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September 7, 2001

The Farm Bill Debate:
Fix it or scrap it–a look at the issues

By Lana Robinson
Field Editor

Would farmers fare better if the language in the 1996 farm bill were scrapped or improved upon, or would they be better off if farm programs were discontinued altogether?

These questions sparked a lively debate when Dr. Ron Knutson, director of the Agriculture & Food Policy Center at Texas A&M University and economist with the Texas Cooperative Extension, faced off with Dr. Luther G. Tweeten, Emeritus Anderson Professor of Agricultural Marketing, Trade and Policy at Ohio State University, during the Texas Agricultural Summit in Lubbock last month.

Dr. Knutson made his case first, admitting that the current farm bill has its flaws, but arguing that it was superior in many ways to farm bills of the past.

"It provides flexibility to make changes in policy that have occurred since its passage. That's a major virtue of this piece of legislation," he said.

Knutson conceded that the 1996 farm bill failed to make good on promises, as originally written, and promises of the WTO.

"First, they promised higher exports, higher prices related to higher exports, and therefore, higher levels of income. We got none. Secondly, they promised lower EU (European Union) subsidies, lower trade barriers, and a streamlined trade dispute resolution method for WTO (World Trade Organization). At best, we got one—perhaps two. We got no concessions from the EU, our main rival from a world policy perspective," he said.

Knutson defends 'flexibility'

But in defending the current farm bill, Knutson reminded producers of its positive features.

"The policy allows us to respond to current problems in agriculture as they exist, which the others did not allow. It allows us to adjust production problems in a way most beneficial to farmers. It virtually eliminates our bases, which was inherent in previous farm programs. All were critical of crop insurance programs. This one was much improved than in the past. Finally, it provided for emergency supplemental AMTA payments whenever necessary. Some could argue they didn't come fast enough, but the method exists," Knutson noted.

Next Knutson commented on the disappointing progress U.S. agriculture has made in terms of a market-oriented approach, which was a major goal of the farm bill. He blamed much of that on the EU's refusal to scale back subsidies to their farmers in order to create a level playing field of competition.

"The EU has been loading up on green payments on top of supports to maintain the level of prices. The thing is, we have the option to go to a similar policy. They are claiming organic farming increased their costs through higher labor, purchases of tractors, purchase of inputs...These are merely subsidies to farmers masked to get around WTO regs," he said.

Knutson said some suggest going back to the policies of the 1949 Act, with parity prices and production controls, but he doesn't see that as a "politically feasible" option, insisting flexibility is better.

"Planting fence row to fence row would create an economic bust—a WTO bust. We didn't get the kind of reform, internationally, we hoped to get. Until we get it, we must have flexibility to provide the needed levels of subsidies to farmers," he argued.

Knutson said he would like see a free market solution, but getting there is the problem.

"We would have lower prices in the short run, lower incomes as the government withdraws subsidies. That would mean fewer farmers, larger farmers and a greater level of price instability. It's the process of adjustment that gives me great concern about moving to free market agriculture," he explained.

As far as the impact on Texas, Knutson suggested an even higher level of production price risk, which would lead to predominately dryland farming— "something akin to the buffalo commons."

"I don't think we've done a good job of addressing the uniqueness of Texas agriculture at the state level and federal level, especially when it comes to drought," said Knutson, who then concluded with a quote from Will Rogers: "`It's not what we know that hurts us. It's what we know that ain't so.'"

Tweeten supports 'transition'

When it was his turn, Dr. Luther Tweeten presented the controversial argument that farm programs don't need to be adjusted, they need to be eliminated.

"Do we really like to get half our net income from taxpayers? Let Congress decide policy? Let Congress decide what our income is going to be? One reason net farm income is low is because of government programs," Tweeten suggested.

Tweeten argued that all farmers should rely on the market, indicating that half of agriculture already does that and the rates of return are about as good in both sectors.

"Competent commercial farmers are earning what their resources would earn elsewhere. The rate of return of assets in commercial agriculture on $200,000 or more in sales earned 8 percent and 15 percent on top earners. Sixty percent of farmers lose money. Eight-hundred thousand farmers, when asked, say 'We're not a farmer.' They do not get the majority of their income from farming," he said.

Tweeten was critical of H.R. 2646, the House Agriculture Committee proposal, supported by the Texas Farm Bureau. He suggested that H.R. 2646, which was the major topic at the Summit, is "going backwards" to old-style policies of price supports and production controls.

In Tweeten's view, an appropriate farm policy is one that "infringes as little as possible, allows us to compete, and doesn't overdo the taxpayer."

Tweeten made the controversial comparison of reliance on farm payments to drug addiction, stating that payments to producers create "less and less of a high" as time goes on.

"When half your land is rented, those benefits, before long, are capitalized into rental payments. In some places, land rents are already reaching prices that are unsustainable. You get hooked on payments like a drug habit. The benefits get passed to the initial landowner. He gets the benefits, but not the renter. Then you get withdrawal symptoms," he suggested. "The current type of programs can't be sustained. Congress spent $32 billion on agriculture in 2000. It can't continue to go on with that. The problem is farmers can't adjust, can't change because they can't see a drop in land prices."

Tweeten believes ag producers would be better off enduring the pain now and making the adjustment to a market-oriented system than putting it off and suffering a worse crisis a few years down the road.

"It's like tectonic plates in the earth. You have changes in agricultural technology, a bigger tractor; improving labor productivity to about 4 percent a year. You adjust. You have a series of small tremors, but if you wait, you eventually have an earthquake, like the 1980s. It was painful," he said.

Tweeten said 2 percent of farmers retire or die each year; demand increases 1.5 percent a year; and the rate of adjustment of farms is 1/10th of 1 percent a year. He said it needs to be faster.

Politics drive farm policy

"It's very difficult now to make any economic justification to lengthen farm support commodity programs. Economists largely agree—the transition program, yes, but that's all. So they justify it, not on economic grounds, but political grounds. The GOP and Democrats do that. At higher levels of net farm income, farmers would still have a higher income than non-farmers. Be careful how you use your political clout. The higher you get those supports, land price, rents, the harder you fall," Tweeten warned.

Tweeten predicted that Congress is going to be providing support whether there is any economic justification or not.

Tweeten urged producers to make changes to help make a transition, to keep costs down, in terms of direct payments (i.e. PFC, AMTA).

"Twenty billion dollars per year adds .15 percent to supposedly 'decoupled' payments. There is no such thing as `decoupled.' Farmers are always short on capital. How small an affect on output is .68 to 1.38 percent? It reduces farm receipts," the OSU economist said. "Loan rates are too high. Insurance is .28 percent—4.1 under a high estimate. Insurance payments are being paid out on 25 to 30 million acres of cropland that otherwise would be in grazing land and trees. When you have 5.7 percent added to production, you have a reduction in net income of $26 billion."

Given there will be a farm program, Tweeten suggested keeping the loan rate low enough so that it would not be an incentive to overproduce. He suggested lowering the subsidy on insurance to cover only the administrative cost to prevent abuse.

"That's a sensible policy to help make the transition," he said.