Bruce Gardner, professor of Agriculture and Resource Economics at the University of Maryland, speaking at Charles A. Lindbergh Memorial Lecture Series at St. Cloud State University. The theme of debate was “Resolved: The Fate of Farming Should Be Determined in the Marketplace.” Dr. Gardner spoke in favor of market influences controlling farm policy.
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(00:00:00) Forgive me if in the course of my argument I have to pause the shuffle my papers a little bit here. But even though my case for the market is probably Ironclad as I wrote it up. I decided this morning to reorder some of the bits in my presentation. I have to admit though that in doing this I was reminded of the old warning against spending too much of your time rearranging the deck chairs on the Titanic. But anyway, let's proceed to steam ahead and we won't even man the lifeboats after saying that I realize president McDonald. This is the wrong metaphor for the Lindbergh lectures, but it's the best I could do in affirming the proposition that the fate of farming should be determined in the marketplace. I want to proceed in three steps. First we need to be clear on what we mean by the fate of farming in the marketplace second. We have to consider the alternatives to letting the marketplace rule in the economy of Agriculture. And third I will argue that over the long-term. Our government is incapable of accomplishing anything other than the rule of the marketplace even if it wants to After making these points. I hope we'll be in a position where any reasonable person will assent to the idea that farming should be regulated by market forces rather than governmental edicts. I want to say first of all that the word fate in the resolution is perhaps unfortunate in that it has unduly negative connotations. Just consider this sentence. Wyatt Earp rode into town to meet his fate. This means we're not sure what's going to happen, but he's probably not just going to cash its paycheck or receive an award from the mayor you'll probably get shot and in speaking of the fate of farming. I accept the idea that there's great risk, but not that failure is for doomed. I believe actually that over the long-term American agriculture will be a success in the marketplace if it is allowed to do so. But of course some will fail and through no fault of their own While others will succeed. The point in referring to fate is that we don't know what will (00:02:19) happen. (00:02:22) So shall we place our trust in the marketplace or not? This is a very timely practical question because the 1985 Farm Bill discussion now going on in Washington is precisely addressed to it. In fact the House and Senate agriculture committees at this very moment are both meeting to markup Farm bills. My other point on the meaning of the fate of farming and the marketplace is that we've got to distinguish farming as an economic activity or business from the fate of the individuals in farming as a way of life the economic and social elements are in some ways Inseparable, but we must distinguish them analytically in order to make any sense out of economic policy for agriculture today many farmers are being forced out of business through the effects of low commodity prices declining land values and high interest rates people in Desperate Straits have a right to be treated with compassion and dignity thus policy specifically directed at saving farms in financial trouble has appeal but it creates as many or more problems as it solves. Just stretching out Farmers debt repayment schedules is only going to postpone the inevitable unless something changes fundamentally for either the individual borrower or for the commodity prices. Now since we can't rely on either of these changes occurring viable policy in this area of helping Farmers specifically in financial trouble will necessarily have a bailout component either for giving some debt or refinancing loans at a lower interest rate. This is in fact what the Reagan administration's current plan does albeit on a quite modest scale some in Congress wanted to go much further but as you know, Reagan vetoed this bill several states have considered going further but so far as I know I haven't done very much in this line either and I think in fact, there are good arguments against a bailout substantial enough to save all or most of the Farms that are in trouble. One is an argument based on fairness bailing out the improvident or unlucky investors in agriculture gives them a competitive Advantage not enjoyed by those who were more careful or more lucky second. The signal that government will repay losses from investments in land that turns sour means that less care will be exercised in future land purchases with the aggregate effect. That land prices will be artificially held up in more risky transactions will be made now turning to the second step in the argument suppose. We do try to protect farming generally if we don't let the marketplace rule, what's the alternative? Well, we don't have to speculate on this we've seen 50 years of US Government attempts to overrule the marketplace. What are they accomplished? Let's consider some examples consider rice with sophisticated technology developed in part to the University of California rice can be produced efficiently in California, but it uses large quantities of federally subsidized irrigation water. The abundance of rice is such that the farm price has fallen from 14 cents per pound in 1973 to about 8 cents this year. However, the Target price that we now have for Rice guarantees producers 12 cents per pound so that the 1985 crop in that crop that will be payments that are estimated at 375 million dollars or about 30% of the total value of the crop will be accounted for by government payments. To keep the payments and the government stocks from growing even larger in 1985. There is currently a 35% acreage diversion program partly paid and partly not paid. So the government ends up paying hundreds of millions of dollars to idle 35% of our rice land which the government also spent Millions to make productive in the first place. It's really the story of maintaining a constant speed in your car by simultaneously pressing on the accelerator and the brake It's not an efficient way to run the vehicle Laura consider sugar to give another example. We paid the equivalent of 21 cents per pound for raw sugar on a New York basis to our sugar cane and beet Growers on this same basis Latin American Producers are now producing sugar delivered to New York at three cents per pound. That's 21 cents compared to 3 cents the Department of Agriculture estimates that this cost consumers of sweeteners about 3 billion dollars per year. Now you hear of consumers having to to take responsibility for to 3 billion dollar nuclear power plants whose were built on some misjudgments just to get a feel for the scale of things. The sugar program makes consumers eat that order of magnitude in costs every year producers on the other hand get about $100,000 each from the sugar program. A lot of variation from one to the other but that's the average. Moreover with the sugar program we're maintaining a whole new industry now of corn-based sweeteners tremendous investments in plants to produce these sweeteners a setup of an industry. That's really quite dependent on this program. And finally in the last year or so we've even created an industry of cooking minors that is to say now pays to import very high sugar content food products, like some cookies and crackers and refine the sugar out of them and sell it at the u.s. Price because what went into those cookies abroad was 3 cents sugar and you can get the sugar out and sell it for 21 cents here. I think there's clearly some in efficiencies there. And of course, we now have a whole set of trade restrictions designed to prevent that from happening. Similar stories could be told about the tobacco program the week program The Peanut program and even the dairy program. Overall, what we have to confront is the following fact. Under the Agriculture and food Act of 1981, which is governed agricultural programs for the four years ending in 1985. Our government has spent about 60 billion dollars on farm programs and conducted a 1983 the largest acreage control program in history in the hope of placing u.s. Farming on a Sounder Financial footing and we end up with the financial situation that we see today. How could we possibly convince Farmers that more of the same is what we need and how can we have been convinced taxpayers that we should spend the many billions more that would be necessary to get prices high enough to really help the farmers who are in trouble. I don't think it can be done. The third part of my argument is that market forces in the long run will dominate despite any attempts to overrule them? I mentioned a list of commodities for which intervention is heavy, but it's really a fairly short list most of our farm Commodities. And once that account for most farm income do not have these heavily interventionist programs consider cattle Hogs soybeans other oil seeds fruits and vegetables poultry and eggs and many specialty crops. Can we say now that we've had 50 years of programs that a farmer will do better producing wheat milk or sugar beets than he will do producing Hogs peas or strawberries. I don't believe so. Moreover the ability of commodity policy really to have an effect has been reduced by the internationalisation in modernization of us agriculture. So that what positive effects palsy could have an agriculture in the 30s and perhaps even in the 50s have been very much depleted today dependence on the World Market for exports gives us very little room to operate with a policy determined price. If we set the price too high our Market disappears to the argentine's the Canadians Australians, even the Indians and Chinese who have become exporters of some commodities. The modernization of Agriculture has meant the integration of farm and not farm and of capital markets within the economy also, so if policy makes for example producing turkeys more attractive capital is going to flow into that activity until it returns a driven down to what investment can earn elsewhere. In summary these conditions the high cost of programs that would bail out the farmers who really need help the wastefulness and inadequacy of past programs and the futility of trying to counter market trends given today's macro economic and international economic forces all these appoint all these point to abandoning the traditional programs and moving to a market-oriented agriculture. In fact, this is essentially the aim of the Reagan administration's proposal for 1985 legislation, which would Face Down and Out both the Target price and Loan rate protections and would have banned and Supply management and it isn't just the Reagan Administration but also the Senate agriculture committee the Farm Bureau several commodity groups and in fact the bill that your Senator boschwitz along with Senator born of sponsored would accomplish the same thing in various ways, but all of them pointing towards a phase out at the traditional commodity program protections that we have (00:12:07) currently. No. (00:12:12) Let me know admit that there are some arguments that could be made (00:12:16) against (00:12:17) the market approach that have some Merit and that we ought to think about even though I think in the end we have to reject them and I want to consider four of these very briefly first as many have asked recently. How can we put our agriculture on a free market basis when there's really no free market internationally. The policies of Japan and Europe especially undoubtedly have been harmful to u.s. Farm interests and these policies do call for a US response. But the response should be in terms of negotiation trade War threats or liberalisation of our own protectionism in manufacturing. These sorts of things are an appropriate response traditional commodity programs are not the best response, especially programs, like pick or other production control measures these mainly increase the market for our competitors and provide a price umbrella for them. No second argument against letting the market rule is that our own government policies have placed our farmers in their current situation. So the government has an obligation to get them out of it. Now there is some truth to this proposition again, but I think it's much overplayed. Sometimes you hear the injunction of secretary butts back in nineteen seventy three or four to plant fencerow to fencerow being cited as causing overproduction. So I guess the argument there is that government assistance is Justified in that producer should be compensated for losses incurred while following USDA advice. Now this to me, this is like asking my broker for compensation for my losses on a stocky recommended that I buy in the end. I've got to make the (00:14:09) decisions (00:14:10) and I can't Blake blame anybody else nonetheless. It does seem clear that some of the actions of government particularly the embargoes we've had on grain exports temporary though. They were even more the macroeconomic policies. We've followed with large budget deficits creating High interest rates. These things have created problems for us agriculture. There are serious again, though. The question is what to do about these problems after all the government government makes choices about many policy variables that create unexpected costs throughout the economy and it would be hopeless to try to attempt to compensate all the losers or tax the winners the clearest policy implication, I think from the past embargoes and macroeconomic policies and so forth. Is that these policy shock? And policy mistakes should be avoided thus the restrictions that Congress has imposed on presidential authority to establish an embargo or related trade restrictions are appropriate but policy receive response Beyond. This is not warranted. Now a third argument against a free market option is that there's a special problem with instability in agricultural commodity markets that risk-averse producers are going to under-invest in the farm sector would underperform when wide and unpredictable price swings occur in an unregulated Market. I think there is a point worth serious attention here, but the acceptance of this argument does not necessarily support current programs. It supports the establishment of purely stabilizing programs such as buffer stocks that bring high prices down as well as low prices up. It supports the establishment of insurance programs, like crop insurance and perhaps price insurance, but it does not mean that the price Insurance should be given away free to producers or tied to set asides as has been done under the current Target price program price Insurance could just as well be sold for example by government through its See us offices or by the private sector through put options on commodity exchanges ultimately indeed the policy route the route to policy reform that makes some sense to me that we might get into later if we have a chance is simply to begin to charge commercial scale Farmers, especially the larger Farmers for the Target price protection, they receive so the corn producer for example might pay 20 cents per bushel in order to guarantee a three dollar price. A fourth and final argument against the market option is that farmers are in a weak bargaining position as against middlemen who handle farm products and businesses which Supply goods and services to Farmers fertilizer pesticides seed Machinery so forth. However, even if the underlying idea here is accepted. I don't think the price supports are the appropriate response rather. It is antitrust laws or the establishment of farmer owned cooperatives for farm supplies and services this sort of Step that is a proper response to the lack of farmers bargaining power not price (00:17:26) supports. (00:17:28) So the bottom line in my view is that a market based agriculture will provide the maximum of what we want and what we want is economic well-being to Consumers income to Farmers efficiency of food production take-home pay the taxpayers and we want the maximum of all these things that are agricultural resources will permit the right choice of farm programs of intervention in the markets might provide more of one of these items I've listed than the market can provide but the market does best on all of them together.