Cultivating Independence

(Page 3 of 5)

Futures markets (which allow farmers to sell their crops in advance of harvest, locking in today’s price for goods that won’t be delivered until later), commodities options (which for a slight premium give farmers the right-but not the obligation-to sell their crop in the future for today’s price), and various forward pricing contracts (which do similar things) are becoming easily accessible. Farmers now have the chance to lock in their returns months before harvest, removing much of the terrifying uncertainty that has long dogged farming.

Unfortunately, only a minority of farmers have bothered to take advantage of these new possibilities. “I would guess only 10 to’ 12 percent of farmers are hedging on traditional major crops like corn, beans, and so forth,” says Terry Franc1 of the American Farm Bureau. “If you include contracts at local elevators and so forth maybe one third to one half of all crops are priced before harvest.”

Farmers have real economic power in commodities trading, if only they develop the knowledge and confidence to exert it. In the 1988 Iowa State University Farm Finance Survey, farmers who hadn’t used a forward contract over the previous two years were asked why not. Fifty-four percent reported that fear or lack of information held them back, 46 percent said they “didn’t have enough time” to do a good job, 68 voiced the opinion that futures markets carried “too much speculation and manipulation,” and 12 percent said such tools were “morally wrong.”

“Farmers are already speculating every time they put a seed in the ground, they just aren’t acknowledging it. They’re flying blind,” says wheat grower Magness. “I started getting the Wall Street Journal three years ago and following futures markets closely every day. It makes me feel a lot better to have my crop hedged. We ought to be as excited about commodities options contracts as we were about hybrid corn, but few farmers are.”

Commodity options, as opposed to futures, notes University of Maryland economist Bruce Gardner, duplicate “the kind of protection that farm programs give-a price floor but no limit on profits from high prices.”

But, he says, “Sometimes farmers will say that selling forward is just as much a gamble as taking one’s chances on the cash market. If you sell forward at $8.00, and the price rises later to $10, you have gambled and lost. In part, this is just a confusion about the meaning of gambling. It’s like saying you are gambling by staying home from Las Vegas because you might have won big if you had gone there.”

Farmers have been conditioned from long experience to shoot for the jackpots in peak years, because lean times will surely be coming. Widespread forward pricing, if it takes hold, represents an entirely new psychological environment-the peaks may not be quite so exciting, but the troughs will be moderated.

So much for what farmers can do to heal themselves. What about the federal programs? Perhaps the first thing that ought to be acknowledged is that the 1985 farm bill was a step in the right direction. It lowered price supports to 75 percent of the most recent five-year average of market prices, throwing out the high and low years. This was the first time price supports had been tied to actual supply and demand conditions instead of just some political calculation-and it was a breakthrough.

Linking price supports to market prices reduces the chances they will encourage overproduction, and keeping them down at the 75-percent level means the government will only get into the costly and destructive business of buying up surplus commodities in rare years. Low, market-tied price supports are also less likely to force prices above prevailing world levels, and this has helped U.S. agricultural exports rebound. The Reagan administration also wanted to change deficiency payments (the money above and beyond price sup- ports that is paid directly to farmers to give them a guaranteed income) so that they would give farmers an annual return equal to 100 percent of the previous five-year average of market prices. This would have transformed our farm subsidy program from its current status as a politically driven income supplement to something more like a real safety net: The government wouldn’t let a bad year take place, but in the long run it would guarantee farmers a return equivalent only to what they could earn in the marketplace. Unfortunately, Congress insisted on maintaining high deficiency payments, prolonging a whole host of overproduction and misproduction incentives

And, of course, subsidy levels are only one part of farm policy. There are also mandatory land set-asides, various types of interference in export markets, conservation regulations, strict cropping controls, huge credit giveaways, disaster-relief protocols, and so forth.

In most of these areas the 1985 farm bill made little progress, and in several it notably worsened government interference with agricultural functioning and farmer independence. Worst of all, there is nothing to protect or preserve the few reforms where the 1985 bill did make progress. Next election, or cyclical downturn, the feds are quite likely to revert right back to old patterns: more welfare, more interference, more central planning, all in the name of the family farmer.

Clearly, sharp departures in U.S. farm policy are needed. Ignore the damage current policies do to farmer morale. Ignore the costs in economic efficiency. Ignore the environmental harm we are subsidizing. Ignore the huge balance-of-payments losses that come from forfeited exports. The single fact that the last decade’s farm policy has cost every single family in this country $300 to $400 a year in extra taxes and consumer costs, without much to show for it, is reason enough to justify a break with business as usual.

And for practical reasons the present may be a good time to try something bolder. The federal government has just finished spending $200 billion on various farm programs during the 1980s. A painful farm shakeout has worked itself through only 7 percent of all operations are today classified as under  severe financial strain. Experts say 85 percent to 90 percent of the individual-debt problem that dogged farmers for most of the last decade has finally been digested. Exports, blasted by the disastrous ’81 farm bill, have begun to rebound. Farm income stands at a record high.

All in all, it is hard to imagine a time when changing directions will be any easier.

Farm bills are written from a notoriously short-run viewpoint. That is why we haven’t had real improvement in the federal programs in more than 50 years, despite wide agreement that the current system has lousy long-term effects. It is time to begin some gradual, inexorable, structural reforms that do more than just tinker.

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