The Need for International Supply Management

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The Need for International Supply Management
Daniel De La Torre-Ugarte May 10, 2005 Luxembourg
Agricultural Policy Analysis Center - The
University of Tennessee - 310 Morgan Hall -
Knoxville, TN 37996 www.agpolicy.org - phone
[phone] - fax [phone]
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Nature of Crop Markets

• Technology expands output faster than population
  and exports expand demand
• Little self-correction on the demand side
• People will pay almost anything when food is
  short
• Low prices do not induce people to eat more
• Little self-correction on the supply side
• Farmers tend to produce on all their acreage
• Few alternate uses for most cropland
• Market failure lower prices do not solve the
  problem

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Critical Changes in U.S. Agricultural Policy
Since 1996

• Elimination of supply control instruments set
  aside program
• Elimination of support price mechanism
• Emphasis on decoupled payments
• Full planting flexibility

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Immediate Impacts

• Farmers planted an additional 15 millions acres
  that were in supply control programs
• Support price were eliminated in practice, so
  there is no limit on how low prices could fall
• Changes in crop mix did occur

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US Six Cereals and FAO Cereals Price Indices

• After 1996
• US prices plummeted
• World prices followed

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Consequence of Low Prices High Subsidies
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Exports Did Not Deliver
Index of US Population, US Demand for 8 Crops
and US Exports of 8 Crops 1979100
Adjusted for grain exported in meat

• Exports down to flat for last two decades
• Domestic demand increases steadily
• Since 1979, exports have NOT been the driving
  force in US crop markets

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Acreage Response toLower Prices?
Four Crop Acreage
Four Crop Price Adjusted for Coupled and
Decoupled Payments
Index (1996100)
Four Crop Price Adjusted for Coupled Payments
Four Crop Price

• Since 1996
• Aggregate US corn, wheat, soybean, and cotton
  acreage changed little
• While prices (take your pick) dropped by 40, 30
  or 22

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Acreage Response toLower Prices?
Four Crop Acreage
Index (1996100)
Four Crop Price

• Since 1996 Freedom to Farm
• Aggregate US corn, wheat, soybean, and cotton
  acreage changed little despite a wide fluctuation
  in price

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Canada Farmland Planted
Other Oilseeds
Other Grains
Canola
Million Acres
Barley
Wheat

• Canada reduced subsidies in 1990s
• Eliminated grain transportation subsidies in 1995
• Crop mix changed, total acreage remained flat

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Australia Farmland Planted
Oilseeds
Coarse Grains
Million Acres
Wheat

• Australia dramatically reduced wool subsidies in
  1991
• Acreage shifted from pasture to crops
• All the while, prices declined

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What about the Geography of Agriculture

• Agriculture production is first and foremost
  determined by land availability and ecosystem
• Then by investments in infrastructure and
  technology
• To a large extent agricultural production and
  consequently gains from free trade are fixed into
  a few countries

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Free Trade No Chance of Success

• Production, exports, and benefits would
  concentrate in same countries
• Hundreds of million of peasant/family farms not
  integrated to the market, so they are
  marginalized
• Free markets do not have the ability to
  significantly adjust production and generate
  acceptable prices

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How to benefit peasants and countries of the South

• Refocused Intl organizations away from free
  trade in agriculture
• Need instruments i.e. international supply
  management- to manage the use of production
  capacity in the North generate higher prices,
  and transfer these prices and higher volume to
  the South

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Supply Management Instruments

• International level export quotas on
  agricultural developed countries
• Domestic Implementation
• Production quotas
• Short, Medium, and long term set asides
• Reserve / Buffer stocks
• Key elements political will and price levels

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Supply Management does not solve all problems

• Need complementary instruments to shift resources
  from export driven commercial farms to locally
  oriented family agriculture
• Supply management and environmental instruments
  should work in the same direction
• Investment in infrastructure
• Improve competition in marketing chain

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Conclusions

• Free market inability to correct supply and
  demand unbalances in agriculture
• Free trade by itself is a race to the bottom
• Free trade has little chance of benefiting family
  farmers and counties of the South
• Another path is possible

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Worldwide Excess Capacity Will Be The Long-run
Problem

• Dramatic yield increases in other countries
• Cargill, Monsanto, John Deere, etc., etc., etc.
• Acreage once in production will be brought back
  in
• Russia, Ukraine and others
• New Acreage
• Brazil
• China

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US Net Farm Income and Government Payments
Net Farm Income
Billion Dollars
Total Government Payments

• Since 1996 US
• Government payments are up over 100
• Net Farm Income declined anyway

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Is There a Natural Trend to Agricultural
Oversupply ?

• History shows social preference for food is
  higher than private preference
• This implies that at every level of price,
  society prefers more food
• Society is willing to invest in agriculture to
  secure food and self preservation