Kutish, Francis A.

English

Research Papers in Economics

CURRENT  U.S.  FARM  POLICY  ISSUES
Francis A.  Kutish
Staff  Economist,  Office  of  the  Secretary
U.S.  Department of  Agriculture
Secretary  of  Agriculture  Orville  L.  Freeman's  announcement
early  this  year  that  wheat  farmers  would  not  be  eligible  to  receive
payments  for  additional  voluntary  diversion  on  1966  spring-planted
wheat  marked  a significant change  in  United  States  farm  policy.
Since  then the  1967  wheat allotment  has  been stepped  up  almost
a  third,  or  over  16  million  acres.  The  rice  allotment  has  been  in-
creased  and  soybean  and  the  milk  price  supports  raised  to  boost
output.  Clearly,  United  States  farm  policy  is  moving  from  one  of
great  restraint  on  production  to  one  of  balancing  production  with
use,  while maintaining  adequate  reserves.
Some  may  look  on  this  as  a  signal  to  return  to  the  so-called
"good old  days"  when the  government  was  not  concerned  with  farm
policy.  But  history  reveals  that  from  the  time  of  the  early  settlers
the United States Government  has been deeply involved in agriculture.
Our first national farm  policy was  essentially  one  to get  the  land
settled.  The  government,  through  grants  and  cheap  land  sales,  en-
abled the nation to  grow in area and  secure its frontier by populating
it.  Ever  since,  the  national  government  in  one  way  or  another  has
been  actively  engaged  in agricultural  policy  actions.
Concern  about  farm  income  problems  eased  in  the  1940's  as
new demands  were  placed  on farm  production  by World  War II  and
early  postwar  reconstruction  in  Europe.  But  with  the  end  of  the
Korean  conflict,  surpluses  again  began to accumulate.  By  1961,  feed
grain  carryover  stocks  had built  up  to  nearly  85  million  tons  and
wheat  stocks  to  over  1.4  billion  bushels.  Realized  net  farm  income
in  1960  was  more  than $2  billion  below  the  figure  for  1953.
From  1960  to  1965,  the  policy  objective  became  one  of  re-
straining  production  while  expanding  outlets.  Price-support  loans
were  reduced;  government  payment  for  acreage  diversion  and  sur-
plus  disposal  rose  sharply.  The  acreage  control  programs  tended  to
restrain  expansion  in stocks  in years  of good  weather  and  to  reduce
stocks  substantially  in  years  of  less  favorable  weather.  Meanwhile,
use-both  domestic  and  foreign-expanded,  and  supplies  were
brought  into  better  balance  with  market  outlets.
27I  would  sum  up  the  U.S.  Department  of  Agriculture's  present
farm  policy  approach  as  being:
1.  Oriented  to  markets-recognizing  the  importance  of  main-
taining  the  marketplace  as  the primary  factor  in  farm  pricing  rather
than  using Commodity  Credit  Corporation  acquisitions.
From  1953  to  1960,  CCC  acquired  between  15  and  41  percent
of  the  annual  wheat  crop,  or  an  average  of  27  percent;  CCC  corn
acquisitions  during  this  same  period ranged  from  about 8 to  16  per-
cent of  the yearly  corn crop,  averaging  12  percent.  In  the past  three
years,  CCC  wheat  acquisitions  ranged  from  less  than  1  percent  to
a  little  over  6  percent  of the  crop,  averaging  about  4  percent.  CCC
corn acquisitions  varied  from  a  little  under to  a little  over  1 percent
of  the  crop.
Payments  to  farmers  have  become  an  integral  part  of  the  mar-
ket-oriented  farm  policy-totaling  $3.35  billion  in  1966.  Whether
made from  public  funds or  partly  from private  funds  (as  with  wheat
certificates),  payments  permit  separation  of  the  function  of  income
support from  interference  with  market prices.
2.  Oriented  to world  trade-recognizing  the  need for  a  realistic
relationship  between  U.S.  and  world  prices  for  farm  commodities.
One  of the  key  purposes  behind  the  feed  grain  program  enacted  in
1962  and  the  subsequent  wheat  and  cotton  programs  has  been  to
support  prices  of  U.S.  farm  products  at  or  near  competitive  world
levels,  so  that  we  could  compete  in  world  markets  with  minimum
resort  to  export  subsidies.
In  the  coming  year,  U.S.  corn  and  cotton  will  be  sold  abroad
without  any export payment;  sorghum  grain  with  little  or no  export
subsidy.  Wheat  continues  for  the  time  being  to  require  export  pay-
ments of 20  to 25 cents  a bushel  (far below former  levels).  Tobacco
and  rice  remain  a problem,  and  the  need  here for  more  market  and
export programs  is  as  great  as  it  was  for  cotton.
3.  Oriented  to  food  assistance-recognizing  that  the  old  P.L.
480  played  its  role  as  a  tool  for  surplus  disposal.  Today  the  real
surplus  stocks  of  grain,  milk,  vegetable  oil,  and  rice  are  gone.  Our
foreign  food assistance  programs  were  founded  on  world  food  needs
which  were  an  aftermath  of  World  War  II.  Then  came  the  era  of
P.L. 480  which operated  under  the flag of  surplus disposal.  The  new
Food-for-Freedom  bill  before  Congress  puts  a different  emphasis  on
food  aid:
Food  aid  no  longer  will  be  limited  to  surpluses.  It  will  be
28made  up  of  commodities  determined  to  be  of  maximum  use
in  meeting  the  desired  objectives.
Food  aid  to  the  extent  possible  will  "take  into  account  efforts
of friendly  countries  to  help  themselves  toward  a  greater  degree
of  self-reliance."
Let  us look more  closely  at three  of  the  main  farm  commodities.
Wheat stocks  on July  1, 1966,  were  about 536  million bushels-
lowest  since  1952,  but  still  two-thirds  of  a  year's  domestic  food  use
plus commercial  exports.
This  year's  wheat  allotment  was  51.5  million  acres,  the  1967
allotment  will  be  68.2  million  acres.  The  Department  expects  that
about  62  million  acres  will  be  harvested  this  coming  year,  which
would provide a carryout  of about the current figure  on July  1, 1968.
In  fiscal  1966,  U.S.  wheat  and  flour  exports,  due  to  the  food
crisis  in  India,  reached  an  all-time  high  of  859  million  bushels.
This  compares  with  about  715  million  bushels  in  fiscal  1965  and
275  million  in  1955.
Roughly,  about  two  out  of  every  five  bushels  of  wheat  produced
in  the  U.S.  are  used  domestically.  Another  bushel  is  exported  for
dollars.  The  other  two  bushels  are  shipped  overseas  on  a  conces-
sional basis-with  one of  those two  bushels  going to India  this  year.
There  are  several  uncertainties  regarding  the  future.  The  first
concerns  the  acceptance  of  the past  rate  of  annual  wheat  disappear-
ance  as  a  measure  of  true  demand  or  requirements.  Certainly  we
have been more than  generous  with  our food  aid in many years  and,
coupled  with  the  lower  level  of  wheat  prices  that  existed  in  the
world  during  the  late  1950's  and  early  1960's,  wheat  consumption
undoubtedly  was  overstimulated.
A  second  question  lies in whether  or  not  world  wheat  production
will  increase  as  fast  as  needs.  While  the  U.S.  was  the  only  major
wheat  exporting  nation  that  seriously  attempted  to  restrict  produc-
tion,  Canada  and  the Southern  Hemisphere  nations  probably  did  not
encourage  production.  I  believe  the  net  result  was  a  hold-down  on
potential  that only  now  shows  signs  of  easing.  Australia  and  Canada
both  have  increased  acreages  this  year  and  have  the  largest  acreage
since  1950.  Only France  has a  smaller  acreage.  This  may  be  due  to
policy  considerations,  although  weather  last  fall  may  have  been  a
factor.  Summing up  the situation  for the  five  major exporters,  we feel
that world  supplies  are  likely  to  increase  in  1967-68.
29Less can be  said  about  the Communist  world's  production  capa-
bilities,  but many people  believe that except for China  we may  grad-
ually  see  a return  to self-sufficiency  in that part of the world.  Should
this  happen  the  demands  on  world  wheat  supplies  would  decline
substantially.  Purchases  by  the -Communist  world  have  accounted
for one-quarter  to one-third  of world trade  in  every year  since  1963-
64.  In  fact,  world  commercial  trade  showed  little  change  in  level
from  the  end  of  World  War  II  until  1960  when  China  started  her
foreign  purchases.  Almost  all  of  the  increase  in  total  world  wheat
trade until that time resulted from  concessional  sales made by the U.S.
As  long  as  we  maintain  the  present  level  of  concessional  sales
(Food-for-Freedom)  we  can  expect  little  restriction  on  production
of  wheat.  However,  allotments  must  be  continued  to  allocate  the
certificates  which  permit  the  portion  of  the  wheat  crop  that  is  ex-
ported  to move near the  world  price.  Should  the  present  level  of  our
concessional  sales  decline,  the  Agricultural  Act  of  1965  permits  ad-
justment  again  in  the wheat  acreage  allotment.
Cotton is  in the  opposite  position  from  wheat.  It  is  discussed  in
the  papers  by  Lowenstein  and  Firch.  At  this  time  I  merely  want  to
point  out  that  this  commodity  still  is  in  the  inventory  reduction
category.  This  requires  production  restraints  which  reduce  the  crop
below  use.
The  Food  and  Agriculture  Act  of  1965  enables  us  to  apply
some  of the same  features  to  adjust  cotton  production  which  proved
so  successful  in  wheat  and  feed  grains.  The  support  price  has  been
dropped from  30 cents  per pound  for  the  1964 crop  to  21  cents  for
the  1966  crop,  supplemented  by  a  9.42  cent  price-support  payment.
I  do  not believe  that  there  will  be  any  great  rush  to  expand  cotton
production  at the  21  cent price,  particularly  as  long  as price-support
payments  are  available.
Feed grains lie  in  between  the  cotton  and  wheat  situations.  The
carryover  stocks  on  this  October  1  are  expected  to  be  about  47
million  tons,  with  the  carryout  down  well  below  this  figure  on  Oc-
tober  1,  1968.  With  no  need  for  further  drawdown  in  CCC  feed
grain stocks  in the  coming  year,  a  1967  feed  grain  crop  about  equal
to next year's  use  in the  case  of  unfavorable  weather  and  one  which
will  replenish  drawdown  stocks  in  the  case  of  good  weather,  now
becomes  the objective  of  the  1967  feed  grain  program.
Changes  will  be  made  accordingly  in  the  program  which  re-
cently  has  been  diverting  about  34  million  acres  of  feed  grain  land
from production.  But  if  there  were  no  feed  grain  program  in  1967,
30and  all  these  acres  were  available  for  production,  with  normal
weather  we probably  would  add  30  to  35  million tons  to  our  carry-
over  in  one  year.  And  this  recognizes  that  not  all  of  this  land
would  come  back  into full  production  in the  first  year.
Moreover,  it is  not clear  that demands  for  feed  grains  will  con-
tinue  to  advance  at  the  recent  pace.  One  of  the  first  grain  imports
that  India  would  cut  back  with  better  weather  will  be  grain  sor-
ghum.  And  while  commercial  feed  grain  exports  can  be  expected
to continue  to expand,  it  is  not certain  that  they  can  maintain  their
recent  rate  of  expansion.
On the domestic  side,  the present  situation  is clouded  by  the fact
that  much  of  the  1965  corn  crop  was  of  light  test  weight.  This
means  that  more  bushels  of  corn  by  measure  are  needed  to  feed
livestock.  The  result  has  been  a  record  rate  of  disappearance  (.95
tons per animal unit, compared  with .90 the previous year).  Thus,  the
current  feed  grain  drawdown  represents  some  unusual  demands-
foreign  and domestic-plus  a less  favorable  1966  crop  year.
The  analyses  of the  Department of  Agriculture  still  indicate  that
the intermediate  outlook  for  farm corn  prices  is  closer  to  a dollar  a
bushel  than  the  current  levels.  Therefore,  there  is  good  reason  to
believe  that  for  the  next  few  years  we  will  need  a  continued  feed
grain  program,  but one  which will  divert  fewer  acres  while  reducing
stocks.
Thus,  commodity  programs  still  are  needed.  The  agricultural
scene  can  change  very  quickly.  The  demands  of  1968  and  1969
may  be  quite  different  from  those  of  1966  and  1967.
The  real  test  of  the  flexibility  of  the  Food  and  Agriculture  Act
of  1965  is  now  at  hand.  The  value  of  the  act  is  that:  (1)  it  pro-
vides  for  selective  increases  and  selective  decreases  in  major  farm
commodities  simultaneously,  and  (2)  it  permits  commodity  pro-
grams to shift gears from one year to the next,  depending  on  changes
in  weather  and  in  demand.  We  must  always  remember,  however,
that no program  can  pinpoint production  exactly-such  as  could be
done  with  the  output  of  washing  machines.  For  this  reason  there
is  need  to  continue  the  price  and  income  support  features  of  the
programs,  also.
I  would  like  to close  this discussion  of  today's  farm  policy  with
these  three  challenges:
1.  We  need  to  continue  the  job  of  basic  economic  policy  edu-
cation.  The  several  thousand  letters  which  came  to  the  Department
31this spring  indicate  a  vast unawareness  of  the impact  of  the  level  of
price  supports  on  matters  other  than  a  single  family's  income.
2.  We  need  to  promote  an  understanding  among  producers  of
how  and  why  the  1967  feed  grain  and  wheat  programs  result  in
fewer  production  restraints  in  the  context  of  the  changing  current
agricultural  situation.
3.  We  need  to  continue  efforts  to  bring  about  a  better  under-
standing  of  the  income  problems  that  still  face  a  large  number  of
small  farmers  and  the  need  to  speed  rural  development  and  reduce
rural  poverty.
We  can  compare  farm  policy  to  a  three-legged  milk  stool.  One
leg represents  the  Congress,  which  must write  the laws  and vote  the
money.  If policy  does not meet  with Congress' approval,  it  will cease
to exist-or no new  policy  will  come  into  being.
The  second  leg  represents  the  Department  of  Agriculture,  which
must  administer  these laws  and develop  the framework  within  which
they operate.
The third  leg represents  the farm  families  themselves.  They  must
cooperate  with  the  programs.  They  need  to  make  intelligent  recom-
mendations  for  change  and  thus  must  understand  the  basic  elements
of the situation  confronting agriculture  and  the  consequences  of pos-
sible  alternatives.
If any of  these  three  legs breaks,  the  stool  will  tip.  It is  the  job
of extension policy  educational  programs  to help  that third leg  carry
its  load-by  enabling  farmers  to  better  understand  programs  and
their policy  alternatives.
Today's  farm  policy  is  not  perfect.  We  must  continue  to  pro-
gress.  But to  do  so,  we  must  evaluate  our  policy  in  terms  of  what
it  is  today-not what  it was-and  within  the realm  of  the  situation
confronting  us today-not what it was.
32PART  II
The Food Marketing
System

CURRENT U.S. FARM POLICY ISSUES

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