The Texas Fanners Union contracted with the Agricultural Policy Analysis Center to
develop a design for the commodity title of the 2018 Farm Bill based on supply
management principles. Over the last six weeks, we have examined the details of the
proposal in this column.
Supply management, as a way to tackle the chronic price/income problems faced by
fanners, has been out of favor for at least the last 20 years, so why bring it up again
when it has so little political support?
The chronic price/income problems fanners' face reflects the lack of responsiveness
to low prices in agricultural commodity markets. Consumers may respond to lower
food prices by buying a better grade of meat or food that has more processing but,
given an adequate diet to start with, they do not purchase more food. Aggregate food
consumption remains fairly stable over a wide price range.
On the supply side, crop farmers do not respond to lower prices by voluntarily
taking acres out of production until profitable prices return. In fact, in the face of
lower prices, fanners have every incentive to maximize their production so that they
can spread their fixed costs out over more bushels, bales, or hundredweight. They
certainly are not going to reduce production on rented ground.
If there were sufficient responsiveness to lower prices on the part of either
consumers or fanners, the chronic price/income problems that face crop agriculture
would not exist and there would be no need for farm programs as we know them.
Given the economic characteristics of crop production we have just described and
the need for a stable national food supply, doing nothing is not a viable option, thus,
the need for an agricultural policy that meets the needs of both consumers and
There are two ways to provide financial support for the agricultural sector so
consumers have access to an adequate supply of food that meets their needs and
farmers are able to remain in production and provide that food: price supports or
revenue support. Both methods support farm income, but do it in different ways.
A supply management program supports net farm income by providing price
support for the major crops that farmers produce. Depending on their management
skills, price supports provide producers with the opportunity to make a reasonable
return on their land and labor.
The alternative is to provide income support. The idea is that these supports should
not influence production decisions. Income support programs include direct
payments, countercyclical payments (i.e. the Counter-Cyclical Program and the Price
Loss Coverage (PLC) program), revenue protection programs like the Annual Crop
Revenue Election (ACRE) program and the Agricultural Risk Coverage (ARC)
program, and crop revenue insurance.
Thus, the argument against a supply management program is philosophical.
Opponents of supply management programs in agriculture believe that ideally no
program is needed (the premise behind the design of the 1996 Farm Bill) but if
there is to be a program, it should support total farm revenue not prices. They
believe that revenue support programs intervene less in production decisions.
Revenue support programs do not take into account the well-documented economic
characteristics of crop agriculture that result in chronic price and income problems.
Supply management programs, on the other hand, take into account the cause of
low prices (supply that exceeds demand) by taking a marginal amount of supply of I
the market so that crop prices rise to a profitable level and if necessary inducing
farmers to reduce their production through paid acreage reduction programs.
By taking the economic characteristics of crop agriculture into account, price
support programs like the APAC/TFU supply management program only make
payments on the small amount of supply that exceeds demand. Revenue support
programs, on the other hand, pay on nearly every bushel, bale, and hundredweight
of production and historically have ended up being far more costly than price
support programs (http://tinyurl.com/v89hzf39).
After 20 years of denying the economic characteristics of crop agriculture by making
farm payments when they weren't needed and failing to provide adequate support
when it is needed, now is the time for members of Congress and farm policy makers
to give price support programs another look. With crop prices well below the cost of
production for the foreseeable future, revenue support programs will be too
expensive and still provide inadequate support to farmers.
Texas Farmers Union, President
|Texas Farmers Union, P.O. Box 738, Sweetwater, Tx 79556|