Michael Coates sits at his kitchen table, an inch-thick legal document before him, a pile of transcripts from trade hearings stacked by his feet.
The papers describe how American subsidies that encourage overproduction and depress grain prices have hurt Coates and fellow corn growers.
Back in 1996, Coates was blissfully unaware of the messy details of farm programs in the United States.
He was rolling into two bountiful years on his grain farm near Carman, Man., when corn yielded $6 to $7 per bushel.
But the U.S. programs have weighed on his mind since the spring of 1998, when corn prices nose-dived to $2.60 to $2.70 per bu. based on the cross-border bargains Manitoba feed mills could get by buying American grain.
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Driven by concern over his bleak financial picture and a growing realization he would not be bailed out by Canadian government programs, Coates started crunching numbers.
He learned subsidies not only supported U.S. farmers’ income, but encouraged them to grow more grain, adding to burdensome stocks.
Coates’ analysis led to a trade complaint that, for four short months, turned Manitoba corn growers into price makers rather than price takers, thanks to a tariff on corn imports from the U.S.
The Manitoba farmers lost the tariff in March. But Coates is back at work on another complaint he hopes will make the tariff stick. He believes tariff protection is the only protection for feed grain growers against American agriculture legislation called Freedom to Farm.
Unforeseen impact
Back in 1996, Canadian analysts were optimistic U.S. programs had taken a turn for the better with the passage of the Federal Agricultural Improvement and Reform (FAIR) Act.
But market watchers now agree the 1996 bill has significantly affected the fortunes of Canadian farmers.
“What we learned from the 1996 FAIR act was that something that was designed to work one way over time changed quite a bit,” said Lars Brink, chief of foreign agri-food analysis for Agriculture Canada.
Many U.S. analysts are also surprised with the turn of events.
In 1996, economist Ed Young
called the FAIR act a “fundamental reform” and a “milestone.”
“At the time, we were projecting high prices, strong exports for U.S. production and we thought, if anything, it was providing too much assistance,” said Young of the U.S. Department of Agriculture’s economic research service.
In fact, it was an unusual time for agricultural markets, economist J. B. Penn of Sparks Companies Inc. recalled at a recent conference.
Weather problems in 1993 and 1995 left stocks low. “We literally emptied the bins,” said Penn, who has since been named to oversee U.S. farm programs.
The world economy boomed, and demand for food seemed insatiable.
The FAIR act turned U.S. farmers loose from a complex system of subsidies that, since 1933, had restricted what they could grow in exchange for supporting crop prices. The theory was that farmers would be free to follow market signals and plant accordingly.
In 1997, farmers around the world responded to strong prices. Unusually good weather meant bumper yields.
But just as these big crops came to market, a financial meltdown in Asian countries set off a slump in world demand, sucking the life out of commodity prices.
Demand for U.S. exports was hit extra hard because the U.S. dollar soared, buoyed by strength in the rest of the U.S. economy, the USDA’s chief economist explained to congressmen earlier this year.
Between April 1995 and September 2000, the U.S. dollar appreciated by 25 percent against the currencies of grain-importing nations, and by 42 percent relative to currencies of competing export nations, said Keith Collins. Suddenly, the marketing loans program – a cash flow tool that had been part of U.S. farm programs since 1985 – became an income safety net.
In 1996, analysts didn’t think prices would fall below loan rates of $2.58 per bu. (US) for wheat, $1.89 per bu. for corn, and $5.26 per bu. for soybeans.
But they did. And the program turned on the taps for $1.8 billion in 1998, $5.9 billion in 1999, and $7.6 billion in 2000. Money shielded U.S. farmers from lower world prices and encouraged them to keep growing.
“The loan rate is like an open-ended invitation to produce more output,” said Virginia Tech economist David Orden.
Congress also responded with $24 billion in emergency payments.
So, a farm program that in 1996 was projected to cost a total of $44 billion over seven years has so far cost $90 billion, and counting: a new high.
Government payments in the U.S now account for 30 percent of gross farm income, and 60 percent of net cash receipts, said John Gordley, a lobbyist for U.S. oil-seed, barley and pulse growers.
“I can’t remember a time when we’ve been so dependent on farm programs,” Gordley told a Canadian canola meeting in March.
All the extra income has “muffled” market signals, according to a 2000 report from the Organization for Economic Co-operation and Development, which monitors subsidies. Despite record-low prices, farmers have planted record-breaking crops.
“We had a real disconnect in the farm sector there,” observed Penn.
Orden believes as much as one-third of payments from the marketing loan program are offset by lower prices. Those lower prices lead to more calls for government assistance, which perpetuates the vicious circle, he said.
Because traders are confident the U.S. government will continue to support farm income, they don’t have to aggressively bid up prices to get supplies, making markets “lazy,” said a vice-president of Refco, a major commodities trader.
“The market smells the treasury,” said Richard Feltes. “The market smells the money.”
Finding a cure
There’s an old markets expression that says nothing cures low prices like low prices.
“This farm bill ain’t allowing the cure to happen,” said Larry Martin, economist with the George Morris Centre in Guelph, Ont.
By and large, prices Canadian farmers
get for their crops are based on the going U.S. prices. So they get caught in the under-tow of the vicious circle of U.S. programs.
American farmers plan to grow record crops of soybeans and canola this year because of attractive loan rates, noted Randy Strychar, analyst with Statcom Ltd.
Meanwhile, farmers in Canada, Australia and Europe are planning to cut acreage because of depressed oilseed prices.
U.S. corn prices set the pace for all the feed grains Canadian farmers grow. The last time corn prices were this low was 1987, when the U.S. had 4.2 billion bu. of corn to carry into the 1988 crop year.
But today, U.S. ending stocks are a paltry two billion bushels, Strychar said. Prices should be higher.
“Something’s not working here,” he said.
Earlier this year, Martin watched December 2001 corn future prices climb to a 40 cent (US) per bu. premium to March futures prices at a time when they would normally be at a discount.
“The price relationships in the corn contract are just ludicrous. They’re not what should be happening in the marketplace,” said Martin.
But Fred Oleson, chief of market analysis for Agriculture Canada, sees a silver lining for Canadian farmers in Freedom to Farm.
“What’s bad for the grain producer is good for the grain user,” he said, noting feed costs have been lower for livestock farmers.
Cheap prices and the low Canadian dollar have also kept export markets buzzing, he said. And even though the old style of U.S. farm program tended to provide a floor for prices Canadian farmers received, he said it also involved market-wrecking export subsidies.
“The FAIR act just changes the nature of the swimming pool you were drowning in, so to speak.”
