The Evolution of Programs

Historically agriculture has been subject to periods of surplus and scarcity. During periods of "shortage" and strong demand farmers have responded to strong prices and prospects of high income levels by expanding production. Production increased through advances in productivity and the addition of land, labor and capital. As supply growth outpaced demand growth - prices and farm income declined. Similarly, during bust periods, characterized by low commodity prices and farm income, resources were removed or idled inorder to reduce production and bring demands and supplies into balance.

This is characteristic of U.S. agriculture prior to the 1930s - boom and bust periods. During the Civil War prices and income were high. However, as the war ended supplies grew and prices and income fell. Similarly strong demand and high prices stimulated by World War I provided the necessary incentives to expand production. After WW I and through the 1920s commodity prices and income trended downward.

Agricultural policies are the result of the resolution of conflict. They begin with divergent views about what should be done and end with a compromise between groups. They are carried out through compromises between the apparent or understood intent of laws and regulations and the personal philosophies and interest of policy administrators. Policies are, therefore, ambiguous to some degree. They leave room for interpretation. Policies are often rationalized to some unintended program objective after programs are written into law or regulation. Programs that were undertaken as an implimentation of a policy in dealing with some acute economic, social or political problem acquire a body of data and arguments in their defense that may be quite different from the original justification for the program or policy. Programs whose functions have been fulfilled are often continued for reasons quite different from those intended at the start of the program. Programs thus evolve over time, taking on different purposes and often supporting policies far different from their initial purpose.

Pre World War I

Prior to the First World War policies affecting agriculture were largley development policies focused on developing the fontier and expanding production. This single objective was facilitated by land settlement programs, support of the family farm concept, and increased agricultural productivity. A sound and expanding agriculture would complement industrial growth and economic prosperity. In 1862, a number of acts were passed that "opened the west" and established the importance of agriculture, from a Federal perspective. The Homestead Act granted acreage to those willing to improve the land and live on it for 5 years. The Morrill Land Grant College Act established agriculture as a mainstay at Colleges and Universities. The U.S.D.A. was established in 1862. Also, Congress subsidized development of the transcontinental railway system - to assist in transporting agricultural commodities. Eventually legislation was enacted to support research at agricultural experiment stations (Hatch Act 1887), extend the land grant college concept to black colleges in the South, and to provide Federal funds for agricultural extension (Smith-Lever Act - l914).

Three additional acts that significantly influenced agricultural development in the early 1900s were the Reclamation Act of 1902, the Federal Farm loan Act (1914), and the Capper-Volstead Act (1922). The Reclamation Act provided federal funding for irrigation development which enabled agriculture to expand in the West. The Federal Farm Loan Act established the Farm Credit System which gave farmers access to subsidized credit. The Capper-Volstead Act exempted agricultural cooperatives from the Sherman Antitrust Laws and allowed these organization to increase in number, size and power.

The 1920's -- Program Initiated

To a large extent today's farm commodity programs are a result of the economic chaos that affected agriculture in the 1920's. As the result of a decline in exports, the introduction of mechanical power for hauling freight and people, and the introduction of the tractor for agricutural production the capacity of agriculture to produce far exceeded the demand for its output. As the result of the shift to mechanical power some 50 million acres were released from production of feed for draft animals. At the same time land was being added to the productive base through expansion onto the plains and grass land and through massive irrigation and reclaimation projects. These forces along with the declines in both domestic consumption and exports in the early 1920's resulted in a rapid fall in farm prices while prices of manufactured goods continued to rise.

Farmers sought relief from, what they percived to be, selective economic depression in agriculture through the introduction of bills in Congress to support prices through the purchase of commodities. A more complex approach to price support was to be achieved through the McNary-Haugen Bills which were primarily programs to remove surpluses from domestic markets through export dumping. Although the bills failed to pass in Congress or were vetoed by the President, they brought a focus to the farm policy debate. The quest for "economic justice" for farm people, for "Equality for Agriculture", was lead by George Peak who believed in a natural balance between agriculture and industry and felt that agricultural commodities should be priced such that their puchasing power was maintained on a par with industry.

In 1929, Congress created the Federal Farm Board and povided it with $500,000,000 to purchase commodities in order to support their prices. The funding proved to be inadaquate and the Board with no ability to control production was seen to be a failure. In 1932, the Board recommended legislation which would "provide an effective system for regulating acreage or quantites sold" inorder to raise prices and incomes for producers of commercially traded commodities.

The forerunners of current commodity programs were created in the 1930's to raise the income of producers of "basic" commodities (commodities which were important in commercial markets) by restricting market supply. The Agricultural Adjustment Act (AAA) was to be a self supporting program to bring about supply restriction through processor taxes. Revenues were to be use to make allotment payments to producers who set aside up to 20 percent of their acreage. The Secretary of Agriculture proclaimed a 15 percent acreage reduction for contracting farmers to be eligible for payments on the 1934 crop.

In the Case of the U.S. vs. Butler, often referred to as the Hoosic Mills decision, the Supreme Court on January 6, 1936 declared the processor tax and production control provisions of the AAA unconstitutional. Thus, the self-financing provisions were eliminated and supply control was disrupted for a short period. To responed to the short-term crisis and replace the production control provisions of the AAA, Congress rushed through the Soil Conservation and Domestic Allotment Act of 1936 by February 29, 1936, less than 2 months after the Hoosic Mills Decision. Under the 1936 Act, acreage reduction was to be achieved through conservation programs, however, the program failed to restrict output.

The Agricultural Adjustment Act of 1938 brought about stronger Federal intervention in the market. The term parity was introduced into legislation for the first time and the Secretary was required to make nonrecourse loans for producers of corn, wheat and cotton. Nonrecourse loans were at the option of the Secretary for rice and tobbacco. Loans were set at a fixed percentage of parity. In addition, producers were to receive parity payments to bring their return as close to parity as possible with available funds. Because program benefits, from higher prices and parity payments, were tied to production, the larger and the more efficient a producer the larger the benefits to that producer.

The Commodity Credit Corporation was established by executive order in 1933, which provided loans to cotton producers enabling growers to hold their cotton until prices improved. For fruits and vegetables, production controls were supplemented by marketing agreements. Quotas were implemented for sugar.

1940s - Abortive Attempts of Price Support Flexibility

Despite the use of acreage allotments and marketing quotas, commodity inventories began to increase in the late 1930s, particularly those owned and controlled by the government. Yield growth helped to make production controls ineffective. By 1939, direct government payments accounted for 35 percent of net cash income and 30 percent in 1940. However, WW II stimulus improved export demand and as a result prices strengthened and direct government payments fell to 13 percent of net cash income in 1941. WW II postponed the need to address growing surpluses and government costs in the 1940s.

Government price supports which were set between 52 and 75 percent of parity in 1938 were above market cleaning levels as surpluses started to become burdensome. However, the improvement in the industrial sector provided Congress with the impetus to raise support for agricultural commodities up to 85 percent of parity (for those commodities which producers had not disproved marketing quotas). Later legislation over 1941 and 1942 period raised support to 90 percent for some commodities and extended the level of support at these high levels to 1948. By 1945 more than l00 commodities were supported at high (above market clearing) levels. During the war years supports rose and supply control requirements declined.

As the war ended debate arose as to what direction supports should take - high fixed supports as in the War years or flexible more market oriented dependant on existing supplies. The Agricultural Act of 1948 favored flexible supports over time. However, supports would remain at near the 1948 levels for 1949 plantings. The 1948 act also revised the parity price formula specifying farm - nonfarm relationships dependant on current (10 years) period to account for productivity and then faster changes since the early 1900s. This would also support levels to decline beginning in 1950. The surplus problem facing policy makers in the late 40s was contributed to by the adoption of hybrid seed for corn and the full transition to "tractor power" as opposed to horse power.

Because prices were expected to collapse following the close of the war the Steagall Amendment was enacted in 1941 to keep prices at war time levels for two years. The amendment expired December 31, 1948. Although there was a growing bipartisan and multi-commodity group consensus that flexible price supports were desirable, the Agricultural Act of 1948 extended high price supports for one more year, after which flexible price supports based on a percentage of parity were to become effective. However, surpluses accumulated and in an act of expediency the Agricultural Act of 1949 pegged price supports at 90 percent of parity through 1950.

After 1951 cooperating producers of basic commodities could receive support levels between 75 an 90 percent of parity (if marketing quotas were not disapproved). Additional refinements to the parity pricing formula were made on the 1949 Act which general merged the price index level.

The outbreak of the Korean War on June 25, 1950 lead to a continuation of high price supports through 1952 for national security purposes and neither acreage allotments or marketing quotas were in effect for the 1950 or 1951 crops of wheat, rice, corn or cotton and stocks held by the CCC accumulated rapidly.

The 1950's -- Recognition of and Dealing with Excess Capacity

Flexibility in price supports was again deferred by Congress in July 1952 though by passing legislation to provide for 90 percent of parity for the 1953 and 1954 crops, if producers had not disapproved of marketing quotas.

Acreage allotments were reinstated for corn for the first time since WW II and marketing quotas were proclaimed for wheat and cotton and continued for tobacco and peanuts. Yet, 90 percent of parity loan rates resulted in the rapid accumulation of stocks by the CCC. The application of acreage allotments to a crop like corn caused expansion of production of nonallotment crops and depressed prices. It was becoming apparent that the rigidity of allotments did not allow for efficient production adjustment.

In recognition that rigid and high loan rates were incompatible with real economic conditions, the Eisenhower Administration moved to implement the adoption of flexible price supports. The Agricultural Act of 1954 set price supports at 82.5 to 90 percent of parity in 1955 and 75 to 90 percent of parity thereafter. A portion of CCC stock holdings were to be set aside and disposed of by export, donation and disaster relief.

The export market was first considered by Congress in the passage of Public Law 480 in 1954. This Act proved to be of major importance in assisting in the disposal of stocks yet it was limited in scope to sales for soft currencys, emergency relief and bartering for strategic material.

Although support prices were made flexible, the range of flexibility was not sufficient to slow the growth in output to an equilibrium situation with demand growth. Pressure from increasing stocks resulted in the establishment of the Soil Bank by the Agricultural Act of 1956. Because prices were above world levels, direct sales in world markets were not occurring and output restrictions seemed imperative. The Soil Bank was designed to take cropland out of production. Composed of an Acreage Reserve and a Conservation Reserve, the soil bank attempted to deal with both short-term and long-term problems.

The Acreage Reserve was an annual program that replaced the acreage allotment. Under the program farmers could reduce the acreage devoted to a crop below their allotment and be paid for diverting it to conserving uses. In 1957 the program had 21.4 million acres out of production, but it was terminated after 1958 because it was condemned as a high cost program that was ineffective in controlling production.

The Conservation Reserve was viewed as a measure to deal with the longer term adjustment of resources out of agriculture. Contracts were signed for a maximum of ten years for whole farms and for cropland to be diverted to conservation uses. By 1960, 28.6 million acres were under the program. The last land left the reserve in 1972. The 1956 Act also began a two tiered pricing system for rice with export rice supported at a different level that domestic rice.

The 1960's -- Direct Payments and Acreage Reduction

By 1960, the high price supports of 1953 had given way to generally lower and more flexible prices however neither the lowering of prices nor the restrictions on acreage had been able to bring about an equilibrium between output growth and demand growth. The export market while increasing slowly, through PL-480, was not moving grain at prices as high as our domestic support levels. Stocks reached record levels.

The decade year of the 1960 saw a fundamental shift in programs from price support to direct income support payments and from voluntary acreage reduction to diversion programs.

Beginning in 1961 Congress passed a bill giving the Secretary of Agriculture authority to make payments to producers in cash or certificates to achieve acreage reduction of at least 20 percent for corn and grain sorghum. Payments were made on 50 percent of their normal yield. If they withheld an additional 20 percent they were paid on 60 percent of normal yield.

The Food and Agriculture Act of 1962 continued the voluntary acreage reduction program but broke new ground by separating price support and income support payments. Loan rates on corn were allowed to decline to near the world price level. A direct income supplement of $.18 a bushel of normal yield was made to support farmer incomes if farmers complied with acreage reduction programs. The combination of large acreage reduction programs and world level loan rates resulted in a significant decline in grain stocks during the 1960 and by 1970 CCC stocks were approaching zero. However, the cost of direct income support payments rose rapidly and reached $3.8 billion in 1969.

The 1970's -- Foreign Market Dependency

Throughout the 1970's production capacity and export growth were issues. Farm programs increasingly built in inflation adjustments.

In the early 1970's a combination of acreage reduction and export subsidy programs, a series of devaluations of the U.S. dollar, and short crops in the USSR and India emptied the U.S. bins. Because of the Russian grain sale in 1972, grain prices rose rapidly. The Agriculture and Consumer Protection Act of 1973 expanded the concept of market orientation and introduced target prices and deficiency payments to replace the price support payments of the previous 10 years. Deficiency payments were to be made only when prices fell below the target price.

The short run situation of strong export demand and low stocks gave rise to a concern about the long run availability and stability of the market. General inflation in the economy and rising prices for fuel and fertilizer created increasing concern over costs of production. The initial target was fixed abitrarily by legislation and had no relationship to market conditions. In later years they were to adjusted by an index of the cost of production.

Yet, there was an effort to maintain the market orientation of the programs by keeping loan rates low relative to market prices. For cotton, loan rates were set at 90 percent of the price of U.S. cotton in world markets. Corn loans were well below the market. As the export market remained strong, more and more people came to believe that the future would be a period with more years of scarcity than of surplus. On the strength of tight markets lenders provided money to farmers to by land and machinery at higher and higher prices.

The Food and Agricultural Act of 1977 was an accommodation to the general inflationary spiral raising loan rates and target prices well above previous levels and above the recommendations of the Administration. Target prices changes were tied to changes in cost of production. A Farmer Owned Grain Reserve (FOR) was created to provide for the possibility of extended nonrecourse loans to farmers in order to provide for a buffer stock to encourage farmers to manage stocks. To encourage participation in the FOR farmers were offered an advance storage payment. Stocks were to remain in the reserve until market prices exceeded release prices.

Although exports remained strong in the late seventies grain was rapidly accumulating in the FOR. Market prices fluctuated with several shocks to the export market and program management became a complex game of balancing the entry and exit of stocks from the FOR.

The 1980's -- Changing Direction; Liberalization

The 1980's brought about the full realization that farm programs cannot be developed in isolation of macroeconomics and international competitiveness. Domestic policies have been clearly seen to have international market implications that alter the actions of consuming and and competitor nations. The beginning of the 1980's saw a reversal of world market conditions.

The value of the dollar rose sharply. Production increased in the consuming nations and our competitors were under-pricing the the U.S. in the world market.

In order to keep grain off the market and out of the CCC the loan rate on FOR grain was increased above the rate for regular CCC loans. Market prices declined and in 1981 dropped below the FOR loan rate for corn and approached the FOR rate for wheat.

Initial efforts toward a 1981 Farm Bill recognized the need for greater market orientation and a reduction in budget costs. However, with the export market turning sour, farmers were applying pressure for greater income protection. The farm sectors performance in 1981 was worse than expected and prices were well below 1980 levels. The grain provisions of the 1981 Act were a Congressional experiment in legislated prices base on expected rapid inflation in production cost.

World wide recession, a continuing strong dollar, and large increases in output dashed hope that the market would recover in 1982. Season average prices for corn and wheat were below the loan rate. Deficiency payments rose sharply. Rigid price floors were again creating stock piles as U.S. commodities were priced out of the market.

PIK, the largest acreage reduction program in the history of farm programs, was introduced in 1983. A total of 82 million acres wase enrolled under the PIK program with payment at 80 percent of production for all crops but wheat and at 90 percent of production for wheat. A combination of PIK and drought in 1983 cut stocks sharply and prices rose much more than anticipated. The bins were refilled in 1984.

The Food Security Act of 1985 introduced a general realization that world markets are a controlling factor in U.S. agriculture. Price supports were reduced from levels projected in the 1981 Bill and farmer incomes have been upheld by direct government payments. Export enhancement programs along with the declining value of the dollar and a modest recovery in world market have resulted in a turn around in exports. Acreage reduction programs and payments in CERTs have reduced stocks. Marketing loans for rice and cotton have made us competitive at world prices.

The evolution of programs has been conditioned by short-term economic and political conditions. Emergency measures once enacted have evolved into long-term programs that often had different objectives and impacts than those intended in the original legislation. Throughout most of the history of the programs the importance of market pricing has been stressed on a bipartisan basis. Yet, political expediency has resulted in a 55 year history of price support programs. A full recognition that income support through ridged prices is unfeasible over the long term is required in order to move to a market oriened program.

Multilateral efforts to bring about rationality in world markets by removing domestic and export market programs that interfere with prices and distort trade are essential to remove the excess capacity problem.