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VIEWS: 22 PAGES: 404

  • pg 1
									         Setting the Stage

 How much does agriculture matter to
  the U.S. economy?
 How big a player is U.S. agriculture in
  the world?
 How much money does the U.S.
  spend on agriculture?
     How Big a Player is U.S.
    Agriculture in the World?

 #1 exporter of ag products in the
  world
 Over 30% of crop acreage basically
  for export
 What does this mean for policy?
  How much does Agriculture
  Matter to the U.S. economy?

 Depends
  Farming accounts for 1.4% of workforce
   and .7% of GDP
  Entire food and fiber system accounts for
   17% of workforce and 12% of GDP
How Much Money Does the U.S.
   Spend on Agriculture?

 What do you call agriculture?
 Do you define it by:
   What Ag committees have responsibility
    for?
   Production only?
  Allocation of U.S. Budget
Outlays by Function, FY 2001
                                      1%
                                    1%                                                  Defense
                        11%                                     17%
                                                                                        Human Resources
                 5%

                                                                                        Physical Resources


                                                                                        Net Interest


                                                                                        Agriculture

                                                65%
Human Resources includes: health, medicare, social security, etc.
                                                                                        Other
Physical Resources includes: transportation, community and regional development, etc.

Source: Budget of the U.S. Government
www.whitehouse.gov/omb/budget/fy2003/pdf/hist.pdf
Share of Mandatory Program Spending by Farm
  Bill Title Budget Authority, FY 2002-2011.

                          0% 5%
                          0%
                                                     18%                    Commodities

                                                                            Conservation

                                                                            Trade

                                                                  5%        Food Programs

                                                                  1%        Rural Development

                                                                            Research

                          $782 Billion Total                                Forestry

                                                                            Energy

                                                                            Miscell. (Sec 32 & FCIC)


                   71%

   Does not include funding for discretionary programs which is provided through annual appropriations.
   Based on CBO‘s March 2002 Baseline.
                 Policy

Defn: Guiding principle leading to course of
 action or specific program pursued by
 governments
Programs implement policy
Example:
  Policy -- Pursuit of freer trade
  Programs – NAFTA, FTAA
     Agricultural and Food policy

Principles that guide government programs
 that influence:
  Production
  Resources used
  Domestic and international markets
  Food consumption
  Conditions under which
    rural people live
     More than domestic farm
   programs support farm prices
         and/or incomes
Retirement of fragile land from production
 (CRP)
Negotiation to reduce barriers to trade (WTO)
Water allocation, development and pricing
Food safety and terrorism
Child nutrition (WIC)
Policies and programs are constantly
    changing – Forces of Change

 Instability of agriculture
 Globalization
 Technology
 Food safety
 Environment
 Industrialization
 Politics
 Unforeseen events
            Review of Demand
• Economics – allocation of scarce resources to the
  unlimited wants of people

• Demand is a schedule of the maximum quantity
  consumed at alternative prices

                $




                                              D
                                                  Q/yr
                         Demand
• Change in Demand
• What changes (shifts) demand?
   –   Income (1-3% growth annually)
   –   Population (1-2% growth annually)
   –   Prices of other goods
   –   Tastes & preferences
                           $




                                                        D2

                                           D0   D1
                                                 Q/yr
                         Demand
• Change in quantity demanded
   – Change in quantity demanded occurs due to change in own price



             $



             P
                 0

             P1
                     1


             P 2


                                                D
                         q 0   q 1    q 2           Q/yr
                         Demand
• Elasticity of Demand
   – Own price elasticity of demand
       • %Change in Q Y / %Change in P Y

       • E = %ΔQY / % ΔPY


       • How do you interpret E = -0.25


       • What is Inelastic (Insulin)

       • What is Elastic (Vacation Cruises)


• Factors that influence Elasticity
   – Necessity
   – Availability of Substitutes
                          Demand
• Elasticity of Demand
   – Domestic demand
   – Export demand
      • Why more elastic?


            $




                   -.60            -1.14



                              DD           TD
                                                Q/yr.
                          Demand
• Other Elasticity Measures

   – Cross price elasticity of demand
       %ΔQY / % ΔPX

       • Substitutes
       • Complements


   – Income elasticity of demand
       %ΔQY / % ΔI

       • Normal Goods
       • Inferior Goods
                        Demand

• The limits of Elasticity Measures

   – Difficult to measure demand



   – Difficult to sort out cause/effect
                            Demand
 • Why are measures of elasticity important
      – Predict Policy Impacts
      – Revenue impact
        Ed = -0.25
                                                 Ed = -1.25

Px
                                       Px
5                                      5
4.5                                   4.5                         D
                        D

            8.0   ?              Qx            8.0          ?         Qx
       -0.25 = %∆QY / %∆PY                  -1.25 = %∆QY / %∆PY
        -0.25 = %∆QY / -10                   -1.25 = %∆QY / -10
           2.5 = %∆QY                          12.5 = %∆QY
          8 * 1.025 = 8.2                      8 * 1.125 = 9.0
                   Demand
• Own Price elasticity of demand (Ed) for policy analysis
   New Qt Demanded = Old Qt Demanded * (1+ Ed * %
   Change in Own Price)
Or
   New Qt Y Demanded = Old Qt Y Dem. * [1+ Ed * (Price
   Ynew – Price Yold) / Price Yold]
If E(Qy,Py) = -.25
Calculate Qt Demanded       Px
                        P Old 5
                      P New 4.5

                                                  D
                                   8.0   ?            Qx
                                  Qold
                    Demand
• Cross Price elasticity of demand (Ed) for policy analysis -
   - Substitutes
   New Qt Demanded = Old Qt Demanded * (1+ Ed * %
   Change in Price for Other Commodity) Or
   New Qt X Demand = Old Qt X Demand
   *[1+Ed*(PriceYnew–PriceYold) / PriceYold]
If E(Qx,Py) = 0.15
Calculate Qt Demanded
                             Py                         Dx wrt
                                  6                      Py

                                  5          10



                                                            Qx
                    Demand
• Cross Price elasticity of demand (Ed) for policy analysis -
   - Complements
   New Qt Demanded = Old Qt Demanded * (1+ Ed * %
   Change in Price for Other Commodity) OR
   New Qt X Demand = Old Qt X Demand
   *[1+Ed*(PriceYnew–PriceYold) / PriceYold]
If E(Qx,Py) = -0.15
Calculate Qt Demanded
                              Py

                                   6
                                   5

                                                        D
                                         10                 Qx
                     Demand
• Income elasticity of demand (Ed) for policy analysis
   New Qt Demanded = Old Qt Demanded * (1+ Ed * %
   Change in Income) Or write it as:
   New Qt Demanded = Old Qt Demanded * [1+ Ed *
   (Incomenew–Incomeold) / Incomeold]
If E(Qx,Inc) = 0.2
                            Income
Calculate Qt Demanded                                  Dx wrt
                              26,000                   Income
                              25,000



                                           600mbu           Qx
                        Supply
• 3 stages of production
• Produce in Stage II      II    III
          Output


                    I              TPP




          Output                         X 1 input



                    MPP


                                 APP


                                         X 1 input
                               Supply
• 3 stages of production
• Multiply MPP and APP by Price of the output
          $/Output

                     y*                              TVP = TPP * Py




                 $                        X1                  X 1 input


                     MVP = P y MPP   X1



                                               MFC   X1



                                           *
                                          X1                  X 1 input
                         Supply
• Calculate the Cost functions from production functions
   – Marginal cost curve MC = Px / MPPx
   – Average variable cost AVC = Px / APPx


        $

                                       MC

                                             AVC




                                             Q/yr
                        Supply
• Supply curve is the MC above the AVC for each firm
• Supply is a schedule of quantities of output that will be
  offered for sale at alternative prices
• Where is the shutdown price?


                        $

                                                    MC

                                                         AVC




                                                         Q/yr
                               Supply
     • Firm Supply and Industry Supply
$$
$                                            $
                    $
                    $                                          S




        Firm 1 QY           Firm 2 QY                 Industry QY

     • Factors change Industry Supply for Output Y
        – Technology
        – Costs of inputs to produce Y           S0       S1        S2
        – Ag. Policy                   P




                                                               QtY
                          Supply
• Factors that change Supply Function for firm
   – Price of Input (Px)
   – Productivity of X to produce Quantity of Y (MPP of X)
   – Increased productivity Shifts MC to right
• Analyze impacts on supply for the industry by starting
  with the firm

                $
                                                MC1
                                               MC2
                                                      AVC1
                                                       AVC2




                                                      Q/yr
                                      Supply
• New Technology – BST PST Roundup Ready crops
• Increase TPP >> Higher MPP >> Lower MC
• Supply shifts to the right
Y                                  TPP1             Y
                               TPP0


                                                                            MPP1
                               X
    $
                                                                  X    MPP0
                   MC0
                                     AVC0
                                                $
                                                             S0
                                                                       S1
                         MC1             AVC1



                                   Q Y /yr                                  Q Y /yr
        The Firm                                        The Industry
                          Supply
• Inflation in Input Prices and Supply
   Price input increases Px
   MC = Px / MPPx                        S1
                                              S0
   AVC = Px / APPx                $




                                                         Q/yr
                              $
                                                   MC2
                                                   MC1
                                                         AVC2
                                                          AVC1




                                                          Q/yr
                    Supply
• Elasticity of Supply
• Generally mean the elasticity of quantity
  supplied with respect (wrt) own price
Es = %ΔQtY / %ΔPY
Es = +0.20               PY
                           2.5                    S

                            2


                                    2,600     ?       QtY




Qt Supplied Y = Old Qt Y * [1+ Es * %ΔPy]
Qt Supplied Y = Old Qt Y * [1+ Es * (Price Ynew
  /Price Yold) / Price Yold)]
                     Supply
• Cross elasticity of supply
• Elasticity with respect to the price of another
  crop
Es(QY, PX) = %ΔQY / %ΔPX
Es(QY, Px) = -0.15
                           PX
                             2.5               S of Y wrt PX

                            2.25



                                   2,600   ?              QY
             Supply and Demand
• Equilibrium price is where Demand equals Supply




         $                         S1

                                                   S2



        P1
        P2




                                        D
                       q 1   q 2            Q/yr
          Supply and Demand
• Equilibrium price is where Demand equals Supply
• After the crop has been harvested the supply becomes
  perfectly inelastic
• Supply in the marketing year is S1 or S2


                                    S1    S2
                      $




                     P1
                     P2




                                                   D
                                    q 1   q 2          Q/yr
            Supply and Demand
•   Overall elasticity problem
•   Es = 0.15
•   Ed = -0.4 of FD = -2.50
•   Base Price $2.88
•   Base Qt = 2357
•   New Price 3.00 due to price support
•   Calculate new Qt supplied and new price
                           $
                                                   S



                       P2
                       P1




                                                       D
                                       q 1   q 2           Q/yr
           Welfare Economics
• Consumer surplus (a)

• Producer surplus (b)

• Total Revenue (b + c)

                          $
                                                 s



                              a
                         P1

                                  b

                                      c

                                                     D
                                          q 1            Q/yr

   Chapter 2 of Knutson, Penn, and Flinchbaugh
             Welfare Economics
• Important Assumptions
   – Equal Marginal Utility of a dollar for all consumers and producers
   – No Externalities
   – No pubic goods




                            $
                                                              s



                                a
                          P1

                                    b

                                          c

                                                                  D
                                              q 1                     Q/yr
           Welfare Economics
• Excess Production




                       $
                                                   s



                           a
                      P1

                               b

                                   c

                                                       D
                                       q 1   q 2           Q/yr
         Welfare Economics
• New Technology




                    $
                              s




                   P1




                                  D
                        q 1           Q/yr
            Welfare Economics
• Policy will often create a Deadweight Loss
• Example of a sales tax
   – Portion of Tax Paid by Consumers (Blue)
   – Portion of Tax Paid by Producers (Red)
   – Deadweight Loss (Black)


                                 $
                                                       s


                                     a
                            P*
                       P1
                      P* - tax
                                     b

                                         c
                                                           D
                                             q*   q1           Q/yr
     Macro Economics Review
• Monetary and Fiscal Policy Tools
• Fiscal Policy
   – Spend

   – Taxation

• Monetary Policy
   – Increase Money Supply (Easy Money policy)
      • Buy securities
      • Decrease discount rate
      • Decrease reserve requirement

   – Decrease Money Supply (Tight Money policy)
           Tight Money Policy Increases the Interest Rate


Interest         Snew$
Rate
                         S$




  I0




                          D$

                              Qt
                              Money
                Tight Money Policy Increases the Interest Rate


Interest Rate                       Interest Rate         V$
                           S$




  I0




                            D$

                                Qt Money            V$0    Value US$
         Tight Money Policy Increases the Value of the Dollar


Interest Rate                  Interest Rate         V$
                      S$




  I0




                        D$

                           Qt Money            V$0    Value US$
       Easy Money Policy Decreases the Value of the US Dollar


Interest Rate                  Interest Rate         V$
                      S$




  I0




                       D$

                           Qt Money            V$0    Value US$
       Increasing Taxes Decreases the Value of the US Dollar


Interest Rate                 Interest Rate         V$
                     S$




  I0




                      D$

                          Qt Money            V$0    Value US$
                        Domestic Supply                            Excess Supply

                                                                       World Price1
Price0                                                           World Price0
Price1

                                                                              Demand
                                                                              Exports


                                                                         New Demand
                                                                         Exports

                             Domestic
                             Demand
                      QS0           Qt per Year           Qt Export0        Qt Traded
                                                       Qt Export1

                  Impact of Stronger US Dollar on Trade
• Stronger   US Dollar makes prices of US products more expensive to ROW
• If prices of exports are higher SHOW this as a lower Export Demand
     • Lower exports and Quantity supplied in the US
     • Lower US price
     • Higher price in ROW
    Macro Economic Impacts on
            Agriculture
• Inflation in prices of inputs
• Ag very dependent on purchased inputs
• Income statement affects of inflation
  Profit = TR – TC
  Profit = (PY * QY) – (PX*QX)– I * (Loan +
  PX*QX)
• Inflation raises Px and real interest rate I
• Inflation raises PY about 66% as much but 5
  years later
           Welfare Economics
• Consumer surplus (a)

• Producer surplus (b)

• Total Revenue (b + c)

                          $
                                                 s



                              a
                         P1

                                  b

                                      c

                                                     D
                                          q 1            Q/yr

   Chapter 2 of Knutson, Penn, and Flinchbaugh
             Welfare Economics
• Important Assumptions
   – Equal Marginal Utility of a dollar for all consumers and producers
   – No Externalities
   – No pubic goods




                            $
                                                              s



                                a
                          P1

                                    b

                                          c

                                                                  D
                                              q 1                     Q/yr
           Welfare Economics
• Excess Production




                       $
                                                   s



                           a
                      P1

                               b

                                   c

                                                       D
                                       q 1   q 2           Q/yr
         Welfare Economics
• New Technology




                    $
                              s




                   P1




                                  D
                        q 1           Q/yr
            Welfare Economics
• Policy will often create a Deadweight Loss
• Example of a sales tax
   – Portion of Tax Paid by Consumers (Blue)
   – Portion of Tax Paid by Producers (Red)
   – Deadweight Loss (Black)


                                 $
                                                       s


                                     a
                            P*
                       P1
                      P* - tax
                                     b

                                         c
                                                           D
                                             q*   q1           Q/yr
     Macro Economics Review
• Monetary and Fiscal Policy Tools
• Fiscal Policy
   – Spend

   – Taxation

• Monetary Policy
   – Increase Money Supply (Easy Money policy)
      • Buy securities
      • Decrease discount rate
      • Decrease reserve requirement

   – Decrease Money Supply (Tight Money policy)
           Tight Money Policy Increases the Interest Rate


Interest         Snew$
Rate
                         S$




  I0




                          D$

                              Qt
                              Money
                Tight Money Policy Increases the Interest Rate


Interest Rate                       Interest Rate         V$
                           S$




  I0




                            D$

                                Qt Money            V$0    Value US$
         Tight Money Policy Increases the Value of the Dollar


Interest Rate                  Interest Rate         V$
                      S$




  I0




                        D$

                           Qt Money            V$0    Value US$
       Easy Money Policy Decreases the Value of the US Dollar


Interest Rate                  Interest Rate         V$
                      S$




  I0




                       D$

                           Qt Money            V$0    Value US$
       Increasing Taxes Decreases the Value of the US Dollar


Interest Rate                 Interest Rate         V$
                     S$




  I0




                      D$

                          Qt Money            V$0    Value US$
                        Domestic Supply                            Excess Supply

                                                                       World Price1
Price0                                                           World Price0
Price1

                                                                              Demand
                                                                              Exports


                                                                         New Demand
                                                                         Exports

                             Domestic
                             Demand
                      QS0           Qt per Year           Qt Export0        Qt Traded
                                                       Qt Export1

                  Impact of Stronger US Dollar on Trade
• Stronger   US Dollar makes prices of US products more expensive to ROW
• If prices of exports are higher SHOW this as a lower Export Demand
     • Lower exports and Quantity supplied in the US
     • Lower US price
     • Higher price in ROW
    Macro Economic Impacts on
            Agriculture
• Inflation in prices of inputs
• Ag very dependent on purchased inputs
• Income statement affects of inflation
  Profit = TR – TC
  Profit = (PY * QY) – (PX*QX)– I * (Loan +
  PX*QX)
• Inflation raises Px and real interest rate I
• Inflation raises PY about 66% as much but 5
  years later
            The U.S. Policy Process

    A lot like making sausage
       Why? Many different players
        −     Congress
        −     Special interests
        −     Constituents
        −     Whiners
        −     Academics
    Have to understand the process if you want to
     influence policy
       Ex.       Information is good to a point

    Chapter 3 of Knutson, Penn, and Flinchbaugh


                                                     05
    Economists Role in Policy

 Concerns > Issues > Policies
 Policy Position
   A conclusion about what the role of
    government ought to be with respect to a
    particular problem
   Influenced by facts, myths, and values
                    Issue/Problem

            Facts      Values       Myths

                      Decision
 Facts, Myths, Values, and Goals

 Facts – known with certainty and objectively
  verified
   People tend to agree on facts, disagree on
    composition of facts
 Myths – unscientific accounts perpetuated by
  legend
   Based on tradition or convenience
 Values – concepts of good, right, and desirable
   Jeffersonian agrarianism
 Goals – desired end results or objectives
            Agrarian Myths

 Economic prosperity depends on agricultural
  prosperity
 Rural community well-being depends on
  farmer well-being
 Land is the source of all wealth
 Farm programs are good food programs
 Farmers are environmentalists
 Myths are popular. What people want to hear.
  Become part of policy rhetoric.
   Do not have to be true to affect policy.
 Jefferson Agrarianism Values

 Agriculture is the basic occupation of mankind
 Rural life is morally superior to urban life
 A nation of small, independent farmers is the
  proper basis for a democratic society
 Are these true? Can they be proven? Are
  farmers better people that urbanites?
 If these do not hold, then economics must be
  used to defend price and income support
  programs
                  Policy Goals

   Goals – desired end results for policy
       The purpose to which a policy is directed
   Economic goals
       Economic growth to achieve higher standard of living
       Full employment
       Freedom of choice in economic activities
       Equitable income distribution
       Economic security for those unable to earn minimum income

       Maximum economic benefits at minimum cost
       Stability of prices and incomes
       Sustainable use and preservation of public and private
        resources
       Maintenance of a safe and adequate food supply
   Economists Role in Policy

 Current Events
 Brazil has brought charges against US cotton
  policy in WTO (World Trade Organization)
 Dan Sumner at UC Davis and Bruce Babcock at
  Iowa State Univ.
   Testified at WTO hearing for Brazil
 Now US Cotton Council has threatened to have
  Congress cut their research funding
 What is academic freedom?
 Should a professor take sides?
Economic Theory of Public Choice


  Private Choices
    Key principles:
      −   All resources are scarce or limited
      −   Assumes rational behavior
      −   Prices signal consumption and production decisions
  Public Choices
    Key principles:
      −   1 & 2 above but votes are the market signals of public
          choice instead of price
    Trade-offs (i.e. log rolling, horse trading) on an
     issue by issue basis
 Positive vs. Normative Economics

 Positive economics explains consequences
   Deals with facts
   What is not What should be
   Let the policy makers decide for themselves –
    that is why we elect them
 Normative economics involves value
  judgments about what should be
   ―Economists are the best trained so their values
    are the best for society.‖
   Is this true?
            The Pareto Criteria

 Pareto optimality
   Exists when it is impossible to make anyone better off
    without making someone else worse off
   Very rare
 In policy we tend to use the compensation
  principle as the basis for policy decisions
   As long as those who are made better off by a policy
    change are able to more than compensate those who
    are made worse off, the change is justified
 Welfare economic theory used to measure gains
  and loses
           Welfare Economics
Consumer surplus
Producer surplus
Often in policy there is a deadweight loss


                    $
                                              s


                        a

                   P1


                        b     c


                                                  D
                                  q 1                 Q/yr
         Approaches to Analysis

 Scientific approach
   Scientific method (define prob., review literature,
    formulate hypothesis, objective, draw conclusions)
   Like chemistry lab
 Analytical approach
   Consequences divided into pros and cons, advantages
    or disadvantages
     •   These tend to depend on person‘s point of view
 Evangelistic approach
   Make case for cause and crusade for it
 Educational approach
   Alternatives and consequences
      Four Process Questions

1. What is ?
   Facts, observation
2. What can be?
   What are politics?
   Can it be done?
3. What will be?
   Predictions
4. What should be?
   Value judgments, normative
            Political Spectrum




Liberal                        Conservative
(more government)         (less government)
Influence Triangle


            Kingmakers


              Kings

                Active group

                      Interested group

                          Apathetic
                           group
        Politics of the Minority

 Find allies issue by issue. Not philosophy
  by philosophy
 Build coalitions, compromise, find
  common ground
 Be positive, reasonable, work within
  system
 Base case on facts, not myths or emotions
 Adopt non-partisan strategy
              Policy Process

 Legislative branch – 435 and 100 those
  are the numbers
   Role of Congress: write and pass legislation
 Executive Branch – President and
  agencies can propose legislation
 Judicial Branch – settles disputes
 Interest Groups -- producers, consumers,
  agribusiness, foreign govts.
     Where is The Power in
  Agricultural and Food Policy?
    • Agriculture‘s iron triangle
    • Government
       – Executive Branch
       – Legislative Branch
       – Judicial Branch
    • Other Organizations
       – General farm organizations
       – Commodity organizations
       – Agribusinesses
       – Public interest groups
    • Other departments


Chapters 3 and 4 of Knutson, Penn, and Flinchbaugh
                                                     06
Agriculture’s Iron Triangle


                Interest Groups




  USDA                            Legislative
 Secretary of
  Agriculture                      Branch
Executive Branch

     President


    VP         CEA


         Cabinet
                     Cabinet

•   Vice President
•   Heads of 15 Executive Departments
•   Attorney General
•   Under G.W. Bush Also
    –   EPA
    –   OMB
    –   National Drug Control Policy
    –   USTR (Robert Zoellick)
     Executive Departments
•   Agriculture (USDA)
•   Commerce (DOC)
•   Defense (DOD)
•   Education
•   Energy (DOE)
•   Health & Human Services (HHS)
•   Homeland Security
•   Housing & Urban Development (HUD)
•   Interior (DOI)
•   Justice (DOJ)
•   Labor (DOL)
•   State (DOS)
•   Transportation (DOT)
•   Treasury
•   Veteran Affairs
                     Structure of USDA
                                        Secretary


                                          Deputy




                      Food              Farm & Foreign
                                                             Marketing &
                     Safety               Ag Services     Regulatory Programs
                     FSIS               FSA FAS RMA       AMS     APHIS GIPSA


 Food, Nutrition &                 Rural              Natural           Research,
Consumer Services               Development         Resources &        Education &
                                                    Environment         Economics
 FNS      CNPP                                       FS    NRCS
                              RBS OCD RHS RUS
                                                                     ARS   CSREES ERS NASS
       Legislative Branch
• ―All Legislative Powers herein granted shall be
  vested in a Congress of the United States,
  which shall consist of a Senate and House of
  Representatives.‖ Article I, Section 1
• Membership
   Functions of Congress

• Authorization

• Appropriation

• Oversight
 How a Bill Becomes a Law
Constituents                 Policy Proposals          House and/or Senate
Congress
Executive/Departments

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                          Hammer out differences
                          between House & Senate



                        Floor Approval in Both


                                President
                         Sign <> Veto <> Pocket Veto
    A Simplified Overview of Budget
Authorization and Appropriations Process

                                       President's Budget           OMB and
                                                                  Exec. Agencies
                                         (Late Jan.)
         Congress

                              Budget
                               Resol.
         Budget              (Apr. 15)
        Committees                                       Floor
                Recommendations
                    (March 15)
         Authorizing
         Committees            Authorizing
                              Bills (May 15)
                                                                    Final Budget
                                    Adopted Budget
                                                                 Through Conference
       Appropriations
       Committees &                    Resolution                    Committee
       Subcommittees                                                   (Oct 1)
                                  Appropriations Bills



     Tax Committees
     Action is in Committees
(House and Senate 109th Congress)

• Overall Congressional Leadership
  – Senate Majority: Bill Frist (R, TN)
           Minority: Harry Reid (D, NV)
  – Speaker of the House: J. Dennis Hastert (R, IL)
          Majority: Tom DeLay (R, TX)
          Minority: Nancy Pelosi (D, CA)


• Budget Committee (sets limits on spending)
  – Senate Majority: Jugg Gregg (R, NH)
           Minority: Kent Conrad (D, ND)
  – House Majority: Jim Nussle (R, IA)
          Minority: John Spratt (D, SC)
 Action is in Committees (109th.)

• Agriculture Committee (authorizes ag. and
  nutrition legislation)
  – Senate Majority: Saxby Chambliss (R, GA)
           Minority: Tom Harkin (D, IA)
  – House Majority: Bob Goodlatte (R, VA)
          Minority: Collin C. Peterson (D, MN)


• Agriculture appropriations subcommittee
  (decides what/who gets money)
  – Senate Majority: Thad Cochran (R, MS)
           Minority: Robert Byrd (D, WV)
  – House Majority: Henry Bonilla (R, TX)
          Minority: Marcy Kaptur (D, OH)
Majority is really important
         Farm Organizations

• General farm/agribusiness organizations
  – American Farm Bureau Federation
  – National Farmers Union
• Commodity organizations
  – National Corn Growers
  – National Cotton Council
  – Every commodity has one, and some have
    multiple
 Commodity Organizations
• Most effective organizations in agriculture
  because of focused commodity interests
• Most effective are those that represent entire
  industry (NCC)
• Beef has had conflicts among cattlemen and
  NCBA
• If producer organization goes head-to-head with
  agribusiness, agribusiness normally wins (ex.,
  packer in beef)
• Almost always have related state organizations
• Party alignment is an interesting issue
     Public Interest Groups
Typically focus on only 1 issue
• Environment (Sierra Club, National
  Resources Defense Council, Environmental
  Working Group)
• Hunger lobby (Bread for the World)
• Animal rights (P.E.T.A.)
• Consumer lobby (CFA, CW, CU, Center for
  Science in the Public Interest)
        Agribusinesses/Trade
            Associations
•   Restaurant Associations
•   Equipment dealers
•   Chemical Applicators
•   International Dairy Foods Association
               Farm Equipment Assoc.
•   Ag Electronics Association (AEA)                      •   Midwest Equipment Dealers Association
•   Agricultural & Industrial Manufacturers Reps
    Association (AIMRA)                                   •   Mississippi Valley Equipment Association
•   Agricultural Retailers Association                        (MVEA)
•   American Society of Agricultural Consultants (ASAC)   •   National Agri-Marketing Association
•   American Society of Agricultural Engineers (ASAE)     •   North American Equipment Dealers Association
•   American Society of Farm Equipment Appraisers             (NAEDA)
•   Association of Equipment Manufacturers (AEM)          •   Ohio-Michigan Equipment Dealers Association
•   Canada West Equipment Dealers Association
                                                          •   Ontario Retail Farm Equipment Dealers
•   Canadian Farm & Industrial Equipment Institute
    (CFIEI)                                                   Association
•   Canadian Farm Builders Association                    •   Outdoor Power Equipment Institute (OPEI)
•   Canadian Society for Engineering in Ag, Food &        •   Pacific Northwest Association
    Biological Systems (CSAE)
                                                          •   Prairie Implement Manufacturers Association
•   Farm Equipment Manufacturers Association (FEMA)
                                                              (PIMA)
•   Farm Equipment Wholesalers Association (FEWA)
•   Iowa-Nebraska Equipment Dealers Association           •   Propane Education & Research Council
•   Irrigation Association                                •   Saskatchewan Trade & Export Partnership
•   Italian Trade Commission                                  (STEP)
•   Lawn & Garden Marketing & Distribution Association    •   Society of Automotive Engineers (SAE)
                                                          •   South West Hardware & Implement Association
                                                              (SWHIA)
                                                          •   Texas Agricultural Irrigation Association
                                                          •   Tractor & Machinery Association of Australia
                                                          •   UNAMOMA/COMAMOTER
                                                          •   Western Association
                 Summary
• General farm/Agribusiness interests generally
  broader than commodity policy
  − Trade
  − Tax policy

• Often have related state organizations
• Often aligned with political party

• Agribusiness firms often have their own
  lobbyists but still belong to commodity groups
  and general agribusiness organizations
    Historical Overview of U.S.
        Agricultural Policy
• 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)
  – Permitted any citizen, or any person who intended to become
    a citizen, to receive 160 acres of public land, and then to
    purchase it at a nominal fee after living on the land for five
    years

  Chapter 7 pages 93-96 Knutson, Penn and Flinchbaugh

                                                                 07
    Historical Overview of U.S.
    Agricultural Policy (Cont.)
• Morrill Act (1862)
  – Donated Public Lands to the several States and
    Territories which may provide Colleges for the
    Benefit of 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 from the USDA
    directly to farmers.
            Early Policies

• Agriculture was called on to increase
  production for World War I
  – After the war, the farm economy became
    depressed
  – Capper-Volstead Act provided limited
    exemptions from anti-trust laws
  – McNary-Haugen bills (two price plans)
    vetoed twice by President Coolidge
• Most of the current policies we have
  today have their roots in the Agricultural
  Adjustment Act of 1933
  Early Policies (Continued)

• Farm Credit Administration (June 1933)
  – Emergency and long term credit programs
• Soil Conservation Service (now NRCS)
  established in 1935
• In 1933, federal government began nutrition
  assistance
  – Direct distribution of surplus foods, school lunch, and
    food stamps
  Agricultural Adjustment Act
• Signed into law by President Roosevelt
• Gave the Secretary of Ag authority to:
  – Reduce acreage by voluntary agreements
  – Entered into 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.‖
   Other Significant Policies

• Agriculture Act of 1949
  – Last farm bill enacted without an expiration date
• Agricultural Act of 1956 established the Soil Bank
  – Goal was to adjust supply by taking land out of
    production
  – Acreage reserve – short term
  – Conservation reserve – long term
          The “Golden Years”

• Early 1970s
  –   Bad weather in U.S. and around the World
  –   Russians started buying grain
  –   Negative real interest rate
  –   Prices high ―parity‖
       • Parity prices – that price which today gives a unit of the
         commodity the same purchasing power as it had in 1910-
         1914
  – 73% increase in real net farm income 1970-73
  – Land values rose 376% in the 1970s
  – Something Bad Had to Happen
              Farm Problem

• For our purposes, we will start with the
  1980s
• Basically one of unstable farm prices
  and, therefore, unstable farm income
  −Due   to   inelasticity of supply and demand
  −Due   to   shifts in international demand
  −Due   to   shifts in weather
  −Due   to   fixity of ag resources
  −Due   to   bad government policy decisions
     What Are the National
     Ag. Policy Objectives?
1.

2.

3.

4.

5.

6.

7.

8.
      Chapter 7 Knutson, Penn and Flinchbaugh
                                                08
       What Are the National
       Ag. Policy Objectives?
1. Income – Maintain adequate net farm income for
   livestock and crop farmers
2. Food – Maintain an adequate food supply at
   reasonable prices
3. Exports – Maintain a competitive trade position
4. Conservation & Environment – Enhance
   environmental and conservation quality
5. Inputs – Maintain a viable input industry
6. Reserves – Adequate reserves in the event of
   crop production problems
7. Rural Areas – Development of rural areas
8. Government Cost – Achieve objectives at the
   least cost
      What Are the National
      Ag. Policy Objectives?
1. Income – Maintain adequate net farm income for
   livestock and crop farmers
        What Are the National
        Ag. Policy Objectives?
2. Food – Maintain an adequate food supply at
   reasonable prices
       What Are the National
       Ag. Policy Objectives?
3. Exports – Maintain a competitive trade position
       What Are the National
       Ag. Policy Objectives?
4. Conservation & Environment – Enhance
   environmental and conservation quality
       What Are the National
       Ag. Policy Objectives?
5. Inputs – Maintain a viable input industry
       What Are the National
       Ag. Policy Objectives?
6. Reserves – Adequate reserves in the event of
   crop production problems
       What Are the National
       Ag. Policy Objectives?
7. Rural Areas – Development of rural areas
       What Are the National
       Ag. Policy Objectives?
8. Government Cost – Achieve objectives at the
   least cost
  Price vs. Income Support
• Price support – direct government
  intervention through buying commodities
• Production controls to reduce supply and
  raise price (e.g. ARPs)
• Income support – involves government
  support of farm income
  −Supporting price in which case both price and
   income is supported
  −Supporting farm revenue through direct
   payments
    −Income is supported but price is not supported
                                                      09
   Price and Income Support
          (combined)
 (Basically raises price and thus also supports income)

• Purchase program
  − Government purchases product at support price
• Nonrecourse loan (CCC LR)
  − Farmer takes out loan at harvest
  − Has option of forfeiting to CCC in lieu of full
    payment of loan
• Production control (ARP)
  − Raises price through controlling quantity of
    commodity entering the market
 Government Purchase Program

• Government stands willing to purchase any
  amount of commodity at the established support
  price level

• What happens in the market?
• Will need to know
  – Where is support price relative to competitive
    equilibrium?
  – Impact on Quantity Supplied
  – Impact on Quantity Demanded by consumers
  – Quantity purchased by government
  – Does elasticity of supply and demand matter?
            Nonrecourse Loan
• Why a loan?
  – Lowest Prices typically at harvest
  – Allows farmer to store and market


• Farmer takes out loan from Commodity Credit
  Corporation (CCC) = loan rate (LR) * production

• Repayment Options
  – Sell crop and repay loan plus interest
  – Forfeit crop (no recourse for forfeiture)
Nonrecourse Loan Rate (Case #1)

• Is it Price or
  Income Support?    $        S



• Set below
  competitive
  equilibrium
                    P1

                    LR

• Does it matter?
                                  D

  – Why not?             q1       Q/yr




  – Why?
Nonrecourse Loan Rate (Case #2)
• Set above
  competitive        $                            S

  equilibrium       LR

• Does it matter?
                    P1




                                                      D

                         qd2       q1       qp2       Q/yr


                               CCC stocks
  Acreage Reduction Program
           No Nonrecourse Loan


• What happens?
                                       S1

                        $                   S0

• Any guess at
  why it isn‘t         P1

  drawn as a           P0


  parallel shift?

                                                 D0

                             q1   q0              Q/yr
  Acreage Reduction Program
        With Nonrecourse Loan #1


• What happens?
                                             S1

                         $                         S0

• Does the LR do
  anything?             P1
                    P0 = LR




                                                        D0

                              qd1= qs1 qd0   qs0         Q/yr


                                     CCC Stocks0
  Acreage Reduction Program
        With Nonrecourse Loan #2

• What happens?
                                                  S1

                            $                                   S0

• Does the LR do
                   P1=P0 = LR
  anything?



                                                                     D0

                                qd0 = qd1   qs1           qs0         Q/yr


                                            CCC Stocks0




                                   CCC Stocks1
Loan Rate with Export Demand
• Set above
  competitive        $                            S

  equilibrium in    LR

  domestic market
  and above TD      P1



  curve                                                TD


• Does it matter?
                                                      DD

                         qd2         q1     qp2       Q/yr


                               CCC stocks
     Loan Rate with Export
          Demand #2

• Set above         $                           S


  competitive       LR

  equilibrium in
  domestic market                                          TD

  and above ED
  curve
• Does it matter?
                                                    D

                           qdd   qed       qp       Q/yr


                    Domestic Export
                    Demand Demand CCC stocks
       Loan Rate Below
   International Equilibrium
                    $                                 S
• Set below
  competitive                 P
  equilibrium
                                                                 TD
                    LR




• Does it matter?
                                                          D

                                  qdd            qp       Q/yr


                         Domestic
                         Demand
                                        Export
                                        Demand
   Target Price (Case #1)
• Is it Price or
  Income Support?    $        S



• Set below
  competitive
  equilibrium
                    P1

                    TP

• Does it matter?
                                  D

  – Why not?             q1       Q/yr




  – Why?
   Target Price (Case #2)
• Set above
  competitive                 $                   S

  equilibrium                TP

• Does it matter?
                Deficiency   P1
                Payments



                             MP



                                                       D

                                      q1    Qp2= Qd2   Q/yr


                                  No CCC stocks
  Target Price (Case #2a)
• Another way to
  look at this              $
                                                      S

• Supply curve              TP

  vertical until
  above target
               Deficiency
               Payments


  price                     MP



                                                          D

                                           Qp2= Qd2       Q/yr


                                 No CCC stocks
   Target Price & Loan Rate
          (Case #1)
• Both set above                            $                    S

  competitive                              TP

  equilibrium           Deficiency
                        Payments
                                           LR

• Now what
  happens?                                 MP



                                                                     D

                                                Qd2        Qp2       Q/yr
           If loan rate wasn’t effective this
           Would be the market price              CCC stocks
     Target Price & Loan Rate
            (Case #2)
• Target price set                 $                S

  above                           TP

  competitive
  equilibrium and    Deficiency
                     Payments

  loan rate below
  market price
                                  MP

                                  LR


• Now what                                               D

                                                         Q/yr
  happens?
                                              Qp2= Qd2


                                       No CCC stocks
     Target Price & Loan Rate
            (Case #3)
• Both set below    $               S

  competitive
  equilibrium
• What are the     MP


  impacts?         TP

                   LR
                                        D

                        Qp2= Qd2        Q/yr


                        No CCC stocks
  Target Price and Loan Rate
     with Export Demand
                                 $                                S

• Set above                      TP

  competitive       Deficiency
                    Payments

  equilibrium in                 MP


  domestic market                LR                                    TD


  and above ED
  curve                                                               DD

                                                 qd2        qp2       Q/yr

• Does it matter?                     Domestic
                                      Demand     International
                                                   Demand

                                           No CCC stocks
           Question:
How can we get price from current
    $2/bu to desired $3/bu?

• What can you           $    S

  do?
                 MP = $2.00



                                   TD




                                  DD

                                  Q/yr
           Question:
How can we get price from current
    $2/bu to desired $3/bu?

• What can you
                                       S2

                             $                        S

  do?
  – Supply control
                     MP = $2.00



                                                           TD




                                                          DD

                                  Qd2=Qp2   Qd1=Qp1       Q/yr
           Question:
How can we get price from current
    $2/bu to desired $3/bu?

• What can you                    $                          S

  do?
  – Supply control   LR = MP = $3.00


  – Price support
                        MP = $2.00



                                                                  TD




                                                                 DD

                                             Qd1=Qp1             Q/yr
                                       qd2             qp2
           Question:
How can we get price from current
    $2/bu to desired $3/bu?

• What can you               $                             S

  do?
  – Supply control   MP = $3.00


  – Price support
                     MP = $2.00
                                                                TD2


  – Export subsidy                                              TD




                                                               DD

                                         Qd1=Qp1               Q/yr
                                  qdd2               qp2

                                     International
                                       Demand
            What Is a Farm Bill?
• Joe‘s Long Definition
  – Legislation developed by the agricultural committees of
    the House and Senate that, when passed into law,
    authorizes the USDA to initiate(and/or maintain) and
    manage a wide range of programs and program
    provisions for a specified period of time.
• Shorter Definition
  – Tells USDA what to do, how to do it, who to do it for,
    and for how long
     •   Ex. Provide food assistance with food stamps to poor for the
         period 2002 to 2007.
• Each farm bill has a varying length with an
  expiration date.
  – Recent farm bills
     •   1985, 1990, 19951996, 2002
         What Is the CCC?

• Commodity Credit Corporation
  – A federally owned and operated
    corporation within the USDA created to
    stabilize and support agricultural prices and
    farm income by making loans and
    payments to producers, purchasing
    commodities, and engaging in various
    other operations.
  – Handles all money transactions for
    agricultural price and income support and
    related programs.

  – the USDA bank
    Major Commodities We Typically
        Have Had Programs For
•   Wheat
•   Feed Grains (corn, grain sorghum, barley, and oats)
•   Upland cotton
•   Rice
•   Oilseeds (soybeans, sunflower seed, rapeseed, canola,
    safflower, flaxseed, and mustard seed)
•   Sugar
•   Tobacco
•   Peanuts
•   Dairy Products (milk, butter, cheese, and NFDM)
•   Wool and Mohair
•   Honey
•   Fruits and Vegetables
                       1990 Farm Bill
•   Titles
    I        Dairy                          XVI     Research
    II       Wool and Mohair                XVII    Food Stamp and Related
    III      Wheat                                  Provisions
    IV       Feed Grains                    XVIII   Credit
    V        Cotton                         XIX     Agricultural Promotion
    VI       Rice                           XX      Grain Quality
    VII      Oilseeds                       XXI     Organic Certification
    VIII     Peanuts                        XXII    Crop Insurance and
    IX       Sugar                                  Disaster Assistance
    X        Honey                          XXIII   Rural Development
    XI       General Commodity Provisions   XXIV    Global Climate Change
    XII      State and Private Forestry     XXV     Other Related Provisions
    XIII     Fruits, Vegetables, and           Last farm bill to contain
             Marketing
    XIV      Conservation                      supply mgmt provisions
    XV       Agricultural Trade                for crops
   Major Commodity Tools in the
          1990 Farm Bill
• Program Crops (wheat, feedgrains, cotton,
  rice, and minor oilseeds)
  – Target Price, nonrecourse loan and marketing loan,
    and acreage reduction program
• Soybeans – Nonrecourse loan only
• Wool and Mohair – Incentive program
• Dairy – Price support (nonrecourse loan) and
  marketing orders (price)
• Peanuts – marketing quota and quota price
• Fruits and vegetables – marketing orders
  (quality)
        Crop Policy Tools

• Target Prices
• Nonrecourse loan and marketing loan
  rates
• Set-aside/Acreage Reduction Programs
• Deficiency Payments (By program crop)
  – DP = TP - higher of {LR or MP} x [crop base
    acreage x (1-ARP%)] x farm program yield
  – Had to plant the program crop to receive
    payment for that crop
               Review

• 1990 Farm Bill
    • Target Price            TP


    • LR (ccc)                 LR
                     P
    • Market Loan             price


    • ARP‘s
                         qs
            1990 Farm Bill

ARP supply control mechanism
• Each year Sect. announces the % of base acres to be
  idled (acreage reduction percentage)
   P
                  S with ARP
                                        USDA analyzes the
 P0                                     market w/o ARP if
                        S with no ARP
 Pexp                                   Price is ―too‖ low,
                                        then announces ARP

                               TD       Carrot    & Stick
            Q0   Qexp               Q
                                        (TP + loan) (ARP)
            1990 Farm Bill
ARP came from Set-Aside Paid Diversion type of Supply
  Controls 1933-1995
ARP – Acreage Reduction Program 1990-1995
 P1                                       ARP => 10% idling of base
                S with ARP                acres is required to qualify
                                          for TP & loan benefits.
 P2                       S with no ARP
Pexp


                                TD

           q2   Q   exp              Q
                     1990 Farm Bill
Target Price: Congress set TP & provided for a Deficiency Pmt.

 P                            S after ARP

                              TP
                 A
Peq
                          D

                     qs       Q/yr

      TP always greater than pt where S=D
      What is equil price with TP in place? Price determined
      where qs = D

      Peq is lower than pt S=D at A
              1990 Farm Bill
Payment Yield 10 year moving avg of actual yields 1976-
1984 and frozen in 1985.
                                           actual
                                    ylds
                                               Pay yld




       60‘s     70‘s       80‘s
     Marketing Loan Program
Marketing Loan Program in ‘90 Farm Bill
•Authorized for only Cotton and Rice
•Approved for grains (fg & wheat & soybean) but never used
•Non-recourse loan on a crop
•Producers take a loan at the CCC loan rate & repay the loan
at the lower of the CCC loan rate or the market price
   Marketing Loan Program
          P
      2.00                       LR         Marketing loan
      1.5 Pe                              gain = (LR-Pe)* qs
                                          P*qs = Rev from
                                             mkt place
                                      D
                      qs at LR            Q/yr


Loan at LR at $2.00
Repay loan at Pe or $1.50
Pocket difference, sell crop on mkt at $1.50
                         1990 Farm Bill
          TP and Mkt Loan with ARP used to reduce costs
     $              S1        S
                                  TP

PARP eq                           LR Mkt Loan

  Peq                                              World price


                                       D
                qs ARP   qs                 Q/yr

   Without an ARP the quantity supplied or qs is determined by TP=Supply
   Given qs=Demand => determine Peq                Set LR>Peq
   Producer received: Mkt revenue: Peq * qs ; LDP or MLG = (LR-Peq)qs
                                           Def pay = (TP-LR) * Base * PY * .85
              Supply Controls
• Land Retirement Programs (Voluntary)
  – Soil Bank (1950s)
  – Conservation Reserve Program (newer version)
     • Land taken out of production for multiple years, normally
       10 in exchange for an annual rental rate
     • 30 percent rule
  – Set-aside/Acreage Reduction Program (ARP)
     • Requires farmers to idle % of base to be eligible for farm
       program benefits
  – Payment-in-Kind Program
     • Much like set-aside/ARP except participants paid with
       commodities rather than cash
           Crops (Continued)
• Acreage Allotments and Marketing Quotas
  (Mandatory)
  – Acreage allotment specifies number of acres crop on
    which a crop can be produced
  – Marketing quota restricts quantity of a commodity
    that can be marketed
     • Tobacco in US
     • Milk in Canada
  – Capitalization of benefits
      Dairy Supply Controls
• Milk Diversion Program (1983)
  – Designed to reduce milk supply by paying producers
    to market less milk
• Dairy Termination Program (1985)
  – Whole Herd Buyout Program
  – Designed to reduce milk supply by paying producers
    to sell whole herd for export or slaughter and
    remain out of production for 5 years
• Cooperatives Working Together (CWT)
  – Producer funded (voluntary assessments) program
    to reduce production
          Dairy (Continued)
• Cooperatives Working Together (CWT)
  – Producer funded (voluntary assessments) program
    to reduce production
  – $0.05 per cwt checkoff on milk marketings (~$60
    million)
  – 45% on herd retirement
  – 10% on production reduction
  – 35% on export assistance
• Are they getting the biggest bang for their
  bucks?
    Production Controls Impacts on
          Land Prices -- ARP
   • Land prices depend on demand and supply of land
   • ARP reduces supply of land and increases demand
                                S
     for land                      S
                               land 1
                                          land 0

Pcrop                 Pland
            S1
                 S0    P1

                       P0
                                          MVP = Higher P crop * MPP



                                              MVP1
            Qt crop                     MVP0 Qt land
    Production Controls Impacts on
         Land Prices -- Quota
   • Quota reduces supply of land and increases demand
     for land and quota
                                          Sland with Quota

Pcrop                         Pland                    Sland w/o Quota
                      PLand &
            S1
                      Quota
                 S0

                          PLand
                            P0
                                                             MVP = Higher P crop * MPP



                                                                MVP1
            Qt crop                                    MVP0 Qt land
                                             Land w/ Quota


                               Price of quota = Pland & quota – Pland
                    1996 Farm Bill
Titles                                                           Decoupled
   I      Agricultural Market Transition Act                     payments
             Subtitle A Title, Purpose, and Definitions          were
                      B Production Flexibility Contracts
                                                                 referred to
                      C Nonrecourse Marketing Assistance Loans
                         and Loan Deficiency Payments            as AMTA
                      D Other Commodities                        and PFC
                        - Dairy, Peanuts, Sugar                  payments
                      E Administration
                      F Permanent Price Support Authority
                      G Commission on 21st Century Prod. Ag.
                      H Miscellaneous Commodity Provisions
   II     Agricultural Trade
   III    Conservation                Major shift from coupled
   IV     Nutrition Assistance       (deficiency payments) to
   V      Agricultural Promotion     decoupled support
   VI     Credit                     (AMTA/PFC payments)
   VII    Rural Development
   VIII   Research, Extension, and Education
   IX     Miscellaneous
                   Overview
• Federal Agriculture Improvement and Reform
  Act of 1996
• Generally referred to as ―Freedom to Farm‖
• As with other farm bills, 1996 farm bill was an
  amendment to permanent legislation (1949 farm
  bill)
• 7 year farm bill beginning in 1996 and ending in
  2002
• Major change in commodity programs relative to
  previous 22 years (starting with 1973 farm bill)
  – Fixed ―decoupled‖ payments in lieu of target
    price/deficiency payment program
  – Fewer production controls
    Commodity Provisions

• Eliminated Target Prices
  – No longer pays deficiency payment based on
    the target price minus the higher of the loan
    rate or market price times base acres
• Eliminated acreage bases
• Eliminated annual supply control
  programs (e.g., ARPs)
    Commodity Provisions

• Initiated decoupled payments
   – Also referred to as AMTA payments or
     production flexibility contract (PFC) payments
• Provided full planting flexibility on previous crop
  acreage bases
   – All program crops plus haying and grazing
   – Limits on fruits and vegetables
    Commodity Provisions
• Continued nonrecourse marketing
  assistance loans and loan deficiency
  payments
  – Maximum loan rate levels determined by
    formula
  – Minimum loan rate levels set for cotton and
    soybeans at $0.50 per lb and $4.92 per bu
  – Fixed loan rate for rice at $6.50 per cwt
Contract Payments by Fiscal Year
                        (million $)
1996    1997    1998    1999    2000      2001    2002    Total


5,570   5,385   5,800   5,603   5,130     4,130   4,008   35,626


                Allocation of Payments by Crop

                Crop                    Percent
                Corn                      46.22
                Grain sorghum              5.11
                Barley                     2.16
                Oats                       0.15
                Wheat                     26.26
                Upland cotton             11.63
                Rice                       8.47
                TOTAL                    100.00
     Payment Limitations

• Fixed payments                     $40,000
• Marketing loan gains
  or Loan Deficiency Payments        $75,000
  – Can use marketing certificates
• Continues 3-entity rule
     1996 Farm Bill (Debated in ’95)
     High prices in ‘93, ‘94 and part of ‗95

                          World recession




     2 weeks after signed ‘96 Bill prices started
     falling
               S
P
                     TP
LR
                            D
                        Direct Payment
      Direct Payment
      AMTA: Ag Market Transition Act
      AMTA = Payment Rate * Base * Pay Yield * .85
      1995 Outlook                             Reality 1996
                         S
                                                              S

Peq                                                               Marketing
                             Loan rate                            Loan rate
                                 D1      Peq
                                                          D reduced by world
                                                               recession
                 qseq                                qs
      Loan rate was to be a safety net
 1996 Farm Bill Removed ARP
No more ARP, kept the CRP, released land back to
  production
Full capacity, freedom to plant ―any‖ crop
 P1                                       ARP => 10% idling of base
                S with ARP                acres is required to qualify
                                          for TP & loan benefits.
 P2                       S with no ARP
Pexp


                                TD

           q2   Q   exp              Q
       1996 Farm Bill Removed TP
Target Price: Congress set TP & provided for a Deficiency Pmt.

 P                          S after ARP

                            TP
Peq2
               A
Peq1
                        D

                   qs       Q/yr




  No production incentive from the target price
  Production declines, price rises
                       Quiz
1. List and describe the purpose of three policy tools
   used in the 1990 farm bill.




2. Evaluate this statement. ―The U.S. went from a
   nonrecourse loan to a marketing loan program to
   save money.‖
            What Is a Farm Bill?
• Long Definition
  – Legislation developed by the agricultural committees of
    the House and Senate that, when passed into law,
    authorizes the USDA to initiate(and/or maintain) and
    manage a wide range of programs and program
    provisions for a specified period of time.
• Shorter Definition
  – Tells USDA what to do, how to do it, who to do it for,
    and for how long
     •   Ex. Provide food assistance with food stamps to poor for the
         period 2002 to 2007.
• Each farm bill has a varying length with an
  expiration date.
  – Recent farm bills
     •   1985, 1990, 19951996, 2002
        What Is the CCC?

• Commodity Credit Corporation
  – A federally owned and operated
    corporation within the USDA created to
    stabilize and support agricultural prices
    and farm income by making loans and
    payments to producers, purchasing
    commodities, and engaging in various
    other operations.
  – Handles all money transactions for
    agricultural price and income support
    and related programs.
                  2002 Farm Bill
Titles
   I     Commodity Programs
         Subtitle A Direct Payments and Counter-Cyclical Payments
                  B Marketing Assistance Loans and Loan Deficiency
                        Payments
                  C Peanuts (Major Changes)
                  D Sugar
                  E Dairy
                  F Administration
   II    Conservation
         Subtitle A Conservation Security (New)
                  B Conservation Reserve
                  C Wetlands Reserve Program
                  D Environmental Quality Incentives Program
                  E Grassland Reserve
                  F Other
                   2002 Farm Bill
Titles
   III    Trade
          Subtitle A Ag. Trade Dev. And Assistance Act of
                      1954 and Related Statutes
                   B Ag. Trade Act of 1978
   IV     Nutrition Programs
          Subtitle A Food Stamp Program
                   B Commodity Distribution
                   C Child Nutrition and Related Programs
   V      Credit
          Subtitle A Farm Ownership Loans
                   B Operating Loans
                   C Emergency Loans
   VI     Rural Development
   VII    Research and Related Matters
   VIII   Forestry
   IX     Energy
   X      Miscellaneous
         General Overview

• Commodity provisions similar to previous
  1996 farm bill
  – Continue decoupled ―AMTA‖ payments
  – Continue marketing loan gains/LDPs
  – No production controls
  – Initiate counter-cyclical payments (CCPs)
    » Similar to but not the same as target
      price/deficiency payment program
  – Allows update of bases and program yields
• Major changes for Soybeans and Peanuts
  – Provisions similar to other program crops
    General Overview (Cont.)

• Required country-of-origin labeling for
  meat, fish, produce and peanuts by 2004
  – Meat products would be stamped U.S. made
    only if the animals were born, raised, and
    slaughtered in the U.S.
  – Have since pushed back implementation date
    General Overview (Cont.)
• Added an Energy Title
  – Commits $405 million to the development of resources
    for the production of ethanol and biodiesel facilities
• Initiates a counter-cyclical dairy program
• Wool and Mohair provided marketing loan
  benefits
• Honey provided marketing loan benefits
• Added new Conservation Security Program
• EQIP funding increased 6 fold
• Includes authority for LDPs on grazed wheat,
  oats, barley and triticale
                Definitions

•   Covered crops:
    – wheat, corn, grain sorghum, barley, oats,
      upland cotton, rice, soybeans, and other
      oilseeds (sunflower seed, rapeseed,
      canola, safflower, flaxseed, mustard
      seed)
    – Eligible for income support
•   Loan Commodities:
    – Covered commodities plus extra long
      staple cotton, wool, mohair, honey, dry
      peas, lentils, and small chickpeas.
                   Crop Base Updating
•       Producers of covered crops had five choices:
          1.   Retain current AMTA bases                                Most
          2.   Retain current AMTA bases and add max oilseeds (if       Used
               applicable)                                              Choices
          3.   Retain current AMTA bases and add min oilseeds (if
               applicable)
          4.   Update bases by using 1998-2001 planted and considered
               planted acreage for all crops
          5.   Retain current AMTA bases and add some combination of
               oilseeds (if applicable)
•       Base updating was on a farm (FSA farm number)
        by farm basis
•       What are the implications of 1998-2001 period for
        Texas? Droughts 1998, 1999, and 2001)
    –     Bad choice of years used to updated bases
    Farm Program Yield Updating
•    Only applied to counter-cyclical payment
•    Only allowed if update base acres using 1998-2001
     planted acreage
•    Producers had three choices:
        1. Retain current program yields
        2. Update yields by adding 70% of the 1998-2001 average
           yield (excluding any year planted acreage was zero) minus
           current program yields to the current program yield
        3. Update yields by taking 93.5% of 1998-2001 yields,
           excluding any year planted acreage was zero
•    What are the implications for farmers/landowners who
     underplanted bases or did not plant anything at all?
    −   Got screwed – would have lost money if updated bases so
        couldn‘t update yields
Farm Program Yield Updating (Cont.)

 •   Could replace any of the 1998-2001
     yields with 75% of the county average
     for that year
     – Using 75% of 1998-01 county average yield
       per harvested acres to replace any yield
 •   Yield updating was on a crop by crop
     basis for each FSA farm #
 •   All crops on a farm were required to use
     the same method for determining yields
           Direct Payments
• Farmers could choose to update base but
  were required to use AMTA (1996 farm bill)
  yield
  – Soybeans and peanuts a little different
• Same formula as AMTA payments
 Direct Payment = (payment rate x (base acres x .85) x
 farm program yield)
• Advance Payments
  – Producer Option
  – For 2003-2007 up to 50% in any month
    between December 1 of the year before and
    October 1 (date payment is otherwise made)
   Counter-Cyclical Payments
• Commodity specific based off of national price trigger
• Base owners and/or producers receive a payment that
  depends on the effective price for the commodity:

        Target price
      - Effective price
        Counter-cyclical payment rate ($/unit)

    CCP = CCP rate x (Base acres x .85) x Updated FPY

• Effective price equals the higher of market price or loan
  rate plus the direct payment rate
• The national market price is the 12 month weighted
  average marketing year price for the crop
• Decoupled from production decision
Counter-Cyclical Payments (Cont.)
• Won‘t know for sure what total payment will be
  until end of marketing year
  – This is roughly a year after harvest
• If Secretary determines CCPs are required:
  – 2002 – 2006 Payment Timing
     » Producer can elect to receive up to 35% of the projected
       counter-cyclical payment in October of the year the crop is
       harvested
     » An additional 35% beginning in February of the following
       year
     » The balance after the end of the 12 month marketing year
       for the crop
  – 2007 Payment Timing
     » First payment (40%) after 6 months of marketing year
     » Final payment after the end of the 12 month marketing
       year for the crop
                Direct Payments
Crops                   1996 Farm Bill    2002 Farm Bill
                          2002 Rate       2002 – 07 Rate


Corn ($/bu)                       0.261                 0.28
Sorghum ($/bu)                    0.314                 0.35
Wheat ($/bu)                      0.461                 0.52
Upland Cotton ($/lb)             0.0572               0.0667
Rice ($/cwt)                       2.05                 2.35
Barley ($/bu)                     0.202                 0.24
Oats ($/bu)                       0.022                0.024
Soybeans ($/bu)                     N/A   New           0.44
Minor Oilseeds ($/lb)               N/A   “covered”   0.0080
                                           crops
Peanuts ($/ton)                     N/A                  36
                          Loan Rates
Crops                     1996 Farm Bill   2002 Farm Bill      2002 Farm Bill
                            2001 Rate      2002 – 03 Rate      2004 – 07 Rate
Corn ($/bu)                         1.89                1.98      Why?    1.95
Sorghum ($/bu)                      1.71                1.98              1.95
Wheat ($/bu)                        2.58                2.80              2.75
Upland Cotton ($/lb)              0.5192                0.52              0.52
Rice ($/cwt)                        6.50                6.50              6.50
Barley ($/bu)                       1.65                1.88              1.85
Oats ($/bu)                         1.21                1.35              1.33
Soybeans ($/bu)                     5.26         Why?   5.00              5.00
Minor Oilseeds ($/lb)              0.093            0.096                0.093
Peanuts ($/ton)                      N/A            355.0                355.0
Dry Peas ($/cwt)                     N/A                6.33              6.22
Lentils ($/cwt)                      N/A            11.94                11.72
Small Chickpeas ($/cwt)              N/A                7.56              7.43
              Target Prices
Crops                   2002 - 2003 2004 – 2007


Corn ($/bu)                    2.60    Why?     2.63
Sorghum ($/bu)                 2.54             2.57
Wheat ($/bu)                   3.86             3.92
Upland Cotton ($/lb)          0.724            0.724
Rice ($/cwt)                  10.50            10.50
Barley ($/bu)                  2.21             2.24
Oats ($/bu)                    1.40             1.44
Soybeans ($/bu)                5.80             5.80
Minor Oilseeds ($/lb)        0.0980           0.1010
Peanuts ($/ton)               495.0            495.0
   Distribution of Government Support
                             Example: Cotton
                                      Reflects payments not on full production
Revenue per Pound                       (payment acres = .85 x base acres)

Target
Price – $0.724                                        Decoupled (do not have to
                          CCP                         produce to receive
                                                      payment)




                                                     }
 Loan            Fixed payment – $0.0667
 Rate – $0.52

 Market Price
                        MLG/LDP                              Coupled (do have to
                                                             produce to receive
                                                             benefits from
                  Market Receipts
                                                             marketing loans
                                                             gains or LDPs)
   Payment Timeline for Most (Depends
     on Marketing Year) Commodities
                                What a mess!

 Oct 04         Dec 02          Feb 05     Aug 05          Oct 05         Dec 05
  1st CCP                    2nd CCP           CCP          1st CCP
  Advance                    Advance           Final        Advance
for ‘05 crop               for ‘05 crop   for ‘05 crop    for ‘06 crop

               Opportunity                                     Final
           for Direct Payment                            Direct Payment
              50% Advance                                  for ‘05 crop
               for ‘05 crop
                 2002 Farm Bill
During 2001 we debated the 2002 Bill
Era: low prices for 6 years and no expectation of high prices,
increased call for new safety net program.
New Safety Net in 2002 Bill is return to Deficiency Payment with
New Target Price.
2002 Bill Policy Tools:
    •New TP
    •Direct Payment
    •Continued Marketing Loan Program
    •No ARP
    •***Farmers were permitted to update Base Acres (frozen in
    1990) & Payment Yield (frozen in 1985). 7 options for update
    Base & Yield.
                    2002 Farm Bill
New Target Price:
Decoupled Payment
   •Def Payment is not tied to the crops you grow
   •Def Payment is based on historical crops base acres & CCP
   yield
   •Def Payment is called a Counter Cyclical Payment (CCP)
CCP= TP - Direct Pay rate – [max of price or LR] * Base acre * CCP
yield * 0.85
                                     S
             Pmt                               Because CCP is not related
                                     NTP
            Peq                                   to crop being grown,
                                                 receive payment from
                                ?                cotton history not for
                                           D          wheat grown.
                           qs        wheat
                 2002 Farm Bill
The New Target Price does not directly affect quantity supplied
because CCP is a decoupled payment.
2002 Bill
    Direct Payment
    =>decoupled
    =>DP = DP rate * Base * .85 * Dp Yield
    DP yield < CCP yield – updated 5 yr average actual ylds.
    Continued marketing loan – LDP & MLG
                  2002 Farm Bill
  Peq > NTP => No CCP for corn, wheat, sorghum, barley, oats, or
  soybeans
                      s


Peq

                                   NTP



                          D
               Payment Limits
•   What is the Issue?
•   Brief History of Payment Limitations
•   Payment Limit Commission
•   What Does the Data Indicate?
    − Payments
    − Certificates
• Estimated Impacts of Tightening Limits
• Conclusions
Brief History of Payment Limitations
• Payment limit debate began in late 1960s
• Limits first enacted in 1970 farm bill at $55,000 and
  ranged from $20,000 to $40,000 through 1985
• 1985 farm bill raised to $50,000 per ―person‖
  − Initiated 3 entity rule
• 1990 farm bill established separate limits for
  deficiency payments and MLG/LDP
• 2002 farm bill set direct payment limit at $40,000,
  CCP at $65,000, and MLG/LDP at $75,000
  − Introduced means testing for first time
     $2.5 million AGI limitation (3 year avg) unless 75%
       came from Ag.
          What is the Issue?

• Depends on a person‘s point of view
  −Proponents generally feel:
    Too much money goes to too few
    Large payments accelerate
     consolidation/industrialization of agriculture
    Large farms don‘t need the money
    Large payments lead to higher land values
  −Opponents generally feel:
    Rules have been set and are being followed
    Business/investment decisions have been made
     based on limits in current law
   What is the Issue? (Continued)
• A person‘s point of view tied closely to what they feel
  is the goal of farm programs
• A few of the often cited goals are:
  –   Foster an abundant supply of food and fiber
  –   Support and stabilize farm income
  –   Help producers get access to credit
  –   Expand agricultural exports
  –   Conserve natural resources
  –   Maintain the family farm and the vitality of rural communities
  –   Capitalize on the multiple functions of agriculture
  –   Counter the protection provided to agriculture in other
      countries
  Current Payment Limitations

• $40,000 per ―person‖ for direct
  payments

• $65,000 per person for countercyclical
  payments

• $75,000 per person for loan deficiency
  payments and marketing loan gains
       Background: A Person

• A person is the unit to which payment limits
  apply—it may be an individual, an individual
  in a joint operation, or other entity: trust,
  limited partnership, corporation

• Under the 3-entity rule, an individual who
  receives payments may also receive
  payments from up to 2 other entities in which
  the individual has up to a 50% interest
Background: An example of maximum
 payments an individual may receive

 Producer has own operation, 50% interest in
   trust A and 50% interest in corporation B
                 Direct       CCP     MLG/LDP
                            Dollars
 Own farm        40,000    65,000   75,000
 A               20,000    32,500   37,500
 B               20,000    32,500   37,500
 Total           80,000    130,000 150,000
   Grand total        $360,000
Background: To be Eligible a Producer Must
     be Actively Engaged in Farming

 • Must provide:
 Land, equipment or operating capital
                and
 Active personal labor or active personal
   management
 • Contributions must be commensurate with
   shares and must be at risk
Distribution of PFC Payments, 2001
      $4.1 bil. Paid to 1.2 mil. Payees


Payment size           % of        % of
                      payees     payments
$10,000 or less          91           43

$10-30,000               8            39

$30,000 or more          1            18
   Payment Limit Commission
• Keith Collins, Chair with 3 members appointed by
  each of Secretary, House, and Senate
• Assess effects of further limitations for direct,
  counter-cyclical payments and marketing loan
  benefits on:
  − Farm income
  − Farm land values
  − Rural communities and agribusiness infrastructure
  − Planted area of covered commodities and supply and
    prices of all commodities
• Recommendations as Commission determines
  appropriate
• Report came out at the beginning of September
      Farms Receiving Government
              Payments
             34% of all Farms in 2001
Of farms         Rural      Intermediate   Commercial
receiving      residence        farms        farms
payments:        farms        (330,000)      (123,000)

                (273,000)
Avg. net         2,256        17,961        124,220
cash income
Avg. gov.        4,827        13,865         60,532
payments
Share of:
Farms             38             45              17
Payments          10             34              56
Production         7             27              66
  Current Limits Do Not Reduce
     Payments Appreciably

Why?
• Most farms are not large enough to
  trigger limits, although farms in 43
  states hit limits in 2001
• Large farms have multiple persons
  (payment limits) per farm
• No limit on marketing loan benefits
Effect of Current Limits on Payments


                   20
                   18
                   16           PFC
 Billion Dollars




                   14
                   12           Mkt
                   10           loss      Amount not paid
                    8                     out due to limits
                    6
                    4           Loan
                    2          benefits
                    0
                        2001                   2001
   Base Acres Needed to Reach
    $40K in Direct Payments

Crop            Base acres   Comment

Corn            1,636        1.5% farms
                             harvest>1,000 ac.

Wheat           2,623        5.2% farms
                             harvest>1,000 ac.

Soybeans        3,565        1.9% farms
                             harvest>1,000 ac.

Upland cotton   1,176        10.1% farms
                             harvest>1,000 ac.

Rice            416          19.9% farms
                             harvest>500 ac.
                 Certificates

• Used to facilitate marketing loan administration

• Used to avoid loan forfeitures, gain not s.t. limits

• Nonrecourse loan makes LDP/MLG limit ineffective

• Have primarily been used in cotton and rice

• Use of certificates with nonrecourse loan has little
  consequence for taxpayers, slight increase in farm
  income, and avoids market disruption of forfeitures
Effects of Further Limitations on:
         1--Farm Income

• Reducing direct limit to $30K, CCP to $50K
  and loan benefit to $75K:
  – Direct payments fall $255-275 mil.
  – CCP payments fall $400-425 mil.
  – Loan benefits fall $400-500 mil.
• Reductions: 4-5% of payments
• Producers affected: rises to 35,000 from
  12,000 farms
• States most affected: CA, AZ, AR, MS
Effects of Further Limitations on:
       2--Farmland Values

• 15-25% of land values due to gov. payments,
  but many factors determine land values
• Non-operator landlords rent out 41% of
  farmland
• Reducing limits to $30/50/75K would reduce
  rental rate and land values. Modest national
  effect; possibly large regional effects
   – Ariz. & Calif: 25% or more of producers
     would reach limit
• Effects greatest in Delta, So. Plains, followed by
  Southeast and rural areas of Far West
   Effects of Further Limitations on:
3--Rural Communities & Infrastructure
• 316 out of ~2,300 rural counties are farm
  dependent
• Vulnerable areas: county income dependent on
  farm income, farm income dependent on
  payments, high proportion of producers affected
• Short-run effects greatest in Delta, West Tex. ,
  rural Ariz. & Calif., Western Kan., Eastern Neb. &
  So. Dak., Western Iowa
   – Lower acres, farm income & spending, but
     higher crop prices & lower rents. Effects
     diminish over time
• Long-run effects largely unknown: farm structure
  less important than technology, economic diversity,
  natural amenities
Effects of Further Limitations on:
4--Commodity Supply and Prices

• Limits on decoupled payments expected to have
  minimal effect; main effect is limits on loan
  benefits
• Planted acres decline: modest national effect
  but larger effect for cotton and rice
  – E.g., cotton: 0.5 to 1.2 to 2.5 mil ac.
• Limited effect on F&V due to climate, lack of
  market outlets, need for contracts, investment,
  negative effects of shifts. Shifting to hay a
  likelihood
• Effects diminish over time
                Conclusions

• The commission report provides support to
  proponents and opponents of tighter limits
• Payment limit issue is not going away
  – Momentum
  – Federal budget situation
• Differences in a person‘s position on this
  issue can be tied to differences in their
  perception of the goals of farm programs
   Milk Price Support Program
• Authorized by 1933 Act and made permanent by
  1949 Act
• Secretary of Ag directed to support the price of
  manufacturing grade milk by purchasing
  manufactured dairy products (cheese, butter, and
  Nonfat dry milk)
• Current support price is set at $9.90/cwt
  – Make allowances
  – Product purchase prices
  Federal Milk Marketing Orders
• Combination of:
  – Classified pricing based on end use
     • Class I – beverage milk
     • Class II – fluid cream products, yogurt, perishable manufactured
       products (ice cream, cottage cheese, and others)
     • Class III – Cream cheese and hard manufactured cheeses
     • Class IV – Butter and milk in dried form
  – Market-wide revenue pooling meaning that all producers
    who market in a particular order receive the same
    minimum ―blend‖ price
  – Blend prices are weighted average based on use in each
    category by marketing area
• Only pertains to minimum prices for Grade A milk
       Dairy Export Incentive
          Program (DEIP)
• Helps exporters of dairy products meet prevailing
  world prices for targeted commodities and
  destinations
• Objective:
  – Develop export markets where U.S. dairy products are not
    competitive due to the presence of subsidized exports
    from other countries
• Eligible commodities:
  – Nonfat dry milk, butter, and cheeses (cheddar, mozzarella,
    gouda, feta, cream, and processed American)
        Milk Income Loss Contract
             (MILC) Payments
•   Established in 2002 farm bill
•   Set to end September 30, 2005 (3.5 year program)
•   Scored at $3.5 million over 2002-2005 period
•   Counter-cyclical program
    – Payment rate is 45% of the difference in monthly Boston
      Class I price and $16.94 (target price)
    – Monthly payment is equal to calculated payment rate
      multiplied by the eligible quantity.
    – Annual eligible payment quantity of 2.4 million pounds
     An Assessment of the Equitability of
     Farm Program Payments across Crops



James W Richardson
Co-Director AFPC, Regents Professor and TAES Faculty Fellow

Joe L Outlaw
Co-Director AFPC, Associate Professor and Extension Economist-Policy


Lindsey Higgins
Research Assistant
     Measures of Equitability
• What do we mean by equity?
  – What share of payments does each crop
    receive?
• There are many measures of equity
  – Payment per acre
  – Payment per dollar of value
  – Payment by farm size
  – Etc.
Breakdown of Payments
  1990 to 2002 Average Support By Crop



                 Soybeans   Peanuts
        Barley
                    9%        1%
         2%

                                      Corn
                                      35%
        Wheat
        22%


      Oats
      0%
       Sorghum
         4%                     Cotton
                 Rice
                 9%              18%
                    Breakdown of Payments
          1990 to 1996 Average
                                               2002 Support By Crop
            Support By Crop

                    Soybeans     Peanuts                  Soybeans
           Barley      1%                                            Peanuts
                                   1%                       10%
            2%                                                         3%
                                                 Barley                          Corn
       Wheat                                      1%                             26%
       26%                              Corn
                                        38%    Wheat
                                               16%
Oats                                            Oats
0%                                              0%
Sorghum                                        Sorghum
  4%                                             3%
                                                                               Cotton
           Rice                                           Rice                  28%
           11%                 Cotton                     13%
                                17%
                    Support per Planted Acre ($/acre)


                    500
                    450
 Dollars per acre




                    400
                    350                                                                                 Average
                    300                                                                                 90-'95 Avg
                    250
                                                                                                        96-'01 Avg
                    200
                    150
                                                                                                        2002
                    100
                     50
                      0
                          Corn   Cotton   Rice   Sorghum   Oats   Wheat   Barley   Soybeans   Peanuts


*Total Annual Support divided by Total Annual Planted Acres
**Note: CCC Expenditures obtained from Farm Service Agency, USDA. Planted acres obtained from
National Agricultural Statistics Service, USDA.
             Effective Benefits Relative to
               Effective Variable Costs

         3.00
         2.50
         2.00
 Ratio




         1.50
                                                                                                                          Average
         1.00                                                                                                             90-'95 Avg
         0.50                                                                                                             96-'01 Avg
                                                                                                                          2002
         0.00
                                                 um




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                                             So




                                                                                         So
*Effective benefits divided by effective variable costs. Effective benefits include direct payments, market price or loan rate,
payment fractions, and for 2002, countercyclical payments. Effective variable costs include variable costs and ARP costs.

**Note: Actual Yield and price obtained from NASS, USDA. Farm bill payment provisions obtained from Farm Service Agency,
USDA. Variable costs obtained from the economic research service, USDA. Economic
        Per Acre Support Relative to Total
                     Costs

                 1.00
 Support Ratio




                 0.80                                                                                 Average
                 0.60                                                                                 90-'95 Avg
                 0.40                                                                                 96-'01 Avg
                 0.20                                                                                 2002
                 0.00
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*Total Annual Support per planted acre divided by Total Costs per planted acre.
**Note: CCC Expenditures obtained from Farm Service Agency. Total Costs obtained from Economic
Research Service, USDA.
       Total Annual Support/ Total Value
                of Production

                  2.00

                                                                                                      Average
  Support Ratio




                  1.50
                                                                                                      90-'95 Avg
                  1.00                                                                                96-'01 Avg

                  0.50                                                                                2002


                  0.00
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*Total Annual Support divided by Total Annual Value of Production.
**Note: CCC Expenditures obtained from Farm Service Agency. Total Value of Production obtained from
National Agricultural Statistics Service.
                    Summary

• Important to keep in mind the intentions of the farm
  bill

• No single commodity consistently receives the most
  or least support throughout all the measures

• Results depend on which measure best defines
  equitable
                       Overview
• Milk is the most regulated product in the U.S.
• Produced in every state
• Milk is not all the same
  – Depends on sanitary conditions produced under
  – Grade A
     • Eligible for fluid consumption
  – Grade B
     • Only eligible for making manufactured products
     • Represents less than 10% of total milk supply
          Policy Position Paper
• Write for your audience:
  – Congressman or Senator
  – Farm organization policy committee
• State the policy position
• Provide background information as to why it is a
  problem
• Use economic theory & facts to show why your
  position is obviously right
• Do not use outdated idealism – Agrarian or
  Jeffersonian ideals – Deal in Facts not Myths

                                                     18
            Policy Position Paper
• Write in bullet or outline form
   – Use bold text on left margin to indicate topic
   – Separate text into following headings
      • Policy Option: state what the policy is and what you want from
        the decision maker to do (for or against)
      • Background or Situation: provide information to explain the
        current situation, what is the problem, what caused the problem,
        how is your group affected, etc.
      • Justification: use economic theory, facts, and persuasive logic to
        make the decision maker clearly see that your position is correct
        and the only logical alternative – never state your opinion, they
        are more powerful than you, as you are asking for their support
• Double space or 1.5 space, use 10 or 12 pt font and
  wide margins 1‖ – Lots of White Space on the Page
        Trade Policy and FAS

• Role of Foreign Agricultural Service in USDA
• Help ag exporters develop and maintain new
  markets
                P




                                         TD2

                          DD     TD1

                                         Q/yr    18
             Barriers to Trade

•   Import Tariff
•   Export Subsidies
•   Export Embargo
•   Import Quotas
•   Exchange Rate Distortions
•   Variable Levy
•   Technical Restrictions
Justifications for Barriers to Trade

• Protect domestic (infant) industry
• Protect national security
• Maintain domestic farm programs
    – (Section 22 in Ag. Adjust Act 1933)
•   Protect against painful adjustment
•   Protect national health
•   Retaliation against policies
•   Improve balance of payments
•   Generate revenue (export tariffs)
       Trade Model Free Trade
P                                P                               P

                                                                               Supply0



                       Supply0
                                                     S Export0


PFT
                         T D0


                      Dom D0                       Export D0                      Dom D0
                               Q/yr   QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                        Trade Sector                    Importer
                          Import Quota
P                                P                                  P

                                                                                   Supply0



                       Supply0        Quota1            S Export0

                                                                    PQT
PFT
PQT



                      Dom D0                          Export D0                       Dom D0
                               Q/yr     QT0                       Q/yr    QD0   QS0        Q/yr
      QD0       QS0

            Exporter                           Trade Sector                     Importer
                           Import Tariff
P                                P                                  P

                                                                                  Supply0



                       Supply0                          S Export0


                                     T                                               PT
PFT
PT



                      Dom D0                          Export D0                      Dom D0
                               Q/yr      QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                           Trade Sector                    Importer
    Quota to a Tariff Rate Import Quota
P                                  P                                  P

                                                                                     Supply0



                         Supply0        Quota1            S Export0

                                                                      PQT
PFT
PQT



                        Dom D0                          Export D0                       Dom D0
                                 Q/yr     QT0                       Q/yr    QD0   QS0        Q/yr
        QD0       QS0

              Exporter                           Trade Sector                     Importer
                        Export Subsidy
P                                P                                  P

                                                                                  Supply0



                       Supply0                          S Export0


                                                              SE-Sub0
PFT

                                     S

                      Dom D0                          Export D0                      Dom D0
                               Q/yr      QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                           Trade Sector                    Importer
                       Export Embargo
P                                P                               P

                                                                               Supply0



                       Supply0                       S Export0



PFT




                      Dom D0                       Export D0                      Dom D0
                               Q/yr   QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                        Trade Sector                    Importer
P                                P                               P

                                                                               Supply0



                       Supply0                       S Export0



PFT




                      Dom D0                       Export D0                      Dom D0
                               Q/yr   QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                        Trade Sector                    Importer
P                                P                               P

                                                                               Supply0



                       Supply0                       S Export0



PFT




                      Dom D0                       Export D0                      Dom D0
                               Q/yr   QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                        Trade Sector                    Importer
P                                P                               P

                                                                               Supply0



                       Supply0                       S Export0



PFT




                      Dom D0                       Export D0                      Dom D0
                               Q/yr   QT0                      Q/yr   QD0   QS0        Q/yr
      QD0       QS0

            Exporter                        Trade Sector                    Importer
           International Policy
• Live in a global economy where:
   – Interdependence means that any policy decisions
     made by one country has a impact on the U.S.
   – Many ag markets are global in scope thus while the
     price of corn may be in the US, there is a global
     market influenced by world supply and demand forces
   – The exceptions to this global market are few and are
     limited to those commodities that have been able to
     isolate themselves through barriers to trade
     (successful only in varying degrees)


         Read Chapters 4, 5, 6 Knutson, Penn and Flinchbaugh
                                                               19
North America Free Trade Agreement
              NAFTA
• Really 3 Separate Trade Agreements
  Canada – US Trade Agreement (CUSTA) effective
   in 1989
  Canada – Mexico Trade Agreement effective in
   1993
  US – Mexico Trade Agreement effective in 1994
• Farm Policy Harmonization is a major problem
North America Free Trade Agreement
              NAFTA
• CUSTA – 1989
  – Tariffs on most commodities phased out over 5-
    10 year period with following important
    exceptions being Tariff Rate Quotas (TRQ) on:
    Poultry: Canadian Poultry Board
    Dairy: Canadian Dairy Board and US price supports
    Sugar: US price supports
  – A TRQ allows a certain amount of imports at a
    lower tariff (sometimes zero) with impacts above
    the quota assessed a higher tariff. Example the
   TRQ in Canada for cheese is 245% of the price at 20,412
   MT. For the US it is 58% at 134,995 MT.
North America Free Trade Agreement
              NAFTA
• US – Mexico Trade Agreement in 1994
  – Convert all trade barriers to tariffs (Mexico had extensive
    licensing of imports) and then reduce to zero over 5-15
    years.
North America Free Trade Agreement
              NAFTA
• Overall provision that has caused conflict involves
  the ability of the three countries to maintain their
  own domestic farm programs (subsidies) in the
  setting of freer trade – reductions in tariffs.
   – If free trade is to exist there must be harmonization of
     policies.
North America Free Trade Agreement
              NAFTA
• Basic method for dispute settlement involves the
  establishment of Panels which act as ―judges‖ of
  who did what to whom (legal rights and obligations)
  – Members of these panels include:
     • 2 members chosen by one country
     • 2 members chosen by the other country
     • 1 mutually agreed upon chair
  – Original agreements had a provision for continuing
    discussion to eliminate domestic program issues but no
    Secretariat was established (comparable to EU
    Commission) to continue to process of negotiation
                  Canada Policies
• Canadian Wheat Board (CWB)
  – No production controls
  – All wheat and barley marketed through CWB except that
    fed on farm
  – Strict Controls over quality
     • Emphasis on protein content
     • Controls varieties planted
  – CWB markets wheat to domestic and export markets
  – Pools all receipts from marketing
  – Pays producers the average price adjusted for quality
     • Payments in increments as sales take place
     • Closes out the pool at end of marketing season
  – Little or no carryover
                    Canada Policies
• Canadian Wheat Board acts as an effective barrier to trade
  by virtue of its marketing requirement
• The price incentive is to move wheat south rather than north
• Dairy and poultry boards have high TRQs combined with
  marketing quotas limiting the quantity of product that can be
  sold
• Net Income Stabilization Account (NISA) program whereby
  farmers can deposit with the government up to 3% of sales
  revenue which is matched up to $250,000 each year with an
  account limit of 1.5 X 5 year average sales
   – Withdrawals are allowed in low income years
               Mexico Policy
Mexican Farm Supports
•SAGARPA: USDA of Mexico
   PROCAMPO: Small farmer payments
   Market support payment: Pays difference
    between government determined target
    price and market price
•Maintains sugar industry
   Discourages fructose in soft drinks
   Mexico Policy Issues
Concern about level of U.S. subsidies
  •Imports of poultry and hogs
  •Lower price of corn and soybeans
     Corn staple
     Input for livestock and poultry
     Input for HFCS production
     Results in low prices for poultry and hogs

  •Deny access to U.S. sugar market
     Share of U.S. imports
     HFCS imports to Mexico
 Mexico Policy Issues
•Research/Extension: Weak
•Infrastructure
   Roads: Border issue
   Railroads: Privatization
   Utilities
   Irrigation development

•Plant and animal protection
Comparison of Mexican and U.S.
   Agricultural Production
  Commodity             MMT   US MMT
  Sugar                  49      63
  Corn                   19     235
  Fruit                  14      31
  Vegetables & Melons     9      54
  Citrus                  6      15
  Milk                    9      77
  Wheat                   3      54
  Tomatoes                2      16
  Beef                    1      12
  Chicken                 2      14
  Pork                    1       9
  Peppers                 2      --
  Bananas                 2      --
  Mangoes                 2      --
  Coconut                 1      --
 Geopolitical Centers of Influence
• Countries or groups (blocs) of countries that have (or could
  have a major impact on U.S. agriculture and agribusiness
• Some individual countries are in this position now, have been,
  or will be
   –   Mexico
   –   Canada
   –   Japan
   –   China
   –   Russia
• Some are organized into blocs
   –   NAFTA
   –   EU
   –   MERCOSUR/FTAA
   –   Cairns group
   –   APEC
Geopolitical Centers of Influence

• Then there are the developing countries
  – Largely ignored up to now
  – Want preferred access to developed country
    markets
• There are interest groups outside the
  countries and blocs that try to influence the
  world agenda
  – Greenpeace
  – UN/FAO
                          U.S.
• 9.6 M sq km
  – 19% arable
  – 214 sq km irrigated
• 280 M people
• Ag
  – Corn, soybean, wheat, chicken, beef, milk, pork
  – Export 2 of 5 acres
• Ag policy
  – Export-oriented
  – Farmer safety net substantial
       Canadian Agricultural
           Production
Commodity         MMT   US MMT
Wheat              21      54
Barley             11       5
Corn                8     235
Soybeans            2      78
Rapeseed/Canola     5      ---
Beef                1      12
Hogs                2       9
Chicken             1      13
Milk                8      75
     Canada WTO Box Status

• NISA?

• Dairy and poultry boards?

• CWB?
           Mexico/Canada/US
Basic need exist for harmonization of
policies
     •Farm subsidies
     •Market information
     •Grades and standards
     •Infrastructure
     •Plant and animal protection
              Traceability

• The ability to trace and follow a food, feed,
  or food producing animal or substance
  intended to be or expected to be
  incorporated into a food or feed, through
  all stages of production, processing, and
  distribution




                                              20
              Background
• Host of Names and Related Issues
  – Quality Assurance
  – Identification systems
  – Identity preservation
  – Segregation
  – Process control
  – HACCP
  – Process verification
  – COOL
      Forces for Traceability
• Risk and Liability
  – Loss of customers
  – Loss of business
• Food Safety
• Food Quality
  – Intrinsic and extrinsic characteristics
• GMO Crops
• BSE
• Biosecurity
 Are Consumers Willing to Pay
       for Traceability?

• Traceability has Some Value Itself
• More Value as Means of Verifying Other
  Characteristics Like Food Safety
• Can Add Value from Marketing
  – Not necessarily just a cost
      Animal Identification
• Biosecurity and Disease Forced Issue
• ID Itself is Not the Solution
  – Doesn‘t make food safe
  – Doesn‘t prevent foreign disease
• Market Access
  – US beef exports to Japan
       Animal Identification
• Disease
  – Monitoring
  – Control and eradication
  – Emergency preparation
• Food Safety
• Compatibility
  – Defined standard
  – Compatible systems through sector
         Role For Government

•   Regulation
•   Set the Standards
•   Oversight and Inspection
•   Credibility
•   Process Verification
                Summary

• Rapidly Changing Area
  – Take some work to remain abreast of changes
• Animal ID System Moving Forward
  – Industry and government action
• Moving Forward in All Areas
                Origins of WTO
• General Agreement on Tariffs and Trade (GATT)
   – Established in 1947 as a forum to reduce trade barriers
• WTO replaced GATT in 1995 as legal and institutional
  foundation of multilateral trade relations
   – Designed to strengthen the trade rules by providing a
     stronger set of institutions for resolving disputes and
     enforcing agreements
• Negotiations take place in ―rounds‖
   – There have been 9 to date
   – Begins with an agreement among members on agenda
   – Most recent completed round was Uruguay Round
   – Currently on Doha Round


         Chapter 5 Knutson, Penn and Flinchbaugh
                                                               21
     Three Basic Principles
• Once a tariff concession is agreed to, it
  cannot be raised
• MFN (Most Favored Nation), any advantage
  given to one country must be given to all
• Imported goods treated the same as
  domestic goods in terms of regulation and
  taxes
      Three Pillars of URAA
• Market access: Convert
  import quotas to tariff or
  TRQ and reduce over time
• Domestic support: Reduce
  domestic support by 20%
  from 1986-89 level
  – AMS = Aggregate measure of
    support is total of red and
    amber box (trade distorting
    subsidies)
• Limits on value and volume
  of export subsidies from
  1986-89 level
            Loop Holes in URAA
• Precautionary principle: WTO requires that S&PS decisions
  be based on science. This principle allows restrictions when
  scientific evidence is deemed to be insufficient. Requires
  seeking evidence over reasonable time period.

• TRQ evading on individual products so that no imports
  occurred

• Safeguards permit imposition of higher tariffs if there is a
  surge in imports above specified levels

• Multi functionality: Green box justification for subsidies
  based on contributions to the environment
        4 Pillars of Doha Round
    (Reflects broader US goals in trade policy)

• Market access: Substantially reduce tariffs
  and increase quantities in TRQs
• Export competition: Eliminate export
  subsidies, variable export taxes, and exclusive
  import rights by state trading importers
• Domestic support: Substantially reduce
  amber box subsidies and simplify into exempt
  and nonexempt
• Developing countries: Enhance input into
  WTO and their benefits from international
  trading
           Boxes of WTO
• Green box: Not trade distorting
• Blue box: Minimally distorting because
  production is controlled
• Amber box: Trade distorting, subsidies
  tied to either price and production
• Red Box: Subsidies that must be stopped
  (empty box)
Amber Box Limits for U.S. and E.U.

                         67.1
70
60
50
40
30
           19.1
20
10
 0
      U.S. Bill $   E.U. Bill $
             WTO Classification

• These classifications are based on recent US notifications
  to the WTO
• The fixed payments and conservation programs have been
  classified as green box
   −Direct payments on a fixed payment base are
    considered as income support
   −Conservation program payments are considered exempt
    as long as the payments do not exceed the actual cost
    of implying conservation efforts or the opportunity cost
    from idling land or producing under conservation
    production practices
            WTO Classification
• The marketing loan benefits, dairy programs, and sugar
  price support have been classified as commodity-specific
  amber box.
   − All of these programs require production of the
     commodity to receive a payment and the size of the
     payment is contingent on the amount of production.
   − Price support programs (such as dairy) are also placed
     here. Even though no payments flow out because of
     the program, the amount of price protection is charged
     against the WTO limit (calculated as the product of
     production eligible for price support and the price gap
     between the price support level and a reference price).
           WTO Classification
• The countercyclical and crop insurance programs have
  been classified as non-commodity-specific amber box.
   − The countercyclical program falls into the amber box
     because payments depend on current prices and into
     the non-commodity-specific box because production is
     not required to receive payments.
   − Crop insurance has been placed here and reported in
     aggregate (net indemnities across all crops). Given the
     nature of crop insurance, it probably should be
     classified as commodity-specific. Insurance at or under
     70% coverage could be reported as green box, while
     higher coverage could be reported as commodity-
     specific amber.
               De Minimis Rule
• The de minimis rule exempts “small” domestic support
  payments
• Whether payments are “small” or not is defined by the
  product covered by the payment
• For the U.S., a five percent rule is applied for de minimis
• For commodity-specific support, payments are compared
  to 5% of the value of production for the commodity
• For non-commodity-specific support, payments are
  compared to 5% of the total value of U.S. agricultural
  production
     Why Classification Matters
• The classification of the new countercyclical program in the
  non-commodity-specific amber box helps the U.S. in
  meeting the domestic support limits
• Expenditures from programs in the non-commodity-specific
  category are compared against the value of all agricultural
  production in the country (as opposed to crop value for
  commodity-specific programs)
• Given U.S. agricultural production values of $200 billion,
  the non-commodity-specific amber box can hold up to $10
  billion in support before reaching the de minimis mark and
  counting against the domestic support limit
Where We Are in Doha Round?

• Most recent Ministerial in Cancun – failed
• Open rift when developed and developing
  countries
• Meetings came to abrupt end on Sept. 14th when
  four African countries submitted a proposal to
  eliminate the U.S. cotton program
• G-21 (group of 21 countries) unwilling to open
  their markets in return
• Peace clause expires end of 2003
  – Can‘t challenge other members export and domestic
    subsidies on agriculture
   Agribusiness and Farm Policy

• Develop economic models for different
  agribusinesses
• Input suppliers
• Output processors to consumers
• Output users (livestock)
• Exporters



                                          23
    Agribusiness Cost Structure

• Costs functions are characterized by flat AVC
  and MC
• Profits very sensitive to price of output and
  volume
   Price
                               MC

                                        AVC



                                              MR




                              Qt year
        Agribusiness with Demand

• Demand for Ag. Inputs is based on MVP fro
  the input
• MVPinput = Price Output * MPPinput
   Price
                             MC

                                      AVC
   P1
   P0




                                            MVP1
                            Qt year   MVP0
                                               PY              S1
ARP and Input Suppliers’ Profits                                               S0

                                               PY1
                                               PY0
  Y crop output




                                                     Y                              Y crop output


                                                                    45o line
   QY0
   QY1




                  QX1   QX0        X Qt. Input Use                                  Y crop output
   PX                                                    QY1 QY0
                              S0




                              Demand X0



                                     X Qt. Input Sold
                                                   PY              S1
Mkt Loan and TP on Input Suppliers’                                                MLR or TP
Profits
                                                   PY0
                                                   PY1
     Y crop output




                                                         Y                            Y crop output


                                                                        45o line
      QY1
      QY0




                     QX0   QX1         X Qt. Input Use                                Y crop output
      PX                                                     QY0 QY1
                                  MC




                                   Demand X1
                                 Demand X0

                                         X Qt. Input Sold
                              Price at Retail


                                        PR0
ARP and impact on consumers prices
                                                                       MC
                                                                       Mkt.
                                                                       Service
                                                                       s

                                                                          D at
                                                                          Retail

                                                                       Qt at Retail
                          Price at Farm Level         S0
                                                S1




                                        PF0



                                                           Derived Demand at
                                                           Farm Level


                                                Qt0                 Qt at Farm
                              Price at Retail


                                        PR0
ARP and impact on consumers prices
                                                                       MC
                                                                       Mkt.
                                                                       Service
                                                                       s

                                                                          D at
                                                                          Retail

                                                                       Qt at Retail
                          Price at Farm Level         S0




                                        PF0



                                                           Derived Demand at
                                                           Farm Level


                                                Qt0                 Qt at Farm
                                Price at Retail


                                         PR0
Mkt Loan and TP impact on
                                         PR1
consumers prices
                                                                           MC
                                                                           Mkt.
                                                                           Service
                                                                           s

                                                                              D at
                                                                              Retail

                                                                           Qt at Retail
                            Price at Farm Level           S0



                                                        ML or TP

                                          PF0
                                          PF1

                                                               Derived Demand at
                                                               Farm Level


                                                  Qt0                   Qt at Farm
                 Exporter Cost Structure

•   Costs functions are characterized by flat MC
•   Profits very sensitive to quantity exported
•   Usually work on aset margin per unit
•   Cut costs by type of transportation
    Price/Unit



                                                     MR



                                                      MC



                            Qt   Qt grain per year
                        Domestic Supply                            Excess Supply
                         Domestic Supply
                         TP or MLR
Price0                                                            World Price0
Price1                                                             World Price1

                                                                               Demand
                                                                               Exports




                              Domestic
                              Demand
                  QS0   QS1              Qt per Year                       Qt Traded
                                                       Qt Export0 Qt Export1

Impact of TP or Mkt Loan on Quantity of Exports
                       Domestic Supply                         Excess Supply


Price0                                                       World Price0


                                                                        Demand
                                                                        Exports




                             Domestic
                             Demand
              QS1     QS0               Qt per Year   Qt Export0      Qt Traded


Impact of ARP on Quantity of Exports
     Macro Economic Policy and
            Agriculture
• Fiscal Policy Tools
  – Government spending
  – Taxation
• Monetary Policy Tools
  – Discount rate
  – Open market actions
  – Reserve requirements


 Chapter 2 pages 26-28 Knutson, Penn and Flinchbaugh
                                                       25
               Monetary Policy
• Easy money or expansionary policy
  – Increases Money Supply leads to lower interest rates and
    value of dollar
  – Buy Bonds
  – Reduce reserve requirement
  – Decrease discount rate

• Tight money or concretionary policy
  – Decrease Money Supply leads to higher interest rates and
    value of dollar
  – Sell Bonds
  – Raise reserve requirement
  – Increase discount rate
                Tight Money Policy Increases the Value of the US Dollar



Interest Rate                       Interest Rate             V$
                           S$




  I0




                             D$

                                Qt Money              V$0       Value US$
                Easy Money Policy Decreases the Value of the US Dollar



Interest Rate                       Interest Rate             V$
                           S$




  I0




                            D$

                                Qt Money             V$0       Value US$
                Increasing Taxes Decreases the Value of the US Dollar



Interest Rate                      Interest Rate             V$
                          S$




  I0




                            D$

                               Qt Money              V$0       Value US$
Impact of Strong Dollar on Export Demand
    Weaker Dollar Impact on Exports
P                                   P                                   $




                          Supply0                           S Export0
                                                                                             1:1



    P2
PFT                                                                                             PFT
                            T D0                    ED1
                                                                            1              P2

                         Dom D0                     ED0
                                  Q/yr                                          1
         QD0       QS0                   QT0 QT1                    Q/yr                        Yen



               Exporter                            Trade Sector                     Exchange Rate
Stronger Dollar Impact on Exports
P                                   P                                      $




                          Supply0                              S Export0
                                                                                                1:1


                                                                                                       P2
PFT
    P2
                            T D0
                                                                               1

                                                         ED0
                         Dom D0                    ED1
                                  Q/yr                                             1
         QD0       QS0                   QT1 QT0                       Q/yr                       Yen



               Exporter                            Trade Sector                        Exchange Rate
                        Domestic Supply                            Excess Supply

                                                                       World Price1
Price0                                                           World Price0
Price1

                                                                              Demand
                                                                              Exports


                                                                                New Demand
                                                                                Exports

                              Domestic
                              Demand
                      QS0                Qt per Year      Qt Export0        Qt Traded
                                                       Qt Export1

                  Impact of Stronger US Dollar on Trade
• Stronger   US Dollar makes prices of US products more expensive to ROW
• If prices of exports are higher SHOW this as a lower Export Demand
     • Lower exports and Quantity supplied in the US
     • Lower US price
     • Higher price in ROW
    Macro Economic Impacts on
            Agriculture
• Inflation in prices of inputs
• Ag more dependent on purchased inputs than in
  past
• Income statement affects of inflation
  Profit = TR – TC
  Profit = (PY * QY) – (PX*QX)– I * (Loan + PX*QX)
• Inflation raises Px and real interest rate I
• Inflation raises PY about 66% as much but 5 years
  later
                                          Supply or Sum MC
                  P/Unit                  After-Inflation
                                                             Supply or Sum MC
                                                             Pre-Inflation




                                     C
                     P1             B        Increased Cost from A to C, but

                     P0         E    A       Price Increase A to B



                                          Total Demand
                                                             QT/Year

                             Cost Price Squeeze
• Increased cost of production shifts Supply or MC from A to C
• Quantity produced falls causing price to increase P0 to P1 or E to B
• But price increase (EB) is less than cost increase (AC)
    Macro Economic Impacts on
            Agriculture
• Balance Sheet impacts
  Net Worth = Assets – Liabilities
  NW = PA*QA –DebtLand –DebtMach –DebtOperating Loan
• Inflation increases PA and encourages more debt
• If interest rates on debt are fixed, repay debt with
  lower real valued dollars
     Protecting Food Safety

• From naturally occurring sources
  – Cholesterol


• From intentional contamination
  – Food terrorism




  Chapters 10 and 11 Knutson, Penn and Flinchbaugh
                                                     25
       Who is responsible for
        a safe food supply?

• Buyer beware
• FDA
  – Processed
  – Food service
• USDA
    Food Security Dimensions

• Producing a sufficient quantity (before
  9/11)

• Protecting individual food needs (before
  9/11)

• Protecting food safety (after 9/11)
     Protecting Food Safety

• Who‘s job is it?
  – USDA – inspects red meats, poultry, and
    processed eggs (1/4 of food) domestic
     • $74 billion -- $899 million food safety
     • 8,000 inspectors
  – FDA – inspects seafood, cooked, canned
    and baked products, whole eggs, produce
    and animal feed (3/4 of food) both
    domestic and imported. Also inspects
    animal feed and its label.
     • $1.7 billion
     • 1,550 inspectors -- $20.5 million food safety
    Protecting Food Safety

• Inspection of imported fresh produce
• 1993
  – 13.8 billion pounds
  – 2-3% inspected
• 2000
  – 20.2 billion pounds
  – 2-3% inspected
• None of domestic fruits & veg.
  inspected unless a disease outbreak
  – If outbreak trace food to its origin
    Protecting Food Safety

• Food borne illness 1993-1997
  – 2,751 outbreaks
  – 12,537 individual cases involving fruits and
    vegetables
  – 6,709 cases involving meats
• Center for Disease Control and Prevention
  – 76 million people get sick from food each year
  – 300,000 are hospitalized
  – 5,000 die each year
     Protecting Food Safety

• Fruit and vegetable contamination with E.
  coli, O157:H7, salmonella and Listeria
• Imported green onions with hepatitis A
  – Chi Chi‘s Mexican restaurant in Western Penn
  – 550 infected Fall 2003
  – 3 died
• Other Cases
  – Cyclospore parasites in Guatemala raspberries
  – Salmonella infected sprouts
  – E. coli tainted lettuce and apple cider
    Protecting Food Safety

• High levels of pesticides on imported
  vegetables and fruits also of concern
  – FDA can not physically inspect all imports
  – Lacks testing capabilities for all chemicals
    Protecting Food Safety

• USDA meat inspectors
  – Inspector on site during operating hours at
    packing plants
  – 6,500 slaughter houses in the USA
  – Monitor meat for signs of fecal matter and
    other problems
  – USDA can not force plant closure
  – But it can with hold USDA inspection stamp
  – USDA can also remove inspectors
  – Closed 127 plants for violating HCCP plans
     Protecting Food Safety

• FDA‘s 2004 proposed budget
  – $20.5 million for food safety and counter
    terrorism
  – Expanded number of inspectors by 900
     • Brings number up to 1,550 to inspect ¾ food
     • Counter terrorism is justification
  – Inspectors at 90 of 317 official ports of entry
• FDA presumes that all is well until
  something goes wrong
  – If someone gets sick, they start tracing
    Most Likely Sources of
  Intentional Contamination

• Salad bars

• Fruits and vegetables (supermarkets)

• Employees (any level of food chain)
Hazard Analysis Critical Control
        Point (HACCP)
• Background: Federally inspected
  meat packing plants
  – 1907-96 Inspections in plant using senses
    of sight, smell and touch
  – 1985: FDA began to apply HACCP to
    processed foods (other than
    meat and poultry)
  – 1995: FSIS published HACCP
    regulations
Hazard Analysis Critical Control
        Point (HACCP)
• Science based system of hazard
  analysis critical control point
  (HACCP) procedures designed to
  minimize and detect pathogens
Hazard Analysis Critical Control
        Point (HACCP)
• HACCP Procedures
 – Assess system (plant) for hazards
 – Determine critical control points
   required to identify hazards
 – Establish procedures to
   monitor
 – Take corrective actions
Hazard Analysis Critical Control
        Point (HACCP)
• HACCP Issues
  – Application at other levels of channel
     • Rancher
     • Feed lot
     • Trucker
     • Packer (covered)
     • Point of sale (retailer/butcher shop/fast food
       operator
  – Authority for trace back
  – Application to fresh fruits and vegetables
  – Impacts on structure
Pesticides and Food Additive Safety


 • Delaney Clause (1958 Food Additives
   Amendment)
   – Zero tolerance
   – Proved unworkable due to technology
 • Food Quality Protection Act of 1996
   – Reasonable certainty of no harm as the
     standard for determining an acceptable
     level of risk
 Crop Insurance/Disaster Relief
• Federally subsidized crop insurance
  – Actual Production History (APH)
     • Most recent 10 years of actual yield histories
  – Multiple-Peril Crop Insurance
     • Various causes of loss
  – Federal Crop Insurance Corporation (FCIC)
  – Passed in 1938
  – Has been repeatedly changed since then
• Long History of providing Ad hoc Disaster
  Assistance
  – Political
                                                        26
              Background
• Insurance in agriculture has
  traditionally been crop yield insurance
  – Multiple peril (weather, fire, hail, wind,
    disease, insects, earthquake, and
    wildlife)
  – Based on:
    • historical producer yields
    • coverage level chosen (% of APH)
  – FCIC determined/developed market
    price converts losses into dollars
            Background

• Participation in Crop Insurance Program

     1980 – 10% of eligible acres

     1999 – 70% of eligible acres
        Background (Cont.)

• Insurance designed to provide
  protection against substantial losses
  – Deductible works like car insurance
  – Most common coverage in Texas has
    been at the 65% level [maximum
    government subsidy] except cotton
    (50%)
  – Higher levels of coverage have been cost
    prohibitive
    Current Insurance Alternatives
•   Actual Production History (APH)
•   Catastrophic Coverage (CAT)
•   Group Risk Plan (GRP)
•   Crop Revenue Coverage (CRC)
•   Income Protection (IP)
•   Group Revenue Insurance Policy (GRIP)
•   Adjusted Gross Revenue (AGR) - schedule F
•   Revenue Assurance (RA)
•   Pilot Programs:
    • Livestock
    • Fruits and vegetables
Dryland Cotton Yield per Planted Acre
    (Williamson Co.), 1989-1998


          600

          500
                                                                    405
          400
 Pounds




          300

          200

          100

           0
                1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
           Producers Hate
           Crop Insurance
Southern Producers
  ―Doesn‘t pay‖
  ―Premiums too high relative to indemnities‖

Midwest Producers
  ―My premiums subsidize producers in
  marginal areas‖

  There is truth to both points of view
           Is There Friction?

―There  are certain parts of the country that have
acres that are challenged by weather and farm
practices that are not up to what they should be ...
the two Texans who lead the House Agriculture
Committee come from such districts and have been
joined by others in supporting crop insurance‖

Senate Agriculture Committee Chairman Richard
Lugar (R-Ind.) October 19, 1999
Comparison of Loss Ratios
 for Selected States and
Commodities, 1998 & 1999

            9 1
            9 9
            8 9
            1 9
X
To
 r
 n
 C          3
            .
            6
            7 .
              4
              6
A
Co
 n
Ir          .
            4
            1 .
              9
              1

X
T  .
   9
   1 .
   2 1
     6
o
r
g
h
Sm
 u
K
O  2
   .
   0
   918
     1
     .
o
r
g
h
Sm
 u

X
C
o
Tt
 t
 o
 n           .
             9
             2 .
             1 9
               9
A
C
o
Gt
 o
 tn          .
             5
             91
             1 7
               1
               .
Agricultural Risk Protection Act of 2000

 Major increase in subsidy levels
 Revenue policies receives a percentage of premium assistance
  equal to APH
 Yield history adjustments for catastrophic years
     Substitute 60% of t-yield for actual yields less than 60% of t-yield
     Only applies to yield guarantee, premium still based on actual yields
 Administrative fees:
     CAT – from $60 per crop per county to $100
     Buy up – from %calculation to $30 per crop per county
     Fees waived for limited resource farmers
   Programs for livestock
   The cost of production as price election
   Premium discounts for good performance
   ―Beefs up‖ efforts to combat fraud
Average Coverage Level in 1998




                           50   -   55
                           56   -   60
                           61   -   65
                           66   -   70
                           71   -   76
Average Coverage Level in 2002




                            50   - 55
                            56   - 60
                            61   - 65
                            66   - 70
                            71   - 76
Agricultural Risk Protection Act of 2000


100%      0%
       1 01 0 0 %




75%                  67%
                            64%    64%
                                          59%    59%

50%
                    55%                                 55%
                           46%                                 48%
                                         42%
                                  38%                                 38%
                                                32%

25%                                                    24%
                                                              17%
                                                                     13%


 0%
       CAT                55%           65%           75%           85%

                           Old          ARPA
               Realities
• Crop insurance provides incentive to
  produce in high risk areas
• Ad hoc disaster assistance
  undermines crop insurance program
  – Incentive not to purchase insurance
• Have had to increase subsidy
The Feasibility of Ethanol
  Production in Texas
            Brian Herbst



Chapter 9 Knutson, Penn and Flinchbaugh
                Introduction
• Increase Interest in Ethanol
  –   Conflict in Middle East
  –   Houston – Non-attainment area
  –   Methyl Tertiary Butyl Ether (MTBE)
  –   Commodity Prices
               Background
• Historic ethanol production
• Texas interest
  – Added value
  – Community Development
• Ask by Texas State Legislature to complete
  the feasibility study
  – Benefits communities, farmers, and producer
    groups
                Objective
• The primary objective of this research is to
  evaluate the feasibility of ethanol
  production in Texas
            Alternative Scenarios
• 2 Feedstocks
   – Corn
   – Sorghum
• 3 Locations
   – Panhandle
   – Central
   – Southeast
• 4 Sizes
   – 20, 40, 60 and 80 MMGY
          Methods and Data
•   Stochastic simulation
•   Capital budgeting
•   Monte Carlo simulation using SIMETAR
•   Multivariate Empirical Distribution
          Stochastic Variables
• Output prices
  – Ethanol
  – Dried Distillers Grain with Solubles
• Input Prices
  –   Corn
  –   grain sorghum
  –   Electricity
  –   natural gas
              Assumptions
• Discount Rate – 8%
• Dividends paid at 30% positive after tax net
  farm income
• Unlimited financing
• Long-term Debt
  – 8% interest
  – 10 years
  – 50% equity required
               Capital Requirements
               20 MMGY       40 MMGY       60 MMGY       80 MMGY

Capital
Requirement    1.50          1.38          1.30          1.25
$/gallon


Total          $30 Million   $55 Million   $78 Million   $100 Million
Construction
and Start-up
                                         Net Income
                                      Corn in the Panhandle
                      5,000                                                            100

                      4,000

                      3,000                                                            80
Net Income ($1,000)




                      2,000




                                                                                             Probability > 0 (%)
                      1,000                                                            60

                          0

                      -1,000                                                           40

                      -2,000

                      -3,000                                                           20

                      -4,000

                      -5,000                                                           0
                               2003   2005   2007   2009   2011   2013   2015   2017

                                 20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                 20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                                                  Net Income Risk
                                                                            Corn in the Panhandle
                                                    20 MMGY                                                                                                                  40 MMGY


 40,000,000                                                                                                               40,000,000

 30,000,000                                                                                                               30,000,000

 20,000,000                                                                                                               20,000,000

 10,000,000                                                                                                               10,000,000

                  0                                                                                                                        0

-1 0 , 0 0 0 , 0 0 0                                                                                                     -1 0 , 0 0 0 , 0 0 0

-2 0 , 0 0 0 , 0 0 0                                                                                                     -2 0 , 0 0 0 , 0 0 0

-3 0 , 0 0 0 , 0 0 0                                                                                                     -3 0 , 0 0 0 , 0 0 0

-4 0 , 0 0 0 , 0 0 0                                                                                                     -4 0 , 0 0 0 , 0 0 0
                       2003   2005         2007            2009      2011              2013       2015           2017                           2003   2005         2007            2009      2011              2013       2015           2017


                                M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile                                   M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile

                                7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile                                                                   7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile



                                                    60 MMGY                                                                                                                  80 MMGY


 40,000,000                                                                                                               40,000,000

 30,000,000                                                                                                               30,000,000

 20,000,000                                                                                                               20,000,000

 10,000,000                                                                                                               10,000,000

                  0                                                                                                                        0

-1 0 , 0 0 0 , 0 0 0                                                                                                     -1 0 , 0 0 0 , 0 0 0

-2 0 , 0 0 0 , 0 0 0                                                                                                     -2 0 , 0 0 0 , 0 0 0

-3 0 , 0 0 0 , 0 0 0                                                                                                     -3 0 , 0 0 0 , 0 0 0

-4 0 , 0 0 0 , 0 0 0                                                                                                     -4 0 , 0 0 0 , 0 0 0
                       2003   2005         2007            2009      2011              2013       2015           2017                           2003   2005         2007            2009      2011              2013       2015           2017


                                M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile                                   M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile

                                7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile                                                                   7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile
                                        Ending Cash
                                        Corn in the Panhandle
                       10,000                                                                100

                            0
                                                                                             80
                       -10,000
Ending Cash ($1,000)




                                                                                                   Probability > 0 (%)
                       -20,000                                                               60

                       -30,000

                       -40,000                                                               40


                       -50,000
                                                                                             20
                       -60,000

                       -70,000                                                               0
                                 2003    2005   2007   2009   2011   2013   2015   2017

                                 20 MMGY         40 MMGY         60 MMGY           80 MMGY
                                 20 MMGY         40 MMGY         60 MMGY           80 MMGY
                                  Dividends Paid
                                   Corn in the Panhandle
                     2,500,000                                                              100



                     2,000,000                                                              80




                                                                                                  Probability > 0 (%)
Dividends Paid ($)




                     1,500,000                                                              60



                     1,000,000                                                              40



                      500,000                                                               20



                            0                                                               0
                                 2003   2005   2007   2009   2011   2013   2015    2017

                                  20 MMGY        40 MMGY        60 MMGY           80 MMGY
                                  20 MMGY        40 MMGY        60 MMGY           80 MMGY
                                      Real Net Worth
                                           Corn in the Panhandle
                          60,000                                                               100


                          50,000
                                                                                               80
Real Net Worth ($1,000)




                          40,000




                                                                                                     Probability > 0 (%)
                                                                                               60
                          30,000

                          20,000
                                                                                               40

                          10,000
                                                                                               20
                               0


                          -10,000                                                              0
                                    2003   2005   2007   2009   2011   2013   2015    2017

                                     20 MMGY        40 MMGY        60 MMGY           80 MMGY
                                     20 MMGY        40 MMGY        60 MMGY           80 MMGY
                      Net Present Value
                        Corn in the Panhandle
                                                           1
                                                       0.9
                                                       0.8
                                                       0.7
                                                       0.6
Prob




                                                       0.5
                                                       0.4
                                                       0.3
                                                       0.2
                                                       0.1
                                                           0
       -150,000,000   -100,000,000     -50,000,000             0             50,000,000

                      20 MMGY        40 MMGY     60 MMGY           80 MMGY
                        Sensitivity Table
                         Corn in the Panhandle
Variable
                          Base       20 MMGY     80 MMGY
Corn Price ($/bu.)
                          2.61          -0.29     -0.21
Natural Gas ($/Mcf)
                          2.39          -1.49     -1.00
Ethanol Price ($/gal)
                         1.086          0.099     0.066
DDGS ($/ton)
                         106.40         32.45     21.63
Discount Rate
(percentage point
                          8.00         -11.40     -6.74
change)
                                        Net Income
                                Sorghum in the Panhandle
                      14,000                                                           100


                      12,000
                                                                                       80
                      10,000
Net Income ($1,000)




                                                                                             Probability > 0 (%)
                                                                                       60
                       8,000

                       6,000
                                                                                       40

                       4,000
                                                                                       20
                       2,000


                          0                                                            0
                               2003   2005   2007   2009   2011   2013   2015   2017

                                 20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                 20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                                                  Net Income Risk
                                                                  Sorghum in the Panhandle
                                                    20 MMGY                                                                                                                  40 MMGY


 50,000,000                                                                                                               50,000,000

 40,000,000                                                                                                               40,000,000

 30,000,000                                                                                                               30,000,000

 20,000,000                                                                                                               20,000,000

 10,000,000                                                                                                               10,000,000

                  0                                                                                                                        0

-1 0 , 0 0 0 , 0 0 0                                                                                                     -1 0 , 0 0 0 , 0 0 0

-2 0 , 0 0 0 , 0 0 0                                                                                                     -2 0 , 0 0 0 , 0 0 0

-3 0 , 0 0 0 , 0 0 0                                                                                                     -3 0 , 0 0 0 , 0 0 0
                       2003   2005         2007            2009      2011              2013       2015           2017                           2003   2005         2007            2009      2011              2013       2015           2017


                                M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile                                   M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile

                                7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile                                                                   7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile



                                                    60 MMGY                                                                                                                  80 MMGY


 50,000,000                                                                                                               50,000,000

 40,000,000                                                                                                               40,000,000

 30,000,000                                                                                                               30,000,000

 20,000,000                                                                                                               20,000,000

 10,000,000                                                                                                               10,000,000

                  0                                                                                                                        0

-1 0 , 0 0 0 , 0 0 0                                                                                                     -1 0 , 0 0 0 , 0 0 0

-2 0 , 0 0 0 , 0 0 0                                                                                                     -2 0 , 0 0 0 , 0 0 0

-3 0 , 0 0 0 , 0 0 0                                                                                                     -3 0 , 0 0 0 , 0 0 0
                       2003   2005         2007            2009      2011              2013       2015           2017                           2003   2005         2007            2009      2011              2013       2015           2017


                                M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile                                   M ean                         5 t h P e rc e n t ile          2 5 t h P e rc e n t ile

                                7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile                                                                   7 5 t h P e rc e n t ile      9 5 t h P e rc e n t ile
                                       Ending Cash
                                 Sorghum in the Panhandle
                       40,000                                                           100

                       35,000
                                                                                        80
                       30,000
Ending Cash ($1,000)




                                                                                              Probability > 0 (%)
                       25,000                                                           60

                       20,000

                       15,000                                                           40


                       10,000
                                                                                        20
                        5,000

                           0                                                            0
                                2003   2005   2007   2009   2011   2013   2015   2017

                                  20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                  20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                  Dividends Paid
                                 Sorghum in the Panhandle
                     4,000,000                                                              100

                     3,500,000
                                                                                            80
                     3,000,000




                                                                                                  Probability > 0 (%)
Dividends Paid ($)




                     2,500,000                                                              60

                     2,000,000

                     1,500,000                                                              40


                     1,000,000
                                                                                            20
                      500,000

                            0                                                               0
                                 2003   2005   2007   2009   2011   2013   2015    2017

                                  20 MMGY        40 MMGY        60 MMGY           80 MMGY
                                  20 MMGY        40 MMGY        60 MMGY           80 MMGY
                                     Real Net Worth
                                    Sorghum in the Panhandle
                          60,000                                                           100


                          50,000
Real Net Worth ($1,000)




                                                                                                 Probability > 0 (%)
                          40,000


                          30,000


                          20,000


                          10,000


                              0                                                            80
                                   2003   2005   2007   2009   2011   2013   2015   2017

                                     20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                     20 MMGY       40 MMGY        60 MMGY       80 MMGY
                                         Net Present Value
                                             Sorghum in the Panhandle
                                                                                                          1

                                                                                                         0.9
                                                                                                         0.8

                                                                                                         0.7
                                                                                                         0.6
Prob




                                                                                                         0.5
                                                                                                         0.4
                                                                                                         0.3

                                                                                                         0.2
                                                                                                         0.1

                                                                                                          0
       -120, 000, 000   -100, 000, 000   -80, 000, 000   -60, 000, 000   -40, 000, 000   -20, 000, 000         0   20, 000, 000    40, 000, 000   60, 000, 000   80, 000, 000




                                              20 MMGY                      40 MMGY                        60 MMGY                 80 MMGY
                        Sensitivity Table
                        Sorghum in the Panhandle
Variable
                          Base       20 MMGY       80 MMGY
Sorghum Price
($/bu.)
                           2.38         -0.06        0.03
Natural Gas ($/Mcf)
                           2.39         -0.27        0.22
Ethanol Price ($/gal)
                          1.086         0.018       -0.014
DDGS ($/ton)
                         106.40         5.90        -4.59
Discount Rate
(percentage point
                           8.00         -0.97        0.83
change)
                Net Present Value Table
Plant                           Feedstock & Location
Size      Corn            Corn       Grain Sorghum      Grain        Grain
        Panhandle      Central Texas   Panhandle       Sorghum     Sorghum
                                                        Central    Southeast
                                                        Texas
20      -12 M     2%    -18 M   1%     -1 M   51%      -4 M   25% -19 M   1%
MMG
Y
40      -23 M     3%    -36 M   1%   -180 K   57%      -8 M   29% -37 M   1%
MMG
Y
60      -26 M     9%    -44 M   1%     6M     71%      -4 M   45% -46 M   1%
MMG
Y
                  Summary
• Corn showed little economic incentive to entice
  equity investment
• Grain sorghum based ethanol showed some
  economic incentive in the Texas Panhandle
• Grain sorghum based ethanol in the Central region
  of Texas shows potential
• Southeast Texas did not show positive results
  using grain sorghum to produce ethanol
      Summary – Continued
• Sensitivity Analysis
  – A small change in ethanol price can have a big
    impact on the economic viability of the plants
    because of the large volume produced
           Future Research
• Different feedstocks
• Different technologies
• Feedstock Prices
        Country of Origin Labeling
      (COOL) and the Cattle Industry




Source: Derrell S. Peel, Livestock Marketing Specialist, Oklahoma State University
       Mandatory COOL

• Proposed Mandatory Rules
  – Issued October 27, 2003


• Comment Period
  – Ends December 29, 2003
What is Country of Origin Labeling

• Included in 2002 Farm Bill (PL 107-171)
• Amends Ag Marketing Act of 1946
• Covers 500+ retail products
  –   Beef, Pork, Lamb (whole muscle and ground)
  –   Fresh and Frozen Fruits and Vegetables
  –   Seafood (wild and farm-raised)
  –   Peanuts
• Administered by AMS
What Country of Origin Labeling Isn’t


  • Is not animal health or food safety
    – FDA (food)
    – FSIS (meat)
    – APHIS (animals)
  • Is not market grading
    – AMS
     Components of COOL

• Retail product must be labeled
• Food service excluded
  – Including deli‘s and salad bars in retail
    establishments
• Excludes processed foods
• Becomes mandatory September 30, 2004
     Who Must Label - Retailer

• Retailer has meaning given in Perishable
  Agricultural Commodities Act (PACA) – a business
  engaged in the selling of fresh and frozen fruits
  and vegetables at retail with an annual invoice
  value of more than $230,000
   − Approximately 4,500 licensees (37,000 stores)
   − PACA definition excludes butcher shops, fish
     markets, and exporters
• Exempts food service establishments including
  those within retail establishments (e.g. delis and
  salad bars)
      Consumer Notification
        Required at Retail

• Country of Origin
• Label or notice must:
   – Be legible
   – Be in English
   – Not obscure other required
     information
            Exclusions

• Covered commodities are excluded if an
  ―ingredient in a processed food item‖
• Regulation defines ―processed food
  item‖
• Does not exclude covered commodities
  just because they have been further
  prepared for consumption
       Processed Food Item –
        Change of Character
• A combination of ingredients that include a
  covered commodity that has undergone a
  physical or chemical change, and has
  character that is different from that of the
  covered commodity
• Examples of covered commodities excluded
  because of change of character:
  – Oranges squeezed to make orange juice
  – Pork bellies cured and smoked to make bacon
 Processed Food Item – Combination
  of Substantive Food Components

• A covered commodity that has been combined with:
   – Other covered commodities
   – Other substantive food components,
   And has a character different than that of the covered
     commodity
• Examples of covered commodities excluded because
  they are a combination of substantive food components:
   –   Bagged salad (e.g. lettuce, carrots and cabbage)
   –   Fruit trays/Vegetable trays (e.g. party trays)
   –   Seafood medley (e.g. shrimp, scallops and clams)
   –   Mixed nuts
      Covered Commodities
      Required to be Labeled

• Examples:
  – Solution-enhanced and seasoned pork loin
  – Cooked beef roast
  – Canned salmon
  – Bagged lettuce
  – Canned roasted and salted peanuts
  – Breaded shrimp
Covered Products – Muscle Cuts
    of Beef, Lamb and Pork

 • ―All muscle cuts of beef, lamb and pork
   whether chilled, frozen, raw, cooked,
   seasoned or breaded.‖
           Beef Products

• Whole muscle meats
  – Product of U.S.A.
  – Mixed Origin
  – Imported
• Ground beef
  – Each specific origin included in the blend
    must be included on the label in
    alphabetical order
    Labeling Requirements

• Product of U.S.A.
  – Born, Raised and Slaughtered in the U.S.


• Product of Country X
  – Labeled from entry until final sale
  – Label only covers importing country (not
    other countries of birth or production)
Labeling Requirements cont.

• Mixed Origin (whole muscle)
• Examples
  – Imported from country X, raised and slaughtered in
    U.S.
     • With records: Born (and raised) in country X, raised and
       processed in U.S.
  – Imported from country Y, slaughtered in U.S.
     • With records: Born in country X, raised in country Y,
       processed in U.S.
 Labeling Requirements cont.

• Mixed Origin (ground or blended)
• Example
  – Ground beef – Product of Australia;
    Imported from Mexico, Raised and
    Slaughtered in U.S.A.; Product of U.S.A.
            Recordkeeping
• Retailers must label covered commodities
  – Must keep Point of Sale records for 7 days
  – Must keep records of origin for 2 years
• Suppliers must provide information about
  country of origin
  – Producers, handlers, processors, packers, importers
• Verifiable (auditable) records
  – Suppliers must maintain records
  – Affidavits may be used to certify origin and existence
    of records
  Recordkeeping - Suppliers

• ―Any person engaged in the business of
  supplying a covered commodity to a retailer,
  whether directly or indirectly, is required to
  maintain records to establish and identify the
  immediate previous source and the immediate
  subsequent recipient of a covered commodity,
  in such a way that identifies the product unique
  to that transaction, for a period of 2 years from
  the date of the transaction.‖
  Recordkeeping - Suppliers

• Suppliers must provide origin
  information to buyers
• Records must identify previous source
  and subsequent recipient of product
• Must possess or have legal access to
  records that substantiate origin claims
• Must maintain records unique to each
  transaction for 2 years
  Recordkeeping - Suppliers

• ―For suppliers that handle similar covered
  commodities from more than one country,
  the supplier must be able to document that
  the origin of a product was separately
  tracked, while in their control, during any
  production or packaging processes to
  demonstrate that the identity of the product
  was maintained.‖
 Enforcement and Violations

• Retailers and suppliers are subject to
  enforcement provisions
  – $10,000 fine for willful violations
• USDA-AMS will conduct compliance
  reviews
• USDA-AMS will initiate investigations and
  enforcement actions
• Other statutes may apply as well
     COOL is a Food Labeling Bill

• Food Labeling is covered by the Food and Drug
  Administration (FDA)
• Code of Federal Regulations
   – Title 21, Chapter I, Part 101.18
   – Misbranding of Food
• ―Among the representations in the labeling of a food
  which render such food misbranded is any
  representation that expresses or implies a geographical
  origin of the food except when such representation is a
  truthful representation of geographical origin‖
Implications for Cattle Industry

• Probable minimum cow-calf records
  – Owner and location
  – Breeding herd inventory
     • Purchased animals
     • Cull sales
     • Raised animals
  – Number and Sex of Births by year
  – Animal sales
     • Buyer
     • Date
     • Animal sex
• Breeding animals are covered by COOL
  Implications for Cattle Industry

• Probable minimum stocker records
• Put-together groups
   – Seller and location of purchased animals
      • Date and sex of purchased animals
   – Animal sales
      • Buyer
      • Date
      • Animal sex
• Must be able to trace animals from different source
  groups through management sorting and commingling
  into several sales groups
Implications for Cattle Industry

• Probable minimum feedlot records
• Each pen
  – Seller and location of purchased animals
    • Date and sex of purchased animals
  – Animal sales
    • Buyer
    • Date
    • Animal sex
Implications for Cattle Industry

• Probable minimum packer records
• Each shift or slaughter group
  – Owner and location of purchased animals
    • Date and sex of purchased animals
  – Meat sales by slaughter/fab group
    • Lot number, date and plant
      Individual Animal ID

• Required? – No, in fact, forbidden as a
  USDA mandate
• Necessary? – Maybe not
• Helpful? – Definitely
  – Especially for stocker and feedlot sectors
    Current Status of COOL

• House and Senate Appropriations
  actions have different language
  regarding implementation of COOL
  – These differences are yet to be reconciled
• Various proposals to modify or repeal
  COOL
  Challenge for the Industry

• Plan for compliance
  – Rules are uncertain and subject to change


• Make beneficial use of new information
  – Use records to improve production and
    marketing

								
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