Commodities: A Historical Look
Why The Government Must Play a Role
Left to the free market alone, farmers face quite a dilemma. No individual farmer can determine crop prices; however, when all farmers together grow more of a particular crop, the price drops. For an individual farmer, the best strategy is growing as much as possible while hoping the price stays high enough to cover his or her costs. Together, when all farmers do this, the price of the crop falls - often below the cost of production.
During the Great Depression, FDR set out to restructure the market farmers faced in order to help them stay solvent. The programs started then (which live on today in some form) are outlined in the Agricultural Adjustment Acts of 1933, 1938, and 1949 and the Commodity Credit Corporation Act of 1948.
Initially such programs addressed goals of providing a fair market for farmers (and thus a stable food supply and economy for Americans) and conserving natural resources. Over time, they have been corrupted to profit major corporations, often at the expense of both farmers and taxpayers.
How the Government Can Create a Fair Market
While American commodity programs can be convoluted, note that the government has only three real tools in their bag of tricks:
1. Control supply
2. Establish price controls
3. Allow the free market to determine the price and pay farmers the difference between the market price and a government-determined "fair" price via subsidies.
Large corporations that buy commodities prefer option #3 because it lowers the price they pay to farmers while sticking the taxpayers with the bill. Since often farmers barely keep their heads above water even with the subsidies, under this strategy farmers boost production as much as possible - thus even further lowering the price for buyers of commodities.
While anyone who has taken even a high school economics class has heard the case against setting price floors (they lead to surpluses), in the case of farming, think of a price floor like a minimum wage. On the labor market, if employers were allowed to pay workers the lowest amount possible while still being able to keep enough employees to run their businesses, certainly wages would sink below the minimum wage. However, it seems inhumane to force an employee to work full time while compensating them so poorly they cannot afford basic needs. If this is so for those working for an hourly wage, why would we feel differently about fairly compensating farmers?
In the past, the government tended to utilize tools #1 and #2 (controlling supply and prices), but as our laws have been re-written by increasingly industry-friendly lawmakers, we've moved towards relying on #3.
Which Crops Are We Talking About
The crops affected here are commodities, which are typically tradeable and non-perishable. Those included in our farm bill are: wheat, corn, sorghum, barley, oats, cotton, rice, soybeans, oilseeds, milk, peanuts, wool, beets, cane beets, sugar, mohair, honey, dry peas, lentils, and chickpeas. Of these, the major ones are wheat, corn, cotton, soybeans, and rice. Since crops that depend on federal subsidies are difficult to kick off the federal dole, the list was established based on crops important in the 1930's, when the programs all began. Tobacco was also on the list, up until 2002.
Controlling Supply
One way to control supply while also accomplishing conservation is to pay farmers to take marginal lands out of production. People often scoff at the notion of paying farmers not to farm, but in reality, this method makes some sense. After all, if the farmer were to use the conserved land - either to farm it or to, say, sell it so someone could build a gas station on it - that land would provide a stream of revenue. In order to use the land for the public good by conserving it, the government has to compensate farmers for that lost revenue.
Controlling Price
Typically, farmers sell their crops after harvesting them. With all farmers selling their crops at once, prices fall around the time of the harvest. In the past, the federal government used this situation to create a de facto price floor.
In order to do so, the government allowed farmers to take out loans, using their crops for collateral. The value of the loan rate was set by legislation. If a farmer did not wish to sell his or her crop when the price was lowest, he or she could take out such a loan. If prices rose during the year, the farmer would pay back the loan (plus interest) and then sell the crop. If not, the government would take possession of the crop to sell when prices rise or to use as food aid. The loan rate essentially became a price floor because the government removed the crop from the market when the price fell below it.
Recent Changes
As noted above, the large corporations that buy commodities do not like when the government controls price or supply. Thus, the loan rate ceased to serve as a price floor in 1985.
In 1996, the Freedom to Farm Act attempted to pull the government out of the agriculture business altogether while giving farmers "transition" payments to help wean them off government assistance. These transition payments were calculated based on each farm's production history - regardless of which crops that farm grew at present. However, this deal came with a catch: farmers transitioning to growing fruits and veggies were no longer eligible to receive their transition payments.
While we are taught to worship the invisible hand of capitalism, allowing farmers to deal directly with the free market does not necessarily work - primarily for the reasons given at the top of this page. Additionally, unlike a factory that can shut down in order to save costs when prices fall too low, once a crop has been planted, the farmer cannot turn it off like a machine. Furthermore, many times when a farmer cannot earn enough to keep farming, he or she sells the land to another farmer, thus failing to lower supply (and presumably increase prices).
Ultimately, the transition payments established in 1996 were not the savior they were meant to be and Congress was forced to provide farmers with annual emergency payments during the late 1990's. The 2002 farm bill tweaked the strategy set in 1996, but fundamentally left it intact.
Source: The Non-Wonk Guide to Understanding Federal Commodity Payments, by The Rural Advancement Foundation International - USA
More information
NYT: As Grain Reserves Drop, Prices May Rise (article) May 31, 1990. A helpful look back at a time when we HAD grain reserves!The Butz Stops Here: A Reflection on the Lasting Legacy of 1970s USDA Secretary Earl Butz (article) February 7, 2008
