Farming is a capital intensive and inherently risky profession, in ways that are different from most other occupations.
Farmers are primarily prone to two types of risk: the relatively short-term risk posed by natural disasters and the long-term risk of prolonged periods of low prices. Farmers with less capital and liquidity often do not have the resources that they need to mitigate these risks.
The U.S. National Farmers Union sees the federal government’s role in farm policy as providing a safety net to help in these two circumstances when disasters strike and markets collapse. It is also important that these farm programs be structured to provide assistance only when needed and not make payments when times are good.
Read Also
Worrisome drop in grain prices
Prices had been softening for most of the previous month, but heading into the Labour Day long weekend, the price drops were startling.
Crop insurance is a good mechanism to mitigate the short-term risk from natural disasters. However, the federal government has struggled, largely for political reasons, to implement consistent programs that help manage the long-term risk of extended low prices.
Commodity farmers are operating in a system in which they have little control. Farmers are price-takers rather than price-makers, and they sometimes overproduce because it makes sense for them as individuals.
In other words, as commodity prices drop and farmers receive less money per bushel or acre, they try and make up the difference by in-creasing their production, which only drives prices down further.
U.S. federal farm programs were developed as a way to deal with over-production problems and mitigate price volatility. Before 1996, commodity programs dealt with over-production in a systemic way by managing commodity supplies available on the market and establishing a price floor that ensured farmers recouped something close to their cost of production.
These programs were, for the most part, fairly successful in removing incentives for over-production and ensuring a relatively stable price for farmers and consumers. However, the 1996 farm bill dismantled them to give farmers the “freedom to farm.”
Without the market stability provided by the farm safety net programs, commodities flooded the market, prices collapsed and Congress authorized billions of dollars in emergency payments to farmers to prevent large numbers of farmers from going out of business.
More recently, major disasters have resulted in the opposite occurrence: crop shortages and dramatically higher prices.
Some now argue that we are in a new period of high commodity prices and that the risk of long-term price collapse has been eliminated. Therefore, our farm programs no longer need to address this risk.
This sort of wishful thinking is what led to Freedom to Farm. History tells us that what goes up must come down, and high periods will be inevitably followed by decline.
This is why we proposed a voluntary market-driven inventory system (MDIS) to help smooth market highs and lows and provide more stable commodity prices to the benefit of farmers and consumers, both in the United States and around the world.
MDIS would also operate at little cost to taxpayers because it would kick in and provide assistance only when prices are extremely low.
In lieu of such a system, NFU supports implementing a counter-cyclical program to help farmers cover most of their cost of production when prices drop below a set reference price.
Federal farm policy must also help previously under-served farmers mitigate their risk and strive to achieve broader policy objectives.
For example, the farm bill encourages disadvantaged people to buy food from local specialty crop growers to help bridge their nutritional gap while simultaneously providing a market for these farmers and supporting the local economy.
Just as farm safety net programs are important for farmers facing hardship, nutrition programs provide critical assistance to consumers in difficult times.
Farm bill programs remain vitally important, and the legislation currently under consideration will make significant reforms. Congress has a responsibility to our nation’s farmers, ranchers, consumers and rural communities to pass a new five-year farm bill this year.
Roger Johnson is president of the National Farmers Union in the United States. This article was published on the farmfoundation.org website and has been edited for length.
