U.S. Sen. Mike Johanns, R-Neb., a member of the Senate Ag Committee and former U.S. Secretary of Agriculture, this week sent a letter to the leaders of the farm bill conference committee highlighting the dangers of artificially distorting agriculture market prices.
“I recognize the importance of giving our producers the certainty of long-term ag policy, but they deserve a farm bill that helps them sell goods on a global market — not one that distorts it,” Johanns said. “As farm bill conferees aim to wrap up this week, it’s crucially important to be more honest about the risks in the direction some are trying to take. It will distort the ag economy, raise trade concerns and skew the market for farmers and ranchers for years to come. A plain extension of the current farm bill — something I have been against — would be better than an outdated farm policy.”
The text of the letter is below:
Dear Chairmen Stabenow and Lucas and Ranking Members Cochran and Peterson:
I am concerned that the conference may take a reckless and fiscally irresponsible path regarding our farm safety net. If the conferees adopt market-distorting policy, such as recoupling target prices to planted acres, sadly an extension of the current farm bill would be preferable.
Consider a lesson from farm bill history. In the early 1980s, historically high commodity prices led Congress to pass a farm bill with increased target prices. At the time, it was not projected to be very expensive because these target prices were mostly below projected prices. But a short time later, the economy experienced a number of factors that caused prices to collapse. Very quickly, that farm bill’s price tag skyrocketed. The Secretary of Agriculture was forced to do everything possible to artificially raise market prices, including desperate attempts to compel farmers to take land out of production through annual acreage set-asides.
This period of historically high prices is very similar to the situation we find ourselves in today. The House Price Loss Coverage (PLC) is a new target price program tied to planted acres. It does not look very expensive because CBO projects relatively high prices. But as we have seen in recent months, there is no guarantee that will last. With the EPA potentially scaling back the Renewable Fuel Standard and growth in Chinese demand slowing, among other factors, we could see a time of low prices again in agriculture. In fact, we have already seen corn prices fall nearly 40 percent in the last year.
While no farmer wants to see a time of low prices, no taxpayer should want the open-ended fiscal exposure of a recoupled target price program that never adjusts with market conditions. The effect of the PLC program is to shield farmers from market incentives. Like all businesses, farms respond to incentives, and if Congress sets an artificially high price, farmers will respond to it and it will lead to overproduction — especially if farmers can get that higher price by planting more acres to a specific crop — increasing supply and driving prices down further.
The basic function of a market is to efficiently allocate resources. Target prices above equilibrium prices cripple market incentives. Unless this Congress decides it knows how to manage supply and demand better than the millions of participants in the agricultural economy, we should avoid these kinds of rigid market-distorting programs.
Now some have argued that the Agricultural Risk Coverage (ARC) program in the Senate bill has some of the same flaws, but the advantage of this program is that the payments run out — if prices stay low farmers are not guaranteed a payment forever. Under PLC, those payments could continue indefinitely with no incentive for the farmer to switch crops or reduce production. Farmers — wherever they live and whatever they grow — should make those decisions in response to demand.
Furthermore, the PLC program would cause the United States to engage in brinkmanship at the World Trade Organization (WTO). We have already subsidized the Brazilian cotton industry to the tune of $147 million per year because of our unwillingness to abide by our WTO commitments, which are nothing more than rules to ensure a level playing field in international trade. The PLC program has many of the same price-suppressing characteristics as programs the WTO ruled against in the Brazil Cotton case. How many more competitors must we buy off or WTO cases must we lose before the Agriculture Committees realize that treating our trade commitments flippantly is a recipe for disaster?
I am not only concerned about our current trade commitments, but also our ability to promote U.S. agriculture in the future. As Secretary of Agriculture, I was heavily engaged in the Doha negotiations in an effort to expand opportunities for U.S. agriculture. While these talks did not culminate in an agreement, it is certainly in the best interest of our agriculture industry to promote market access for our agricultural products in the future. If we pass a farm program that suppresses prices in international markets, we will hamstring our negotiators who will have to leave valuable concessions on the table because they will be forced to defend trade-distorting programs that were unwisely passed by Congress.
Therefore, I strongly urge you to ensure that the farm programs respect our trade commitments and are either decoupled from production decisions or limited in the amount of support provided to farmers in cases of multi-year price declines. I am strongly committed to completing a five-year farm bill, but we should not pass a farm bill simply for the sake of passing a farm bill. Let’s also make sure we have good farm policy. I look forward to working with you in this endeavor as the conference moves forward.
United States Senator