'Freedom to Farm' Results in Failure

By A.V. KREBS

There is an emerging consensus within this nation's agricultural community that the much touted "Freedom to Farm" legislation which became law in 1996 should be more aptly titled "Freedom From Farming," for it has turned into an economic disaster for the nation's family farmers.

Testimony by American Corn Growers Association (ACGA) board member Dan McGuire to the House of Representatives Committee on Agriculture hearing in Grand Island, Nebraska, on February 15 underscored that fact.

McGuire, who also serves a member of the state board of directors of the Nebraska Farmers Union, decried that the majority of those testifying on the various panels represented organizations that almost unanimously promoted the concepts embodied in the "Freedom to Farm" law.

In written testimony to the committee, he emphasized that it was essential that information be submitted for the record that first, exposed the fundamentally flawed assumptions of the farm law; second, documented the glaring failure of that law and the serious economic disaster facing the farm economy as a result; and third, verified what the vast majority of U.S. farmers want as changes in federal farm policy.

Citing U.S. Department of Agriculture's own figures, McGuire showed how the 1995 "Freedom to Farm" law was based on eight fundamentally flawed assumptions.

FLAWED ASSUMPTION #1: Farmers rely on the export market for most of their sales. Except for those few producers of specialty crop, he noted that farmers do not export their grain or oilseeds at all. Farmers sell nearly 100% of their grain and oilseeds into the domestic market. They deliver and sell those commodities to local or regional commercial grain elevators or processors.

Those elevators or processors act as "gathering agents" for the multinational exporters. Thus, farmers receive the domestic market price and for that reason the farm program price support loan rate must be raised in order to provide farmers a fair price for what they produce.

The combined tonnage of corn, soybeans, wheat, grain sorghum, barley, oats and rice exported in marketing year (MY) 1996/97 and MY 1997/98, McGuire notes, only averaged 25% of production. When soybean oil, soybean meal, beef and veal, pork, lamb-mutton, goat and poultry meat are added, the total tonnage exported remains at 25%. Multinational exporting companies only exported 19.4% of U.S. corn production in MY 1996/97 and only 16.3% in MY 1997/98.

"Why should Congress or U.S. farmers allow exporters to set the corn price when our market is entirely the domestic U.S. market?" McGuire asked the committee.

FLAWED ASSUMPTION #2 Lowering commodity loan rates and prices increases exports. Doing away with non-recourse price support loans, changing to recourse "marketing loans" and dramatically lowering the loan rate has not increased U.S. grain exports. With the old non-recourse loan, the farmer stored his crop with the Commodity Credit Corp. in exchange for a loan at a price established by Congress. If the market price exceeded the loan, the farmer could repay CCC, take the crop out of storage and sell it on the open market. If the market price did not reach the loan price, the farmer simply kept the loan and the CCC owned the crop. So the loan rate acted as a floor price for the commodity. The Freedom to Farm law has replaced the non-recourse loans with recourse loans, which do not allow the farmer, except in extreme low market price situations, to forfeit the collateral grain if the market price stays low. This and a hybrid of other programs lower the grain prices received by farmers, while greatly enhancing the profits of the Cargills, ADMs and Continental Grains.

McGuire documented that U.S. corn exports have never reached the 2.4 billion bushels exported in MY 1979/80 and MY 1980/81, when the regular corn loan rate ranged from $2.10 to $2.40 per bushel. Loan rates were as high as $2.90 in 1982. Indeed, corn exports over those three "high loan rate" years of the 1980's averaged 2.26 billion bushels while corn exports over MY 96/97, MY 97/98 and MY 98/99 are averaging only 1.675 billion bushels under the low loan rate of $1.89.

McGuire also shows that the 13-year average of corn exports (MY 1985/86 through MY 1997/98), since the so-called "market and export-oriented" farm law was passed in 1985, is only 1.756 billion bushels. That compares with the six-year average U.S. corn export volume of 2.057 billion bushels from MY 1979/80 through MY 1984/85, when the U.S. had higher loan rates that averaged $2.42 per bushel. In fact, the loan rate for corn in the farmer-owned reserve within that period averaged $2.63.

A similar set of numbers can be provided for U.S. wheat exports under the farm laws since 1985, except the export track record is even worse.

"Obviously," McGuire, the former Agency Director for the Nebraska Wheat Board concludes, "the farm policy philosophy in place since 1985 lacks credibility and must be changed. It hasn't worked and it won't work! It's time for a major change. Furthermore, the U.S. national 'strong dollar' policy vis-a-vis foreign currencies is great for Wall Street but flies in the face of the stated 'export-market-oriented' farm policy. It cuts the legs out from under main street and rural America. So, forego this monetary policy or change this farm policy quickly!"

FLAWED ASSUMPTION #3: 1980's-style "higher loan rates" encourage excessive domestic and competing foreign grain production while 1990's-style lower loan rates discourage such increased grain production.

Here again, the reality is the nine-year average corn production from 1977 through 1985 was 7.268 billion bushels, when loan rates ranged from $2 to $2.65. Compared with that "high loan" period, U.S. corn production from 1986 through 1998, under lower loan rates since the 1985 farm law, averaged 8.059 billion bushels. Since the 1996 "Freedom to Farm" law was enacted, U.S. corn production has averaged 9.417 billion bushels. This major increase in corn production has taken place under the low--and extremely low--loan rates ranging from $1.57 to the current $1.89.

Meanwhile, total world grain production has risen from 1,671 million metric tons in 1989/90 to 1,850 million metric tons in 1998/99, as forecast by USDA's Economic Research Service. That's an increase of 179 million metric tons or about seven billion bushels. So low U.S. price supports did not discourage foreign grain production. Just the opposite scenario unfolded.

FLAWED ASSUMPTION #4: U.S. grain exports will steadily increase through the year 2007.
It's only one year since USDA issued its report, "International Agricultural Baseline Projections to 2007" and they already have missed their projections for U.S. corn exports by over half a billion bushels. That report projected U.S. corn exports to be 2.251 billion bushels in MY 1998/99. The most recent World Agricultural Outlook Board supply/demand report, issued on February 12, only projects U.S. corn exports at 1.725 billion bushels, a shortfall of 526 million bushels, yet these USDA baseline projections are being used to make a case for continuing the 1996 farm law through 2007.

FLAWED ASSUMPTION #5: The 1996 farm law would bring about profitable grain production for U.S. farmers.

When the full economic costs of producing a bushel of corn in 1996 is taken into account, the cost was $2.82, according to the USDA. Because the 1995 corn crop was reduced by over 2 billion bushels, farm prices were a little over the cost of production. However, using 1995/96 production costs and USDA's average yield, U.S. farmers spent $2.88 to produce a bushel of corn in 1996/97 and only received an average price of $2.71, a loss of 17 cents on every bushel.

Based on USDA projections for 1998/99 yields, the cost of producing a bushel of corn will be about $2.82, using the questionable assumption that input costs did not go up since 1995/96. Even using the $2.82 figure and optimistic yields, farmers will only receive $1.95 per bushel, a loss of nearly $1 per bushel.

"That record can hardly be considered as bringing profitability to corn production under the 'Freedom to Farm' law," McGuire adds. "This data is just more glaring proof that this farm law is not about helping farmers at all. It is clearly about subsidizing multinational grain processors, grain traders and grain exporters on the backs of farmers.

"This farm policy forces farmers to use the equity in their land and equipment to subsidize that handful of multinational corporations that were already some of the most profitable corporations in the U.S. and world economies before the 1996 farm law."

FLAWED ASSUMPTION #6: Farm and trade policy, including funding the International Monetary Fund (IMF), World Bank, etc., and bailing out failing foreign economies, enhances U.S. export potential.

Here again the reality is that the U.S. Treasury is being used to finance the very foreign competitors that U.S. farmers are told this farm program helps us compete against in the world market.

A most recent example of these "conflicting policies" can be seen in Brazil which recently received a $41 billion IMF bailout. Following IMF guidelines, Brazil then devalued its currency (the real) which raised the domestic Brazilian soybean price by nearly 30% since January 13, 1999.

Far from helping make the U.S. more competitive, these policies have encouraged expanded soybean production in Brazil.

And with IMF austerity policies, that extra soybean production must be sold mostly on international markets because a) Brazil cannot absorb the increase and, b) the country needs to generate cash through international sales to pay off its debts.

But those sales will, of course, only drive world prices lower, which, in turn, will encourage Brazil to export even more beans to generate the money it needs to meet its international debts. And it will have the beans to export because high domestic prices will fuel soybean expansion.

"These facts," McGuire adds, "make an even stronger case for changing current farm policy! If our federal government is going to bail out foreign competitors in the interest of the U.S. and world banks, then our government owes farmers and the rural economy a much better farm program to offset the damage done."

FLAWED ASSUMPTION #7: Corporate concentration in agriculture provides benefits to U.S. consumers via lower food prices:

This flawed assumption is demonstrated by the recent takeover of the pork industry by mega factory farms. The resulting massive drop in pork prices forced upon family farmers has demonstrated again that corporate concentration does not benefit consumers. Indeed, pork prices in the supermarket have not gone down while family farmers are being forced out of business. Meanwhile packers are recording record profits. McGuire challenged the testimony recently provided to the House Agriculture Committee by an economist for the Center For Study of Rural America at the Federal Reserve Bank of Kansas City who told the lawmakers that consolidation in agriculture is "generally a positive trend" that leads to lower-priced and higher quality food for consumer.

"Ask the consumers," McGuire implored the Committee, "who have dealt with e-coli or other dangerous micro-organisms that have shown up at the same time that the concentration trend has escalated in agriculture, if consolidation leads to higher quality food."

FLAWED ASSUMPTION #8: Lower loan rates and eliminating set asides were necessary in order to achieve "planting flexibility."

The reality, McGuire declares, is that planting flexibility will work just fine with both higher commodity loan rates and voluntary acreage set asides.

"If it is determined by the Congress that the national policy of the United States is to export grains and oilseeds at prices below the farmers' cost of production (plus a profit), then the Congress should subsidize the exporting companies directly," he said.

"BUT," McGuire quickly warns, "grain and oilseed exporting cannot continue to be done on the backs of farmers, at these ridiculously low prices. I'm certain that U.S. consumers and taxpayers do not expect farmers to subsidize all other sectors of this thriving U.S. economy, as we are today, under the 1996 farm law."

He argued that the U.S. Congress should give considerable weight to the federal farm policies supported by the majority of farmers surveyed by professional, independent and reputable research firms as opposed to a handful of multinational grain and livestock exporters, processors and futures traders who have a fundamental economic conflict of interest regarding support prices and other federal farm program provisions.

McGuire pointed out to the committee that the farm program policies supported by the corn growers association are the policies supported by 75% of the nation's farmers, based on data in a national scientific survey of 1,000 U.S. grain farmers conducted in September 1998 by Rockwood Research, a subsidiary of Farm Journal, Inc..

The study showed that 73% of the farmers surveyed agree that "Congress should lift the loan caps and raise loan rates 59 cents per bushel on wheat and 32 cents on corn." Seventy-five percent of farmers agreed that, "A farm program should retain planting flexibility and include normal crop acreage set asides."

"The 1996 'Freedom to Farm' law has created a disastrous situation in the farm economy.

"Farmers need a referee in the marketplace," McGuire stated."That referee role can only be provided by the federal government. Congress must pass a stronger farm program that serves as a price referee to give farmers some bargaining power against the giant corporations that buy the grain and livestock produced by farmers. A much higher loan rate in the farm program, combined with a farmer-owned and controlled reserve and acreage set asides will provide the such needed bargaining and marketing tools."

A.V. Krebs is the author of The Corporate Reapers: The Book of Agribusiness (Essential Books: 1992)

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