Farrell, Kenneth R.

English

Research Papers in Economics

ISSUES  IN  A FOOD POLICY
Kenneth R.  Farrell
Deputy Administrator, Economic Research Service
U.S. Department of Agriculture
Never  in  recent years  has the food  industry  experienced  such
turbulent,  trying  times  as  in  the  past  eighteen  months.  The  im-
mediate  future  seems  much  like  the  immediate  past-continued
tight supplies  of many  commodities,  rising  production  costs,  and
higher food prices.  From one end to the other the food  industry is
experiencing rapidly rising costs of doing business, leaving many in
a  potentially  precarious  financial  position  should  product  prices
decline  substantially.
Discussion  of food  policy  has  broadened  and  assumed  a new
intensity  with  opinions  divided  over  both  issues  and  solutions.
Some  emphasize  the need to  manage  exports,  others the  need  to
maintain  or  expand  exports.  Some  point  out  the  need  to  build
stocks, others the pitfalls  of public stockpiling.  Some see the short
food  supplies of the past two years as a temporary  shift  in  a long-
term trend of rising per capita production,  others as the beginning
of the  Malthusian  specter of chronic  food  shortages.  Some  stress
all-out  production,  others the danger of doing  so.
Before  discussing  food policy  issues,  it  may  be  helpful  to  ex-
amine  briefly  the  economic  climate  within  which  policy  choices
must be made.
THE SETTING  FOR NATIONAL  FOOD  POLICY
Throughout  much of the last two decades food  supply  pressed
heavily against  effective demand.  Large carryover  stocks of many
crops  were  available  to  offset  production  shortfalls  and  planning
errors.  Idle  cropland  allowed  individual  program  decisions  to  be
considered  in  isolation-any  increased  need  for  land  could  be
taken  from  a  stock  of  idle  crop  acres.  There  was  no  need  for
concern  over  competition  between  crops  and  livestock;  excess
crop  acres  provided  a  margin  for  expansion  of both.  Further,
underemployment of labor and capital resources  provided the com-
plementary  inputs,  and planning  could  safely  assume  ample  sup-
plies of fuels,  fertilizers,  and insecticides.  These circumstances  led
to  an  environment  in  which  policy  decisions  involved  relatively
few  variables  and considerations.
But circumstances  have  changed  dramatically  in the  past two
27years.  The  farm  sector  is  operating  at  near-capacity  levels.  Mil-
lions of acres once idled by government programs  have been  made
available  for production.  Supplies  of fuels,  fertilizers,  and  insec-
ticides are  relatively  scarce and high priced  and promise to remain
so for years  to come.  Stocks of grain  are  low and  any substantial
rebuilding  in the United States is at least a year off. Feed-livestock
relations are seriously  distorted, posing both immediate and poten-
tially  long  lasting  adjustment  problems  for  the  livestock-poultry-
dairy  complex.
Whereas  we  could  at one  time  reasonably  equate  agricultural
policy with  food  policy,  we  can no  longer do so.  Food policy  has
become a major component of national economic and trade policy.
Conflicts among  societal goals such  as efficient  production and
distribution  of food,  preserving  and broadening  economic  oppor-
tunity, wider sharing of real income, and preservation of resources
and environmental quality are open and sharp. A much more com-
prehensive,  systematic  approach  to  development  of food  policy,
not just agricultural  policy,  is needed  to reflect  the increased  com-
plexity  of our current circumstances.
FOOD  SUPPLY  POLICY  ISSUES
For  most  of the  past  forty  years,  food  supply  policy  in  the
United States has concentrated  on control of crop  production and
restraints  on food imports.  With excess capacity available,  supply
policy  limited  crop  production  and  provided  for  purchase  and
storage  of excess  output.  With  a  potential  for  excess  livestock
production  due  to  underemployed  labor,  abundant grassland,  and
abundant  grains and  concentrates,  an effective  system  existed for
orderly  but  controlled  expansion  of total  food  supplies.  Supply
policy  was  relatively  simple:  Control  production  and  support
prices to adjust grain and oilseed production to meet domestic  and
export  needs.  Price-support  loans removed  a  measure  of market
risk to crop producers.  Only  during war was policy seriously con-
cerned with expansion  of farm  production.
Sometime  in  the late  1960's  it appears  that the situation began
to change.  Production  of food  for domestic consumption began to
level  out as foreign  livestock-derived  demand  for feedstuffs  grew
and domestic  programs  to restrict  supply and deplete  government
held  grain  stocks  began  to  take  effect.  The  primary  impact  oc-
curred  in  animal  and  animal  products.  The  index of animal  prod-
ucts  available  to  consumers  climbed  about  15  percent  between
1960  and  1967,  but the  same  index increased  only 2.5 percent  be-
tween  1967 and 1973.  Pork production slowed,  sheep and dairy cow
28numbers  continued  downward  mainly  from  competition  of beef
cow herd expansion  and tight labor supplies. Total supplies  of red
meat began  to stabilize.
Following the initial export boom in mid-1972, the buoyant cash
market for grains  and soybeans caused many  producers  to retreat
from traditional  livestock production.  And the guaranteed market
prices for crops and uncertain  markets for livestock  tended to dis-
courage livestock production because of the relatively greater risks
involved.
When  there was  abundant feed,  labor,  and complementary  re-
sources, the greater risk in production of livestock had little impact
on supplies.  As  markets  tightened,  however,  and  labor resources
were  drawn  away  by  more  attractive  off-farm job  opportunities,
the risk differential between crop and livestock production became
more important.  National  agricultural  policy with  its emphasis  on
the crop  sector became  less effective  in meeting  the demands  of
consumers,  who were shifting away from cereals and toward meat
and protein products.  The government programs  aimed at regulat-
ing  crop  production,  coupled  with  a  policy  of export  expansion
mainly  for crops,  raised  serious problems  for the livestock indus-
try. The greater degree of market certainty for crops tended to bias
resource use.  Examined'from  the view of a country that has been
demanding  more  meat  and  protein,  the  past  concentration  of
policies on crop production must  be questioned.
Another  question  associated  with  food  supplies  is  the appro-
priate  policy  on grain  stocks.  For decades,  supply  policy  has  in-
cluded a heavy element of carryover stocks of primary agricultural
commodities.  They  came  into existence  as a means of supporting
farm  prices.  As  a  derivative,  the  nation  was  provided  insurance
against  shortfalls  in domestic  production-or  sharp expansions  in
export  demand.  This  stability  protected  consumers  against  large
fluctuations  in the  price  of food.  But these  stocks  also  had  high
budget costs and were generally viewed as a burden.  In the process
of reacting to  this problem,  policy assigned  a heavy  weight to  rid-
ding the country of burdensome  stocks.  Price supports were  low-
ered,  especially  in  real  terms,  and  accumulated  stocks  were  dis-
posed of through food  aid and  subsidized exports.
With reduced world production of food in  1972 and subsequent
sharp rises in commodity prices during the past two years,  the role
of stocks has again come to the forefront.  Unless world food condi-
tions change  dramatically,  rebuilding  of grain stocks  will  be very
slow.  An  important  question  is  whether  only  commercial  stock-
piles  will  be  sufficient  in the future.  Will current  policies  provide
29adequate  stockpiles?  Should  we accumulate  publicly held  stocks?
At what levels  should loan and target prices be established?  Should
we have a stockpile  for emergency  food aid and relief purposes and
another for commercial  price  stabilization  purposes?  Should such
stocks  be  managed  by  interested  bodies,  coordinated  by  interna-
tional  bodies,  or  be  a  part  of an  international  grains  agreement?
These  are  important  policy  issues.
Some  very  immediate  supply  policy  issues  confront  us.  Feed
grain supplies  for domestic use  are going to be tight and relatively
high  priced.  An issue  of current  debate  is  whether  export  limita-
tions should be imposed to protect domestic feed supply. The issue
is complex  and  brings  into focus  conflicting forces  within  agricul-
ture,  between  agriculture  and  consumers,  between  domestic  and
foreign  users  of feed  grains,  and  between  food  policy  objectives
and balance-of-payment  and trade objectives.
Other  supply  policy  issues  revolve  about  actions  to  increase
imports,  to  rescind  supply-restraining  marketing  orders,  and  to
lower the many  barriers  to  increased  productivity  in  the  food  in-
dustry.
MARKETING  POLICY  ISSUES
The marketing  share of food  products  represents  considerably
more  than  one-half  of the  cost of retail  food.  However,  over  the
years  far  less  than  one-half  of the  policy  emphasis  and  program
expenditures  on food  products  have  been  devoted  to  marketing.
Public expenditures  on  improving the  flow and quality of products
moving across  retail checkout  counters  are  relatively  insignificant
compared  to  either  supply or demand  expansion  policies.
One major element  of marketing  policy  is  a  set  of grades  and
standards established  in the past to facilitate  the orderly movement
of food products.  But times  have changed.  The mix  and quality of
products  have  shifted,  merchandising  methods  have gone  through
a revolution,  but  the  regulations  have  remained  static.
The  broad  impact  of grade  and  standards  regulations  on  the
efficiency  of farm  production  or even  retailing economics  is  only
speculative.  More  questions  need  to be raised  and more  effective
research  initiated concerning  their impacts on performance  of the
food  industry.
A very important set of issues revolve around the structure  and
organization  of the  food  industry.  The  North  Central  extension
publication  on  "Who  Will  Control  Agriculture"  raised  many  of
30these  issues  and  set  forth  alternative  configurations  having  very
important  policy  overtones.  A wide  array  of issues  turn on ques-
tions of the nature  and degree  of competition  in food markets,  on
concentration  of economic power,  and responsiveness of the input
and  product  markets  to  consumers'  and  producers'  needs.  The
farm  sector  issues  include  how  much  power  farmers  possess
through  group  action  devices  such  as  cooperatives  and marketing
orders.
The  conventional  marketing  institutions-grades,  orders,  and
cooperatives-are  significant  but  by  no  means  include  the  most
important public policies affecting food marketing.  Transportation
accounts for a large portion of the final cost of food, and this sector
has  had to function under an extraordinary  burden of government
regulation.  As  a  consequence,  the  transportation  industry  is  far
less efficient than  it could be, and that affects the cost of food.  The
National  Commission  on  Productivity  recently  completed  a
thorough review  of productivity  in the food  sector and  made  rec-
ommendations that  are  worth reviewing.
It  should  be  of concern  that  agricultural  economists  have  so
little to say about  the behavior of firms  and the performance  of the
food processing, manufacturing,  and retailing sectors.  Many of the
most crucial decisions  affecting  farmers  and  consumers  are  made
in the board rooms of food companies.  Why should the agricultural
research  establishments  defer  to  the  Federal  Trade  Commission
the important questions of whether collusive or monopolistic prac-
tices exist in retailing, processing,  and handling of food and agricul-
tural commodities.  We  have  not integrated  farm  supply  and  mar-
keting  policies  to  yield  a  consistent,  wholistic  food  policy.  A
myriad of consumer oriented,  protective legislative initiatives  have
been  proposed  and  several enacted  in  recent  years.  What  do  we
know  about  the  impact  of such  measures  on  consumer  welfare?
Upon costs  of processors  and handlers?  Upon  retail food  prices?
These  are  increasingly  important elements  of food policy.
DEMAND  POLICY ISSUES
Consumption  of food  is  far more  flexible  than  most of us  be-
lieved.  Total  food  consumed  per capita  in  1973  was  down  1 per-
cent,  protein  consumption  was  down  2.3  percent,  and  meat  con-
sumption  was  down  4.8  percent.  There  have  been  some  sharp
shifts  in  eating  habits.  Consumption  of fresh  fruits  was  up  5.3
percent,  fresh  vegetables  down  2 percent.  There  have  been  other
shifts,  especially  in  dairy products,  where small price differentials
have  brought large changes  in consumption  habits.
31Changes  in food  consumption this year are  primarily reactions
to changes  in  relative  prices.  The  reductions occurred  despite  at-
tempts to increase  food availability through  sharp cutbacks in Pub-
lic  Law  480 and  commercial  export subsidy  programs.
In contrast,  there has  been a  sizable increase  in domestic food
assistance  programs.  Even  so,  the  sharp  rise  in  food  prices  has
meant  less  real  value  from  food  assistance  programs.  To  what
extent are  we  prepared to guarantee  the poor and other disadvan-
taged  groups  against the ravages  of escalating  food  prices?
Public  Law  480  and domestic  food  assistance  programs  focus
attention on the trade-offs  between satisfying needs of low-income
domestic  food  consumers,  low-income  foreign  consumers,  and
domestic  consumers  ineligible  for  food  assistance.  Programs  to
encourage  exports  to other countries have  included direct  subsidy
of commodities for export,  differential  pricing  of sales from CCC
stocks,  provision  of low-cost  CCC  credit,  use of Import-Export
Bank credit  to facilitate  sales,  and  acquainting foreign  consumers
with products and commodities available for export. This differen-
tial approach  in  administering  policy to  satisfy  foreign and domes-
tic food demand  has brought about  some sharp conflicts in the past
year.  Curtailment  of livestock production  as feedstuff prices  rose
caused  a  temporary  embargo  on  exports  of oilmeal  products,  a
clear demonstration  of the conflict between domestic food demand
and export demand.
The  trade-off between domestic  and  export  markets  raises  an
obvious  question:  Should the government continue  a policy of ag-
ricultural export expansion, and how vigorously, when this leads to
more expensive  food to  our own  consumers?  This issue becomes
especially significant when we recognize that U.S. markets provide
a major share of the rationing  function among  the industrial  coun-
tries of the world since many other countries isolate their domestic
food  markets.  Is  it in the interest of the United States to  absorb a
significant  share of the  adjustment of the fluctuations  of world  ag-
ricultural  production? These  issues  will face  resolution  in  coming
months  through  various  international  and national  forums.
CONCLUSIONS
The immediate future for the U.S. food industry seems likely to
be marked by continuing tight supply relative to effective domestic
and foreign demand.  Stocks of major food commodities  will remain
low,  some  precariously  low,  for at least another  year.  Distortions
in livestock-feed  relationships  are unlikely to be soon resolved and
32repercussions  may extend  for  several  years.  Coupled  with  strong
inflationary  pressures rampant  throughout the economy,  the most
likely near-term scenario  features high commodity and food prices
and rapidly escalating production costs throughout the food indus-
try.
Policy options  in the immediate future  are limited.  On the sup-
ply side the best that can be done is to pursue programs which will
encourage  a high output in  1975 while managing disappointing  1974
supplies in  a manner that will create the least possible  distortions.
Some  hard choices  have  to be  made.
Judgments  of agricultural  economists  suggest  that  the chronic
excess capacity that has characterized  U.S.  agriculture for so long
will  not  likely  persist  in  the decade  ahead.  Willard  W.  Cochrane
suggests  aggregate  demand  will  tend  to  press  against  aggregate
supply with the real prices of farm commodities and food trending
upward.  George  W.  Brandow concludes  that the most likely  out-
come  is  small  excess  capacity  by  1985.  But  both  Cochrane  and
Brandow  foresee  possibilities  of  wide,  unpredictable  gyrations
around  central tendencies  in the food  sector.  Both  emphasize the
need for flexible policies  and argue for purposeful creation of pub-
licly  held stocks to  buffer  swings  in production  and trade.
The questions  of whether we  should  have  publicly  owned  re-
serves and the levels of such stocks are a central, vital policy issue.
Related  to this is the basic question of our posture  with respect  to
food  aid and technical  and economic  assistance  to the  developing
nations.  Is the future to be characterized  by potentially  great year-
to-year instability  in food  production relative  to growing demand?
To  what extent  and  in  what ways  should  producers  be  protected
against such  instability to achieve desired food  policy goals? Does
the  Agriculture  Act of 1973  provide  an  adequate measure  of pro-
tection to farmers?
In about another year we will need to begin facing the issue of
what, if any, program is to be developed to succeed the Agriculture
Act of 1973.  Should the essential features of that act be extended?
Should other commodities be covered? What loan and target prices
will  be  appropriate  in  light  of  inflated  price-cost  relationships?
What standards  should  be  applied  to  adjust loan  and  target  price
levels? How much stability  in farm prices and incomes do we want
to  provide?  An  even  more  basic  question  is  whether  an  urban-
oriented,  inflation-conscious  Congress  will  pass  any  legislation
aimed  primarily  at one group  of citizens.
33An  activity  deserving  high  priority  on the  research  agenda  of
agricultural  economists  should  be  that  of identifying  the  diverse
components  of national  food  policy  as  distinct  from  national  ag-
ricultural  policy.  Only  when  these  components  have  been  iden-
tified  systematically  and  their  interdependencies,  conflicts,  and
trade-offs  analyzed  can  we  begin  to  fashion  a  rational,  inte-
grated  set of programs  comprising  a national  food policy.
34

ISSUES IN A FOOD POLICY

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