All Things Considered: February 2007

Don’t Take Your Eyes Off the Elephant

Back in the early 1980s the United States made a massive change in its agriculture policy. I know it’s something that happened in another country and it’s ancient history, the trouble is we’re still living with it. And we’re living with it and continuing to suffer from it in ways that only a few appreciate.

If you want a quick Canadian example of the problem, consider CAIS and all its predecessors. CAIS and the other programs are and were multi-billion dollar propositions that are a direct result of what the U.S. did a quarter century ago.

What happened was the U.S. moved from de facto supply management to a government financed, or at least bolstered, open market.

From the end of the Second World War until the early 1980s the U.S. government controlled the flow of farm product to market by buying up surplus stocks at a set price and putting the product in storage. When supplies of farm products were tight and prices rose the government released its stocks of stored foodstuffs at a predetermined price.

This system took swings out of supply and demand and as a result curtailed the booms and busts that traditionally plagued farming. The result was stability and it extended beyond America’s borders.

Because of the policy of storing burdensome surpluses, other producing countries knew that a bumper crop in the U.S. wouldn’t flood world markets and collapse international prices. Likewise, if crops were bad and prices rose they knew that the U.S. would move farm products onto the U.S. and world markets, ensuring adequate supplies and keeping a cap on price spikes.

Overall, the program was pretty effective. But in the late 1970s and early 1980s it was being strained because world markets were changing, with Europe shifting from a net importer to a net exporter.

The Americans and many Canadians like to lay the blame for the troubles of the U.S. farm policy solely at the feet of Europe. But American politicians and farm groups must also take responsibility because they started playing games. The government prices were raised beyond anything needed to stabilize production and farm incomes. As a result farmers, who coined the phrase “farming the program,” began turning over increasing amounts of grain to the government. Government elevators and storage facilities were stuffed. More storage was built and filled.

Something had to be done. But instead of returning the program to its foundations, President Ronald Reagan and his advisers decided to blow it up. They wanted to get the U.S. government out of the business of storing food and to become the world’s dominant food exporter.

While the U.S. Congress was willing to go along with that, the local politicians weren’t about to cut off the hands that voted for them. So, while the changes were advertised as freedom to farm or a shift to free market capitalism, it was anything but. Prices were no longer going to be supported by controlling supply, but U.S. farm incomes and internal U.S. prices were to be supported with federal government cash.

Initially this was done by a combination of export subsidies, government inflated domestic pricing and straight transfers of cash. Over the years the program has been changed and modified, but its fundamentals remain the same – the U.S. government spends tens of billions of dollars to support farm incomes and prop up production, particularly for grain.

Where Canada and other countries came in was during the first days of that change.

Prior to the change Canadian agriculture, and grain production in particular, was enjoying its best years ever. Demand was strong, as were prices.

Canada had a few stabilization-type programs but they cost the government little. Few knew that all of that was about to change.
The tenor of the times may be captured by the following anecdote.  John Miner and I were agriculture reporters at the Leader-Post in Regina. We attended a talk by Andy Schmitz, a Canadian born U.S.-based agriculture economist. During the talk he warned that the Americans were about to change their farm program and the result would be that world and Canadian wheat prices would fall $1.00 a bushel the day after the legislation was passed.

Almost no one took the warning seriously. But John and I being forewarned were forearmed. We told a disbelieving managing editor and when it happened we were ready.

World prices did drop. Expected increases in the initial wheat prices never materialized.

When initial prices were announced for the next crop year they had fallen below the cost of production. The Canadian government reluctantly started down the road of billion dollar ad hoc farm programs and followed those up with an alphabet soup of more formal programs like GRIP, NISA, and now CAIS.

Billions of dollars have poured from Ottawa over the years. Around the world agriculture policies and programs are a mess.

While there were a host of subtle forces and some dynamic changes in agriculture production that got us to this point, the seismic shift that turned the farming world upside down originated on Capital Hill in Washington, D.C. and it originated in a political change in the White House and Congress.

This year, the Congress once again changed hands. Canadian farmers would be well advised to watch this new group. As a whole they seem more protectionist, but just as willing to support multi-billion dollar farm programs.

It is entirely possible that they will push through Country of Origin Labeling for food and boost ethanol subsidies. They are also likely to be more willing to enact and employ trade barriers and trade actions.

There is also a move afoot to extend direct U.S. farm program payments to fruits and vegetables – products that never before needed or received subsidies. But now everything from garlic to apples is facing direct competition from China. U.S. producers have seen their prices collapse and markets shrink. I suspect the new Congress will be inclined to help them.

It’s also no secret that significant parts of the U.S. poultry industry are facing troubles. They may or may not turn to Washington for help. But if they do, Canadian producers should keep a close eye on the amount and type of assistance requested.

While it is unlikely that whatever they do will have as great an impact as what happened 25 years ago, it would be wise to keep eyes open and ears attuned because it seems the U.S. elephant is restless and you want to ensure you don’t get trampled.