, like the 2003 program, are the loan rate and target price provisions for grains, upland cotton, and oilseeds. The loan rate for corn remained unchanged, as did the target price. This was also true for rice. For soybeans, the loan rates remained unchanged, but the target price was increased by U. …