Declining crop prices affecting U.S., world ag policy

By JULIET BRISKIN | Staff writer

International demands to reform the U.S. cotton subsidy program are based on the argument that U.S. commodity payments are due to overproduction, and overproduction has caused prices to plummet, cited a researcher.

February 5, 2004 -- Unprecedented international scrutiny and dramatically declining crop prices worldwide are forcing U.S. policymakers to rethink current agricultural policies.

During the 2004 Beltwide Cotton Conferences in San Antonio, Jan. 5-9, Kelly Tiller of the University of Tennessee delivered a paper she co-authored with Harwood Schaffer on U.S. agricultural subsidies and their role in the current worldwide agriculture crisis.

According to Tiller, there are a number of things in U.S. and world agriculture that have led to the rethinking of agricultural policy as a whole.

"Obviously crop prices have plummeted in recent years effecting both farmers in the U.S. and worldwide," she began. "Currently the U.S. pays about $20 billion dollars per year in annual cash direct payments to farmers and it is estimated that total supports in all developed countries are as high as $300 billion dollars per year."

Tiller continued by explaining the primary beneficiaries of the low crop prices are the large integrated livestock producers, agribusiness processors, agribusiness input suppliers, and U.S. import customers.

"Other countries have accused the U.S. of dumping or selling crops on global markets at prices below the cost of production," stated Tiller. "To further exacerbate these problems, developing countries in general are not able to afford cash subsidies to offset the low commodity prices."

Cotton is grown commercially in a large number of countries, relative to other crops, and it is a major cash crop in many less-developed countries, explained Tiller. Because of this, cotton is unique from many other commodities.

"The declining cotton revenues have a proportionally larger impact on the GDP of these less developed countries," said Tiller. "The farmers in these countries have few if any protection mechanisms to help them offset the low market prices."

According to Tiller, international demands to reform the U.S. cotton subsidy program are based on the argument that U.S. commodity payments are due to overproduction, and overproduction has caused prices to plummet.

"The rationale continues that because the U.S. is the price leader, those low prices have been transmitted globally," she explained. "Following that logic, the elimination of U.S. subsidies would cause the number of planted acreage to decline in the this country, in turn causing a decrease in prices around the globe."

Tiller then raised some questions. "Are the problems of overproduction, low prices, high levels of government support and dumping of commodities policy induced problems? If the answer to that is 'yes' then why didn't the policies work the way they were expected? It follows then that the real question becomes what would be the impact of eliminating U.S. subsidies," she asked. "And finally what needs to be considered when evaluating alternative policy scenarios?"

Tiller believes, to a large extent, the problems that exist today are policy induced. "But it is very important to understand the cause-and-effect relationship," she explained. "In fact, low prices trigger larger subsidies, not the reverse. I have to point out that for policy analysis purposes you have to consider aggregate impact in the agriculture sector. It is misleading and certainly not the whole picture, to isolate crops.

"The policies in place have not worked as expected because technology has expanded output faster than population and exports expand demand," continued Tiller. "This has led to chronic over production. Coupled with that we have market failure in the agriculture sector where lower prices do not solve the problem of over production as in other sectors of the economy."

When considering what would happen if subsidies were eliminated, Tiller and her team used two models. "Remember the logic discussed earlier, if subsidies are actually the cause of low prices, it follows then that eliminating those subsidies should increase prices. The POLYSYS model, jointly developed by USDA's Economic Research Service and the University of Tennessee's Agricultural Policy Analysis Center, examines a scenario where we eliminate all direct government U.S. subsidies in 2003," explained Tiller. "What we saw was minor changes in aggregate acreage and prices, a large decline in net farm income and switching and adjusting among crops.

"Then there is the model that the International Food Policy Research Institute (IFPRI) uses, the IMPACT model, where all direct subsidies are eliminated in all developed countries over the next few years. What we saw with this model was a relatively insignificant price impact as well."

Tiller emphasized that when evaluating alternative policy scenarios it is important to look at the aggregate policy impacts and the actual nature and behavior of food and agricultural markets.

"There are unique characteristics in agriculture," she stated. "These characteristics need to be noted and taken into account."

In summation, Tiller stated it may be impossible for one nation's policy to cause changes unilaterally and that coordination of international efforts may be required in the future.