Ag Policy, Lecture 8 Knutson 6 th Edition, Chapters 2 & 7 Knutson (Fourth Edition), Chapter 10

1. Ag Policy, Lecture 8Knutson 6th Edition, Chapters 2 & 7Knutson (Fourth Edition), Chapter 10 • Farm Policy History

2. Farm Program Options • Free Market • Price Supports • Price guarantees • Government purchase programs • Supply Controls • Land retirement • Acreage reduction • Acreage Allotments & Quotas • Direct Payments • Crop Insurance • Buyouts

3. Historical Overview of U.S. Agricultural Policy • 1776-1929 The Settlement Period • 1929-1954 The New Deal Era • 1954-1970 Flexible Price Supports • 1970-1996 Coupled Direct Payments • 1996-Present Decoupled payments

4. 1776-1929 The Settlement Period • U.S. declared independence from Great Britain largely because of repressive ag policies: • Taxing and controlling exports • Limiting westward settlement • Collecting fees on settler’s land purchases • Homestead Act (1862) • Citizens or any person who intended to become a citizen • Homestead 160 acres of public land • Purchase at nominal fee after living on the land for 5 years

5. 1776-1929 The Settlement Period • Morrill Act (1862) • Donated Public Lands to the States and Territories to support Colleges – Agriculture and the Mechanic Arts • Hatch Act (1887) • Established agricultural experiment stations • Smith-Lever Act (1914) • Set up the Cooperative Extension system to communicate new technologies directly to farmers.

6. 1929-1954 The New Deal Era • Following WWI (1920-21) ag prices dropped and the farm economy became depressed • Things got worse through the 1920’s and the beginning of the Great Depression • 1929-1932, index of ag prices dropped 56% • 1929-1932, net farm income fell 70% • Did the Farm Depression lead to the Great Depression?

7. 1929-1954 The New Deal Era • President Roosevelt was elected (1932) on the promise of a “new deal” • Many program provisions of today began with Agricultural Adjustment Act of 1933 • Price Support Loans • Production Controls • Commodity Storage • Crop Insurance

8. Agricultural Adjustment Act 1933 • Gave the Secretary of Ag authority to: • Reduce acreage • Agreements with processors to control prices paid to producers • USDA could spend money to expand markets or remove surpluses • Financed by a processing tax • Secretary Wallace, “The present program for readjusting productive acreage to market requirements is admittedly but a temporary method of dealing with an emergency.” • Milton Friedman, “Nothing is so permanent as a temporary government program”

9. Agricultural Adjustment Act 1933 • Consequences of AAA 1933 • Over thrown by the Husac-Mills case over processor fees • Idled millions of acres of land • 30 million acres of cotton before ’33 Act 15 million afterwards • Passed AAA 1936 as a replacement • Basic price support program used for 60 years • Reduced output by paying producers to idle land or kill cattle and sheep • Financed by drawing money from Appropriated funds

10. 1929-1954 The New Deal Era • Farm Credit Administration (June 1933) • Emergency and long-term credit programs • Soil Conservation Service (now NRCS – National Resource and Conservation Service) established in 1935 • In 1933, federal government began nutrition assistance • Direct distribution of surplus foods, school lunch, and food stamps

11. 1929-1954 The New Deal Era • World War II brought a new farm program that encouraged expanded production • 49 million acres added to production • Agriculture Act of 1949 • Last farm bill enacted without an expiration date • A goal was to transition to peace time levels of production • Permanent Legislation

12. 1954-1970 Flexible Price Supports • 1954 Farm Bill • Gave Secretary discretion on setting support prices • Major program crops treated as a group • Began to focus on export market potential • Agricultural Act of 1956 established the Soil Bank • Goal was to adjust supply by taking land (49 million acres) out of production

13. 1970-1996 Coupled Direct Payments • Move toward market orientation • 1970 and 1973 Legislation • Introduced “income support” through direct payments to farmers. Payments triggered below target price • Attempt to become more competitive in world markets by shifting to direct payments and lowering support prices • Payment Limits • Production Controls

14. The “Golden Years” • Early 1970s • Bad weather in U.S. and around the World • Russians started buying grain (wheat and corn) • Prices high “parity” • Parity prices – that price which today gives a unit of the commodity (bushel or pound) the same purchasing power as it had in 1910-1914 (the Golden Era of Agriculture) • 73% increase in real net farm income 1970-73 • Land values rose 376% in the 1970s

15. 1980’s ^%$#*&#@@# • Double digit inflation and depression lead to tight money policy of Reagan years • Exports were shut off • Prices fell • Land values dropped • Farm financial crisis • Prices rested at the support price and Government stocks accumulated

16. 1980’s ^%$#*&#@@# • Efforts to reduce surplus and government stocks • PIK (Payment In Kind) 1983 • Switch to Marketing Loans (1985) • CRP, Conservation Reserve Program (1985)

17. 1990’s Budget/Trade Driven Policies • 1990 Farm Bill and Budget Reconciliation • Across the board 15% reduction in direct farm payments • 1996 Farm Bill (Freedom to Farm) • Decoupled, Fixed income support • Transition out ? • Satisfied Budget and Trade issues • Congress showed no restraint in the face of low prices

18. Today • 2002 Farm Bill • Kept fixed “transition” payments, now call Direct Payments • Added Counter-cyclical payments, Return of target price • Kept Decoupled provisions

19. Lecture 8, Wrap up • Know the significance of each of the six policy periods • Know the Policy Acts that established the Texas A&M University System • Next Class • Policy Tools (chapter 7)