Knutson, Ronald

Paggi, Mechel

Richardson, James

Smith, Edward

English

Public Research Access Institutional Repository and Information Exchange

South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Economics6-10-1986The Wheat Poll Do Wheat Producers FavorMandatory Limits on Production?Edward SmithSouth Dakota State UniversityMechel PaggiJames RichardsonTexas Agricultural Experiment StationRonald KnutsonTexas A&M University SystemFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Economics at Open PRAIRIE: Open Public Research Access Institutional Repositoryand Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator of Open PRAIRIE: OpenPublic Research Access Institutional Repository and Information Exchange. For more information, please contact michael.biondo@sdstate.edu.Recommended CitationSmith, Edward; Paggi, Mechel; Richardson, James; and Knutson, Ronald, "The Wheat Poll Do Wheat Producers Favor MandatoryLimits on Production?" (1986). Economics Commentator. Paper 233.http://openprairie.sdstate.edu/econ_comm/233COOPERATIVE EXTENSION SERVICEEconomics NewsletterEditor: Donald C. TaylorEconomics Department SDSU, Box 504A Brookings, SD 57007 Tele: (505) 688-4141No. 237 June 10, 1986THE WHEAT POLLDO WHEAT PRODUCERS FAVOR MANDATORY LIMITS ON PRODUCTION?Edward Smith, Extension Economist-Grain Marketing andPoiicyMechei Paggi, Extension Economist-lnternationai TradeJamesRichardson, Professor, Texas Agricultural Experiment StationRonald D. Knutson, Extension Economist-Policy and Marketing, and ProfessorTexas A&M University SystemWheat producers in the U.S. will soon receive a ballotfrom USDA asking a question similar to that posed in thetitle of this article. The poll is beingconductedas one of therequirements of the Food Security Act of 1985 (farm bill).The outcome of the poll, however, does not bind the Secretary of Agriculture to establish mandatory controls.The 1985 farm bill states, "Not laterthanJuly1,1986,the Secreta^ ofAgriculture shall conduct a poll, by mailballot, of eligible producers of wheat to determine whether"suchproducers favor the imposition ofmandatory limits ontheproduaionofwheat thatwill result inwheat prices thatare notlower than 125% ofthecost ofproduction (excludingland and residual returns tomanagement) as determined bythe Secretary." Only those producers who have grownwheat in at least one crop year from 1981-1985 on a farmwith a wheat base ofat least 40acres will beeligible to vote.Although this poll is non-binding, it should not betaken lightly. Its inclusion inthefarm bill reflects agrowingdemand for mandatory production controls byproducers inthe wheat industry as well as other producer groupsfrustrated by surplus production and low farm prices.Producers, therefore, must consider the many consequencesbefore answering this simple question.This article explores the question of mandatoryproduction controls as well as other supply-managementalternatives and their consequences for wheat producers.The purpose of this article is to provide wheat producerswith information that should be considered in their decisionon how to vote. Of course, the discussion in this articlefocuses on the implications of supply control and does notsuggest how a producer should vote in the poll.Before Making the DecisionMost producers would like to have answers to anumber of questions before voting "yes" or "no" onmandatory production controls. Some questions toconsiderinclude:• What does the Secretary of Agriculture consider tobe the cost of wheat production?• What quantities of wheat would be sold if priceswere increased to 125% of this cost of production?• How much will production need to be cut tomaintain theprice at 125% ofthecost ofproduction?• What mandatory supply-management options areavailable?• What are the consequences of continuing with thecurrent farm program?These are not easy questions to answer. We considerthefollowing analysis reasonable, given available information.What is the Cost ofProducing Wheat?There probably areas many answers tothis question asthere are wheat producers. USDA, however, is required byCongress to estimate the cost of producing wheat, feedgrains, cotton, anddairy commodities each year. Based onprevious USDA cost of production estimates, we estimateThis Economics Newsletter is a reproductionof a report, written by Texas A&M Universityagricultural economists. The report reviewsthe potential impacts of imposing mandatoryproduction controls on wheat producers.A mail ballot asking producers if they favormandatory production controls will be sentout around the middle of June. This is notthe same as the marketing quota referendumwhich must be completed by August 1, 1986.Richard ShaneGrain Marketing SpecialistSouth Dakota State Univ.Mandatory Acreage ControlsMandatory acreage controls or allotments wouldallow wheat production on a specific number of acresallotted to each farm based on its share of the nationalallotment necessary to meet the Administration's supply-management objectives. Acreage allotments were usedextensively in the 1950's and 60's and still exist in tobacco.Experience has shown that when acreage allotmentsareused,in the absence ofmarketing quotas, the programis ineffective in limiting production to the desired level.Farmers select their best acreage and farm the allottedacreage more intensively. The result is increased production per acre,requiringfurther tightening ofthe allotmentin future years.If the Secretary determined, as in our analysis, that57% of the wheat base would have to be removed fromgrainproduction tomeet theneeds ofthemarket at apriceof S4.04/bushel, farmers might only be allowed to plantwheat for grain on 43% of their allotted acreage. Thequestion that immediately surfaces is, "What can we dowith the idled acreage?" Allowances for use of the idledacreage become extremely important to producers indetermining their preference for this type of mandatoryprogram.The rules for transfer of the allotment are also veryimportant. If the allotment is tied to the land and non-transferable, then the price of land tends to be bid-up. Ifallotments aretransferable, thenanyprofits resulting fromthe allotmentwillbe quicklycapitalizedinto the allotment'svalue. Is the landowner better off? The answer dependsagainon whathe cando withhis idledacreage. Ifthe idledacres can be profitably farmed, then the producer wouldgain from the capitalized value of the allotment as well asfrom the earnings oh wheat. If the idled acres cannot befarmed, the capitalized value of the allotment must beoffset against the reduced value of land that cannot befarmed and the cost of controlling weeds and erosion onthe idled land.Allotments tied to a specific crop tend to restria thefarmer's ability toadjust crop mixes inresponse tochangesin relative crop prices. If idled acreage is allowed to beplanted to alternative crops, furthermore, it could result insurpluses for non-allotment crops, thus tending to forcethese producers to elea allotments for their crops.Thebottom line is thatfarmers are notautomaticallybetter offfrom mandatory acreage controls. Whether theyare better off depends on the rules of the game and eachspecific situation. At this point, we do not know the rulesunder which mandatory controls would operate.Marketing QuotasIt is not surprising that the 1985 farm.bill, under its,wheat title, has a marketing quota section immediatelyfollowing the section requiring the "Wheat Poll." Amarketing quota is a mandatory mechanism which determines the quantity of a commodity that can be marketed.The national quota, set by the Secretary of Agriculture, isbased on the quantity of wheat necessary to meet theexpected market needs, taking into consideration domestic. Aand export requirements as well as emergency food aid \heeds and adequate carryover stocks.After the establishment of the national quota, theSecretary wouldassigna marketing quota for eachfarm onwhichwheatwas plantedor consideredplantedforharvest' during the 1981-1985 base period. The marketing quotawouldbe equal to the product derived by multiplying thefarm's baseacreage byits farmprogramyieldand reducedby the appropriatepercentage necessary to bring nationalmarketing down to the level of national quota. Penaltieswould be assessed to producers who marketed wheatbeyond their assigned quotas.The Secretary has the authority to announce amarketing quota for wheat to cover the crop years 1987-1990. To implement a quota under the 1985 farm billprovisions,the Secretarymust proclaimthe nationalwheatquota by June 15, 1986. He must also conduct, by mailballot, a marketing quota referendum by August 1, 1986.This referendum is separate from the non-binding pollconducted in June, which is the topicof this paper. TheSecretary may proclaim that marketing quotas areineffectfor 1987-1990 if he determines that 60% or more of theeligible producers, voting in the referendum, approvedmarketing quotas. According to the 1985 farm bill, thenational quota could be terminated or adjusted in anymarketing year the Secretary determines there exists anational emergency or there has been a material change inthe demand for wheat. Our analysis indicates that areduction inexport andfeed use demand would be likely.Previous experience with supply control programsindicates that marketing quotas are the most effectivemeans ofcontrolling production because there is virtuallyno slippage. Quotas are, however, hard to maintainbecause ofpolitical pressure to increase thenational quotaonce it is established.As was the case with acreage allotments, the use ofidled cropland is a big factor in a producer's decision tofavor a marketing quota. Many ofthesame consequencesmay apply.In thecase ofmandatory acreage controls ormarketingquotas, the incidence of government involvement inagriculture is high. In terms of taxpayerdollars,however,mandatory programs are relatively inexpensive supply-management alternatives.What Are the ConsequencesOf Continuing the Current Program?The current program calls for voluntary compliancein announced acreage reduction programs in return fordirect government income support (deficiency) paymentsand access to price support loans. In addition, authorization exists for a 45 million acre conservation reserve.Voluntary acreage limitations call for different levelsof idled acreage each -year, depending on the projectedcarryovers. If carryover stocks are expected to exceed 1billion bushels (highly likely for the next few years), theannual acreage reduction requirement will be between20-30% (20-27.5%) in 1987 of base acreage. If stocks areexpected to be less than 1 billion bushels, the acreagereduction requirements would be not more than 20%.tKe national average cost ofproducing wheat (excluding landand residual returns to management) to be about $3.23/bushel. The objective of a mandatory production controlprogram, therefore, would be to raise the price of wheat toabout $4.04/bushel (1.25 times $3.23/bushel).How Much Wheat Can Be Sold?The answer tothis question is vital toouranalysis sinceit determines the level ofproduction necessary tosustain a$4.04/bushel market-price. Unfortunately, there is nosimple answer. The quantity ofwheat sold at $4.04/bushel•will depend onamyriad offaaorsaffecting thedomestic andexport sectors. Due to the importance of the answer to thisquestion, further examination of these sectors is warranted.Domestic UseDomestic wheat utilization can be categorized intothree components: food, seed, and feed. As shown inFigure 1, the major domestic use of wheat is in the foodsector. Wheat for food use, however, has been virtuallynon-responsive to price. Food demand, thus, would beexpected to decline only moderately to approximately 650millionbushels if price is increased to 14.04/bushel to thefarmer.Seed use is a fimction ofplanted acreage and seedingrate. The planted acreage will vary depending on suchfaaors as grain needs, livestock grazing needs, wheat's use asacover aop onaaes idledimdergovernment programs, andwheat's importance in double aopping systems. For thepurpose ofthis malysis, we assume seed usage at 70 millionbushels, down 22% from 1985 leyels.Feed use has varied over the last several years (Figure1) depending on the price relationship between wheat andcompeting feed grains. If mandatory produaion controlswere implemented for wheat irrespective ofthe feed grainseaor, it is likely that the amount of wheat used as feedwould drop significantly. For the purpose ofthis analysis,we assume annual feed use to decline to 90 million bushels.Export UseSince the early 70's when the dollar was allowed tofloat relative to other currencies, the export seaor hastraditionally absorbed more wheat than the domesticFiguno 1. • i sappoar-ancQ and Car-nyovQrof Whoat. 1980-1985Sa»dSOURCE! USOAmarket. USDA's estimate of 900 million bushels for the1985/86 marketing year marks the first time since 1971that importers will demand less U.S. wheat than thedomestic seaor. The decline in exports (Figure 1) hasoccurred because of: a strong U.S. dollar, U.S. pricesupport levels (loan rates) exceeding world market levels,foreign coinpetition, and aheavy debt load in many developing countries.The export wheat market is highly competitive. Anincrease in the U.S. wheat price would place the UnitedStates soundly in the position ofa residual supplier. Aconservative response to a U.S. price increase to $4.04/bushel would result in a drop in exports to 750 millionbushels.This analysis suggests that the total demandfor U.S.wheat could fall by 21% from 1985 levels to approximately1.56 billion bushels ifU.S. wheat prices were supported at$4.04/bushel.How Much Would Production Need to Be Cut?In 1985, U.S. wheat producers harvested 2.43 billionbushels from 64.7 niillion acres. Ignoring, for the moment,record levels of carryover (Figure 1), the United Stateswould have to reduce wheat production by about 36% tomeet the 1.56 billion bushel demand estimated in theprevious section. Further reduction would be necessary, inthe short run, ifthe wheat already in government storagewere allowed to enter the market.Assuming minimal production control programslippage (slippage is that portion ofreduced acreage whichdoes not result in correspondingly lower production, e.g.,due toidling thepoorest land) resulting ina39 bushel/acreaverage yield, theprojeaed demand of1.56 billion bushelscould be produced on 40.0 million harvested acres—only43% ofthe wheat base for 1986. Inother words, 57%ofthewheat base would need to be removed from grain production to support a market clewing price of$4.04/bushel.What Mandatory SupplyControl Options Are Available?Mandatory production control programs can takemany forms. This discussion, however, will focus onmandatoiy acreage controls and marketing quotas. Theanalysis in the previous section applies to eitlicr form ofproduaion control.USDA may take the position that even if an overwhelming majority of the farmers vote in favor ofmandatory produaion controls, ithas no authority to implement them. The 1985 farm bill contains authority forestablishing marketing quotas in wheat. USDA's positioncould be that from alegal perspeaive, marketing controls(quotas) are not production controls. However, underconditions of asufficiently overwhelming favorable vote,the marketing quota authority in the 1985 farm bill mightstill be utilized. Alternatively, Congress could enact newlegislation authorizing acreage allotments or providinglegal interpretation of marketing quotas as a tool forcontrolling production.89ZD 'ON llWUadvasnaiVd S33d 5 aovisod3ivu )nnaTheconservation reserve program provides for up to45million acres oflandbeingtakenoutofproduction fora10 year period. Available USDA data suggest that about25% of this land (11.3 million acres) would have wheatbase. This is about 22%ofthe land that would be taken outof grain production under a mandatory control programthat was designed to raise the price of wheat to $4.04/bushel. The main question surrounding the conservationreserve program is whether the money is going to beappropriated to remove45 millionacresfrom production.With potential Gramm-Rudmann-Hollings budget cutrestrictions on funding, this program could suffer.Continuation of the current farm program wouldlikely result in farm level prices being determined by theloanrateforthe next few years. In addition, the presence oflarge carryover stocks would likely lead to further reductions in the loan rate based on the loan rate formula in the1985 farm bill. It would be difficult for the market toabsorb the expected 1.88 billion bushels of stocks on handasofJune 1,1986,withthe acreage reductionrequirementscalled for in the farm bill. Voluntary acreage reductionprograms have never been a very effective tool for controlling production due to slippage.A policy scenario which could lead to different priceresults involves the implementation of a wheat marketingloan by the Secretary, which is authorized in the 1985farm\pa)sanbay uojpajjoo ssajppvsojiiuouopg00e$ ssn ajEAuj jo^SS3NISn8 IVIDlddOZ00Z9 as 's6u!>ioojaZi!SJ9A!un SJBJS ijjnosajnjinouSv to lusiuyBdaa -g-nao!AJ0s uojsuaixg aAj^Bjadooobill. Initial indications arethatinrice, where themarketingloan is currently ineffect, exports increase as market pricesfall to the world price level. Government paymentsinitially rise sharply, offsetting the fall in market price.Once stocks are drawn down, however, market pricesshould rise above current levels.Regardless of whether themarketing loan is used, the current program will berelatively costly to the U.S. treasury.ConclusionsThe "Wheat Poll," althoughnon-binding, couldhaveimportant implications for future wheat programs. Themarket says we have overproduced. Effectively managedmandatory production controls provide anorderly way toget resources out of agriculture.The decision to vote in favor or against mandatoryproduction controls is multi-faceted. Producers mustconsider the short- and long-run consequencesof mandatory supply controls versus the current program. The basicchoice is between the current voluntary program withrelatively highgovernment costs and lower market pricesand a mandatory program that costs less but could result inrelatively higher prices, lower export and feed demand,and considerably lower production. In anyevent,as inanypolitical issue, it is important that farmers make theirpreference known.Issued in furtherance of Cooperative Extension wijork. Actsof May 0 and June 30.1914. Incooperation withthe USOA. Richard A. Battaglia. Director ofCES. SDSL). Brookings.Educational programsand materials offeredwithout regard to age. race, color, re'ligion. sex. handicap,or national origin. AnEqual Opportunity Employer

The Wheat Poll                        Do Wheat Producers Favor Mandatory Limits on Production?

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The Wheat Poll Do Wheat Producers Favor Mandatory Limits on Production?

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