US Capitol Building – Washington, DC Photo: Licensed Image.
In April 1933, Senator George W. Norris (R-NE) argued that Congress should incorporate cost-of-production calculations into farm support policies. His efforts were part of the debate over authorizing emergency policies in response to the Great Depression and part of President Roosevelt’s New Deal.
Nine decades later, high production costs, due in part to Russia’s unprovoked war against Ukraine, have renewed the argument in Congress for adding a cost-of-production component to farm support programs. The current concept is “margin protection” or payments based on yield margins.
In light of the anticipated reauthorization debate in 2023, this article begins a multi-part analysis of cost of production and margin calculations in farm payment programs.
Returning to the floor of the United States Senate in 1933, Senator Norris led the fight to include a cost-of-production option to induce farm support. Congress debated legislation that would become the Agricultural Adjustment Act of 1933. The prevailing policy at the time was based on the concept of economic fairness for farmers and became known as parity; he used the ratio of costs to prices compared to costs to prices at a fixed point in time (1909-1914).
Among those who opposed the cost-of-production policy option was Agriculture Secretary Henry Wallace, who wrote a letter to senators that was read into the record of the debate. Secretary Wallace told senators that he was “scared of the term “cost of production.” . . [i]it is too elusive: there are too many types of cost of production.’
Southern senators were the strongest opposition to Norris’s proposal and argued that the cost-of-production policy was insufficient because farmers needed more than cost recovery to survive. They were also concerned that the level of support might decrease as costs are reduced. Senator Norris was unsuccessful, but he fought his way from the committee room to the Senate floor to President Roosevelt’s Oval Office. The passage of the Act was almost derailed by this underlying political dispute.
If Congress reauthorizes the farm bill in 2023, it will mark ninety years since the first foray into federal policy to directly support American farmers during the Great Depression. Much has changed in recent decades, but the debate has consistently included disagreement over fixed support mechanisms or those that adapt to changing circumstances.
The drive to incorporate some version of cost of production into policy tends to arise when the costs of agricultural inputs such as seeds, fertilizers, chemicals and fuel rise and reduce farm incomes; the era of inflation and stagflation in the 1970s provides a prime example.
Early discussions raised the concept of yield margins to include cost of production in program payments. The margin has not yet been clearly defined or explained, but is expected to include the difference between crop prices or revenue and some calculation of the cost of producing the crop.
A lot depends on how the margin is defined. When program payments are calculated using production costs, the first questions are what costs to include and then how to include costs in a national program with significant variations across crops, farmers and regions. For reference, the USDA reports major crop expenditures through 1975 through the Economic Research Service (ERS).
USDA reports costs in two categories: (1) operating (or variable) costs; and (2) allocated overhead costs. For historical perspective and for further discussion, ERS data for 1975-1985 are illustrated in Figures 1a-1c for corn, wheat, and cotton, respectively; the gross value of products (excluding government payments) is also included. This is the last era of high inflation.
The difficult economic times of the 1970s and 1980s were the most important, recent, and relevant era in which Congress used cost of production to adjust target prices. Figure 2 provides an overview of inflation over time as reported by the Minneapolis Fed. Inflation for the period 1972 to 1984 is highlighted because it is consistent with the provisions of the farm program discussed here. The inflation rate for 2022 is estimated, based on changes from the first quarter of 2021 to the first quarter of 2022.
The Farm and Consumer Protection Act of 1973 was a milestone in the history of farm policy. At a time when crop prices were rising as were costs, Congress effectively replaced the failed parity policy of the previous forty years with a stimulus policy that used target or set prices to trigger deficit payments whenever market prices were below the target price .
Figure 3 illustrates the average monthly price received by farmers for corn, wheat, and cotton during 1970-1985 relevant to the farm program payments discussed here.
Figure 4a summarizes the 1973 Farm Bill target prices and adjustments for corn, wheat, and cotton. Congress designed the adjustment to take into account any changes during the preceding calendar year in the index of manufacturing costs, interest, taxes, and wage rates. Figure 4b illustrates the changes in variable costs and overhead costs in 1976 compared to 1975 for corn, cotton, and wheat.
These would not be the actual costs used to adjust the target prices, which would be based on changes during the calendar year. Figure 4c shows USDA-adjusted target prices for corn, wheat, and cotton.
The Food and Agriculture Act of 1977 revised the calculations of plan price adjustments. USDA was required to use variable costs, machinery ownership costs, and total farm overhead, and two-year averages were used to calculate the adjustment, with target prices adjusted for changes from crop year to crop year.
Figure 5a summarizes the 1977 farm bill adjustment, which was revised using a comparison of two-year average costs, including variable costs, equipment costs, and total overhead costs. Figure 5b compares the changes in two-year moving averages for corn, cotton, and wheat between 1978 and 1981 to demonstrate the adjustment problem rather than the actual adjustments calculated by USDA. Figure 5c illustrates the adjusted target prices as reported by the USDA.
The Agriculture and Food Act of 1981 was the last farm bill to provide for adjustments to target or set prices based on changes in the cost of production. As Congress wrote, the set or target price was no less than a fixed amount, and adjustments were only to increase that price factor. The adjustment was based on changes in average costs over two years, which may include variable costs, machinery ownership costs and general farm overhead.
Figure 6a summarizes the provisions of the 1981 Farm Bill. Figure 6b compares the changes in two-year moving averages for corn, cotton, and wheat between 1982 and 1985 to demonstrate the adjustment problem rather than the actual adjustments calculated by USDA. Figure 6c illustrates the adjusted target prices as reported by the USDA.
Note that USDA reported reductions in target prices in 1985 because the Food Security Act of 1985 froze target prices; the target price for wheat in 1984 ($4.38 per bushel) was reduced from the statutory provision ($4.45 per bushel) for that year.
For each of the 1973, 1977, and 1981 farm accounts, payments to farmers were initiated based on the shortfall between the target (or set) price and the price that was above the average price for the first five months of crop marketing. year or crop loan rate.
Figure 7 compares USDA-adjusted and reported target prices with prices received during the first five months of each crop’s marketing year (or credit rate, whichever was higher). This shows the programs in action, but may not reflect the actual deficiencies used to determine payments due to various adjustments or other provisions (such as advance payments and reserves).
Where the solid line falls below the dashed line, payments are expected to have been triggered.
The concept of using cost of production has a long history in the farm policy debate. In the past, US agricultural policy has sought to respond to changes in the cost of production when production costs change significantly in nominal terms. This article examines how this happened in the 1973, 1977, and 1981 farm bills.
In each of these three farm bills, Congress revised the calculations to adjust the price-based payment factors using changes in certain production costs of the program crops. This historical overview of the last significant era of inflation provides much food for thought and raises many questions for further evaluation.
If the 90th anniversary of the farm bill prompts a reauthorization debate over the inclusion of production costs or crop margins, historical experience can be informative and relevant. They are reviewed here to start the discussion. Future articles will delve deeper into the various issues and questions about this potential policy and its many alternatives.
https://www.agfax.com/2022/09/22/farm-policy-a-historical-look-at-discussions-of-margin-protection/ A Historical Look at the Margin Protection Debate – AgFax