Role of Government in Agricultural Markets

1. Role of Government in Agricultural Markets • Food safety and consumer protection • Trade regulation and producer protection • Research and education • Market efficiency

2. Consumer Health and Safety • Food and Drug Act • 1906, 1938 • 1958 Delaney Clause • Food Quality Protection Act • 1996 replaced the Delaney Clause • Initiated HACCP • Wheeler-Lea Act 1935 • Truth in advertising • Labeling laws, 1973, 1990

3. Labeling Claims • Trend to product differentiation • Evaluate label claims • Production claims • Organic standards established • Not all terms have standard definition • “Natural” “Nebraska Corn-Fed Beef” • USDA-AMS is establishing standards for • Naturally raised • Grass-fed • Other claims

4. Regulations on Food Prices • Price control or freezes • Typically war time and/or rapid inflation • Retail price freeze -> farm price impact • WWI 1917-18 • WWII 1941-1946 also rationing • Korean conflict 1950-1953 • 1971-1973 inflation

5. Economic and Social Progress • 1862 Department of Agriculture • 1862 Morrill Land Grant Act • 1887 Hatch Act, experiment station • 1914 Smith-Lever Act, extension • Currently over 10,000 agricultural researchers employed by gov’t

6. Regulate Competition • US founded on private enterprise • Concerns about market power • 1890 Sherman Anti-trust Act • 1914 Clayton and FTC Acts set rules • 1936 Robinson-Patman Act • Price discrimination illegal unless economically justified

7. Regulations of Monopolies • Recognized natural monopolies and dealing with monopolies • Capper-Volsted Act 1922 • Right of farmers to collectively bargain • Agricultural Marketing Act 1937 • Established marketing orders for dairy and fruit and vegetables

8. Facilitate Trade and Service • PSA 1921 • Set standards for trade • Assured prompt payment • Changed to GIPSA in 1990s • Grades, weights, & standards • Promotion and research 1980s • Checkoff activity

9. Data and Price Reporting • Competitive markets require equal access to information for buyers and sellers • USDA-NASS • Acreage, yield, inventory, etc • Farm number and demographics • USDA-AMS • Price reporting • Slaughter and production • State and Federal partnership • Auctions and grain prices

10. Mandatory Price Reporting • Federal law passed congress in 1999 • Started with 7 Midwest states initiating new price reporting regulations • Industry and government found it “better” to have a single federal regulation • Slaughter cattle, hogs, lambs and wholesale beef, lamb but not wholesale pork • Currently • AMS collects, reports summary, doesn’t keep individual company prices • GIPSA can demand all records from companies to do an investigation if they have just cause

11. Standardization and Grading • Reduces marketing costs • Improves communication • Possible to trade on description rather than inspection • Grading sorts commodities by defined quality standards • Quality grades typically optional

12. Criteria for Grades and Standards • Based on characteristics that • Are important to users • Are easily recognizable • Can be measured and interpreted by graders to reduce variation within a grade • Have common terminology • Represent the distribution of production • Make it cost effective to operate

13. Public or Private Grades • Use differs by industry • Cattle use USDA grades • Grading done by USDA employee • Hogs use private grading • Grading done by employee of buyer • Grain use USDA standards but grading by the buyer

14. Examples of Grades: Beef • Quality grade uses marbling as a measure of eating experience (taste, texture, juiciness) • Yield grade is measure of retail meat yield in the carcass Quality Grades Yield Grades Prime 3-4% 1 11-12% Choice 60-65% 2 48-50% Select 30-35% 3 33-40% Standard --- 4 1-2% 5 <1%

15. Examples of Grades: Hogs • Historically used USDA grades (US 1-2) • Moved to objective measures of the carcass • Measurement systems • Carcass weight ranges • Carcass Leanness • Backfat measure at 10th or last rib • Fat-O-Meter measure fat thickness and loin depth to estimate percent lean in the carcass • Ultrasound to estimate percent lean in carcass

16. Examples of Grades: Grain Class: #2 Yellow Corn • BCFM (Max)1/  3.0% • Damaged Kernels (Max)2/ 5.0% • Moisture (Max)  14.5% • Test weight (Min) lbs./bu 54.01 1/ Broken corn and foreign material 2/ Includes heat damaged kernels (0.2% max)

17. Examples of Grades: Grain • Class #2 Yellow soybeans • Foreign Material (Max.) 2.0% • Damaged Kernels (Max.)1/ 3.0% • Splits (Max.) 20.0% • Moisture (Max.) 14.0% • Test Weight (Min.) lbs./bu. 54.0 • 1/Includes heat damage kernels (0.5% max)

18. Examples of Grades: Grain • Class: #2 Soft White Wheat • Protein: Ordinary • Moisture (Max): 13.5% • Dockage (Max): 0.6% • Test weight lbs/bu (Min.): 58.0 • Falling Number (Min.): 300 • Wheat of Other Classes (Max): 3.0% • Total Defects (Max):1/ 3.5% • 1/ Includes damaged kernels, foreign material, shrunken & broken kernels

19. Mandatory v. Optional Grades • Few precedents for compulsory • Cost may increase if mandatory • Industry may already have grades • Grades may inhibit innovation • Produce to the minimum to make a grade • May not match convey value trait as well as another measure, i.e., tenderness

20. Problems of Grades and Standards • Subjective nature of “quality” • Made for industry not consumers • Designing grades and grading methods • Accurate, fast, cheap, meaningful • Number of grades • Implementing grades

21. Farmers and Grades • Not always used • May not trust of grades or grader • Risk – reward • Large discounts on small percentage • Small premiums on small percentage • Direct measurement possible with new technology • Percent lean • Protein percent

22. Marketing Agencies & Grades • May add value to commodity • Role of private brands • Larger firms may develop own grades • Specification contracts with more detail may replace grades

23. Consumers and Food Grades • Grades often confusing and offer little differentiation • Consumers often do not understand grades • Brand loyalty may replace uniform grades

24. FARM POLICY • Historically, agriculture has been highly protected in many countries, including U.S. • Main reasons advanced for supporting domestic farmers: • Risk reduction • Shield farmers from weather and world price volatility • Food security • Ensure country’s food supply • Rural society • Stimulate rural economy • Promote rural development

25. FARM POLICY Food and Nutrition Trade Policies to Support Farm Income Rural Development Natural Resources

26. FARM POLICY • Evolution of U.S. farm and rural sector

27. Evolution of U.S. farm policy • 1920s: • Emphasis on “orderly marketing” • Encouraged storage and marketing throughout the year • Provided loan-storage programs • 1930s: • Forerunners of current farm programs • Favored supply control to achieve “fair” prices • Acreage controls, import and marketing quotas, soil conservation programs • 1940-52: • Large increase in U.S. farm prices and incomes • Consumers faced wartime food rationing and price controls • Farm programs established in 1933-38 continued with minor modifications

28. Evolution of U.S. farm policy • 1950s and 1960s • Great expansion in productive capacity due to science and technology • Downward pressure on prices due to enhanced productive capacity • Previous farm programs continued and worked on supply and demand policies • “Food for peace program” 1954 • Soil Bank program of 1956 • Food Stamp Act of 1964

29. Evolution of U.S. farm policy • 1970s • Prices and farm income increased due to large expansion in worldwide demand • Increased world population and incomes, and devaluation of U.S. dollar relative to other currencies • Enhanced outlook triggered a large supply response • Planted acres increased by 47 million between 1969 and 1978, took land out of Soil Bank • Increase in quantity supplied led to depressed prices and farm incomes by the end of the decade

30. Evolution of U.S. farm policy • 1980s • Compromise between two views • More market orientation: Flexible price supports, less government purchase and storage, greater reliance on direct subsidies to farmers • Government intervention to improve balance between supply and demand: Acreage controls, selective reductions in support prices, export subsidies

31. Evolution of U.S. farm policy • 1990s • FAIR Act of 1996 • “Decoupled Payments” • Removed linkage between farm income support payments and farm prices • Declining support payments over 1996-2002 period • Ended supply controls, giving farmers flexibility regarding crop choices • Loan Deficiency Payments (LDP) replaced non-recourse commodity loans • Promotion of export market development, especially for higher value-added products • More emphasis on conservation

32. Evolution of U.S. farm policy • 2000s • Emphasis on risk management with subsidized crop insurance and new insurance products • Farm Security and Rural Investment Act of 2002 • Extends market-oriented reforms of 1996 FAIR Act • Introduces Countercyclical Payments • Triggered when current prices fall below target level, but amount paid based on historical production • Three types of farm income support programs • Decoupled Payments • Countercyclical Payments • Marketing loans

33. Evolution of U.S. farm policy • 2000s • Emphasis on risk management • Farm Security and Rural Investment Act of 2002 • Extends market-oriented reforms of 1996 FAIR Act • Introduces Countercyclical Payments • Three types of farm income support programs • Conservation programs • All programs are expanded • New working-lands conservation payments through Conservation Security Program • Rural development • New programs and increased funding for rural areas • Trade • Expanded support to promote export market development, especially for higher value-added products

34. Farm Policy • A function of their time • Farm income and society • Current thinking and innovation • A function of government budgets • Slow to change • Often see response quickly • Devil is in the details

35. Summary • Policy • Protection • Infrastructure • Market efficiency